-----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, DGz8hvt0fOmR0xM1j5FsiLpdn9R5rGGAiBT8GCgZlcZtAkRxyFKP5i93eAQJ1faT ZrVdf06IV0JL7VpGazyXYw== 0000102710-97-000061.txt : 19970630 0000102710-97-000061.hdr.sgml : 19970630 ACCESSION NUMBER: 0000102710-97-000061 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970626 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALLEY RESOURCES INC /RI/ CENTRAL INDEX KEY: 0000102710 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 050384723 STATE OF INCORPORATION: RI FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30113 FILM NUMBER: 97630736 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 S-2 1 As Filed with the Securities and Exchange Commission on June 26, 1997 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 VALLEY RESOURCES, INC. (Exact name of Registrant as specified in its charter) RHODE ISLAND 05-0384723 (State of incorporation) (I.R.S. Employer Identification No.) 1595 MENDON ROAD, CUMBERLAND, RHODE ISLAND 02864, (401) 334-1188 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ALFRED P. DEGEN PRESIDENT AND CHIEF EXECUTIVE OFFICER VALLEY RESOURCES, INC. 1595 MENDON ROAD CUMBERLAND, RHODE ISLAND 02864 (401) 334-1188 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: CHRISTINE M. MARX, ESQ. JOHN L. GILLIS, JR., ESQ. EDWARDS & ANGELL ARMSTRONG, TEASDALE, SCHLAFLY & DAVIS 150 JOHN F. KENNEDY PARKWAY ONE METROPOLITAN SQUARE SHORT HILLS, NEW JERSEY 07078 ST. LOUIS, MISSOURI 63102 (201) 376-7700 (314) 621-5070 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If the Registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ____________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] _________________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS AGGREGATE OFFERING REGISTRATION OF SECURITIES BEING REGISTERED PRICE# FEE Common Stock, $1.00 par value* .................................... $ 8,056,812 $2,685.60 _ % Debentures, due 2027...................... $ 7,000,000 $2,333.33 Total ................................... $15,056,812 $5,018.93
#Estimated for purposes of calculation of registration fee. *Also includes rights to purchase Cumulative Participating Junior Preferred Stock. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. RED HERRING LANGUAGE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion Preliminary Prospectus Dated June 26, 1997 VALLEY RESOURCES, INC. 620,000 SHARES OF COMMON STOCK $7,000,000 % DEBENTURES DUE 2027 The Corporation's Common Stock ("Common Stock") is listed on the American Stock Exchange. On June 25, 1997, the reported last sale price of the Common Stock on the American Stock Exchange was $11.25. See "Price Range of Common Stock and Dividends." Interest on the Debentures is payable semiannually on the first day of March and September, commencing March 1, 1998. The __% Debentures due 2027 (the "Debentures") will be issued in the form of one global security (the "Global Security") registered in the name of the nominee of The Depository Trust Company (the "Depository"), and such nominee will be the sole holder of the Debentures. An owner of an interest in the Debentures ("Beneficial Owner") will not be entitled to the delivery of a definitive security except in limited circumstances. A Beneficial Owner's interest in the Global Security will be recorded on and transfers will be effected only through records maintained by the Depository and its participants. See "Description of Debentures." At the option of any deceased Beneficial Owner's representative, the Debentures are redeemable at 100% of their principal amount, plus accrued interest, at any time, subject to the maximum principal amounts of $25,000 per deceased Beneficial Owner and $210,000 in the aggregate for all deceased Beneficial Owners during the initial period ending September 1, 1998 and during each twelve month period thereafter, within 60 days after presentment to the Depository of a satisfactory request for redemption. Otherwise, neither the Corporation nor a Beneficial Owner can require redemption of the Debentures until September 1, 2002, although the Corporation may, but is not required to, redeem interests in the Debentures tendered in excess of the above limitations. On or after September 1, 2002, interests in the Debentures will be redeemable, in whole or in part, at the option of the Corporation at declining premiums. The Debentures will be unsecured obligations of the Corporation payable out of the Corporation's general operating funds, and no mandatory sinking fund will exist to provide for the repayment of the indebtedness represented by the Debentures. See "Description of Debentures." Prior to this offering, there has been no public market for the Debentures, and no assurance can be given that one will develop. THE SECURITIES OFFERED HEREBY INVOLVE A DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS. ___________________________________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. __________________________________ ___________________________________________________________________________________________________
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) CORPORATION(2) Per Share..................................... $ $ $ Total Common Stock (3) .................. $ $ $ ___________________________________________________________________________________________________ Per Debenture ................................ $ $ $ Total Debentures ........................ $ $ $ ___________________________________________________________________________________________________ Total Offering (3) ...................... $ $ $ ___________________________________________________________________________________________________
(1) The Corporation has agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deduction of expenses payable by the Corporation estimated a $115,000. (3) The Corporation has granted to the Underwriters an option (the "Over- Allotment Option"), exercisable for a period of 30 days after the date of this Prospectus, to purchase up to 93,000 additional shares of Common Stock upon the same terms and conditions set forth above, solely to cover over-allotments, if any. If the Over-Allotment Option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Corporation will be $_____________, $_______________ and $_______________, respectively. See "Underwriting." The Common Stock and Debentures are offered, subject to prior sale, when, as and if issued by the Corporation and accepted by the Underwriters, and subject to approval of certain legal matters by their counsel. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Common Stock and Debentures will be made in St. Louis, Missouri, on or about 1997. The Debentures will bear interest from the date of delivery of the Global Security to the Underwriters, which is expected to be on or about ___________ 1997. EDWARD D. JONES & CO., L.P. FIRST ALBANY CORPORATION The date of this Prospectus is ________________. Map of Valley Resources, Inc. A map of New England and upstate New York with an overlay of areas served by the nonutility subsidiaries appears here. A map of Rhode Island highlighting the Utilities' service area appears here. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK AND DEBENTURES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE OF COMMON STOCK AND DEBENTURES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." AVAILABLE INFORMATION Valley Resources, Inc. (the "Corporation") has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-2 with respect to the securities offered hereby (herein, together with all amendments and exhibits, referred to as the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"). This Prospectus does not contain all of the information set forth in such Registration Statement, certain parts of which are omitted in accordance with the Rules and Regulations of the Commission. For further information pertaining to these securities and the Corporation, reference is made to the Registration Statement. The Corporation is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files reports, proxy statements and other information with the Commission. Reports, proxy statements and other information filed by the Corporation can be inspected and copied at the public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, as well as at the following Regional Offices: 7 World Trade Center, New York, NY 10048; and Citicorp Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. Copies can be obtained by mail at prescribed rates. Requests should be directed to the Commission's Public Reference Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. Such material also can be inspected at the offices of the American Stock Exchange, 86 Trinity Place, New York, NY 10006. In addition, certain of such materials are also available electronically by means of the Commission's home page on the Internet at http://www.sec.gov. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE The following documents, which have heretofore been filed by the Corporation with the Commission pursuant to the Exchange Act, are incorporated by reference into this Prospectus and shall be deemed to be a part hereof as of their respective dates: 1. The annual report of the Corporation on Form 10-K for the fiscal year ended August 31, 1996. 2. The quarterly reports of the Corporation on Form 10-Q for the fiscal quarters ended November 30, 1996 and February 28, 1997. Any statement contained in any document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Registration Statement to the extent that a statement contained herein or in any subsequently filed document which also is incorporated by reference herein modifies or supersedes such statement. Except as so modified or superseded, such statement shall not be deemed to constitute a part of this Registration Statement. Any person, including any beneficial owner, receiving a copy of this Prospectus may obtain, without charge, upon written or oral request, a copy of any of the documents incorporated by reference herein, except for the exhibits to such documents. Written requests should be mailed to Kenneth W. Hogan, Senior Vice President, Chief Financial Officer and Secretary, Valley Resources, Inc., 1595 Mendon Road, Cumberland, Rhode Island 02864. Telephone requests may be directed to (401) 334-1188. 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information appearing elsewhere in this Prospectus or incorporated herein by reference and, except as otherwise noted, assumes that the Underwriters' Over-Allotment Option will not be exercised. The Corporation Valley Resources, Inc. is a Rhode Island holding company organized in 1979, whose principal office is located at 1595 Mendon Road, Cumberland, Rhode Island 02864. (Telephone number 401-334-1188). The Corporation has five active wholly-owned subsidiaries: Valley Gas Company, Bristol & Warren Gas Company, Valley Appliance and Merchandising Company, Valley Propane, Inc. and Morris Merchants, Inc. The Corporation also has an 80% interest in Alternate Energy Corporation. See "Valley Resources, Inc." The Offering Common Stock: Shares of Common Stock offered................. 620,000 Shares of Common Stock outstanding after the offering...................................... 4,885,606* Latest 52-week Range of Sales Prices (through June 15, 1997)................................ $13 - $11 Indicated annual dividend rate per share of Common Stock.................................. $0.74 American Stock Exchange Symbol................. VR Dividend Reinvestment Plan (the "Plan")........ Available by separate prospectus Debentures: Debentures offered.. $7,000,000 in aggregate principal amount. Maturity............ September 1, 2027. Interest............ ____% payable semi-annually on each September 1 and March 1, commencing March 1, 1998. Beneficial Owner's Redemption Privi- lege............... At the option of any Deceased Beneficial Owner's representative, the interests in the Debentures are redeemable at 100% of the principal amount, plus accrued interest, at any time, subject to the maximum principal amount of $25,000 per deceased Beneficial Owner and $210,000 in the aggregate for all deceased Beneficial Owners, during the initial period ending September 1, 1998 and for each twelve month period thereafter. See "Description of Debentures." Corporation's Re- demption Privi- lege............... In whole or in part, beginning Septem- ber 1, 2002, at a premium of 104% declining by 1% per year for the next four years, plus accrued interest. See "Description of Debentures." Use of Proceeds...... To reduce short-term debt of utility operations, to make loans to nonutility subsidiaries to repay short-term debt, and for working capital requirements. See "Use of Proceeds." ____________ * Based on the number of shares of Common Stock outstanding as of February 28, 1997 4 SUMMARY FINANCIAL INFORMATION The following table sets forth certain summary financial information of the Corporation and the ratio of earnings to fixed charges as of February 28, 1997 and 1996 and for the six months then ended and as of and for each of the five fiscal years ended August 31, 1996. The summary financial information is qualified by reference to the consolidated financial statements and other information and data set forth elsewhere in the Prospectus.
For the Six Months Ended For the fiscal February 28 Year Ended August 31 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- (Unaudited) (In thousands except for per share amounts and ratios) Operating Income: Operating Revenues................. $47,272 $44,345 $80,360 $74,870 $83,553 $77,286 $67,144 Operating Income................... $ 3,992 $ 4,462 $ 6,850 $ 5,744 $ 6,501 $ 6,084 $ 4,899 Net Income......................... $ 2,488 $ 3,079 $ 3,998 $ 2,555 $ 3,826 $ 3,727 $ 3,115 Net Income Applicable to Common Stock........................... $ 2,488 $ 3,079 $ 3,998 $ 2,555 $ 3,826 $ 3,727 $ 3,115 Earnings per average Common Share Outstanding............... $ 0.58 $ 0.72 $ 0.94 $ 0.61 $ 0.91 $ 0.89 $ 0.74 Dividends per Common Share......... $ 0.365 $ 0.360 $ 0.725 $ 0.71 $ 0.69 $ 0.66 $ 0.63 Average Number of Common Shares Outstanding................. 4,262 4,251 4,259 4,223 4,206 4,203 4,201 Ratio of Earnings to Fixed Charges Actual............................. 3.0 3.5 2.5 1.9 2.6 2.8 2.8 Pro Forma(1)....................... 3.1 2.6
February 28, 1997 Actual Pro Forma(2) ------ ------------ (In thousands) CAPITALIZATION: Long-term Debt (including current maturities)........... $ 23,699 45.8% $ 30,699 47.0% Common Equity........................................... 27,991 54.2% 34,912 53.0% Total Capitalization ................................... $ 51,690 100.0% $ 65,353 100.0% ---------- ----- ---------- ----- Short-Term Debt......................................... $ 20,700 $ 7,387 ========== ==========
(1)The ratio of earnings to fixed charges represents the number of times that fixed charges are covered by earnings. Earnings for the calculation consists of net income before income taxes and fixed charges. Fixed charges consist of interest expense and amortization of debt expense. (2) Adjusted to reflect the sale of the Common Stock (at an assumed price of $11 5/16 per share) and the issuance of the Debentures (at an assumed interest rate of 8.3%) offered hereby and the application of the estimated net proceeds of $13,313,100 therefrom. 5 RISK FACTORS This Prospectus contains forward-looking statements within the meaning of Section 27A of the Act and Section 21E of the Exchange Act. Actual results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this Prospectus. In addition to the other information contained and incorporated by reference in this Prospectus, the following factors should be carefully considered in evaluating the Corporation and its business before purchasing the securities offered hereby. Factors Affecting the Gas Utility Industry - ------------------------------------------ The natural gas industry is subject to numerous regulations and uncertainties, many of which affect the utility operations of the Corporation in varying degrees. Industry issues which have affected or may affect the Corporation from time to time include the following: fluctuations in demand attributable to weather; new business and operational requirements for gas supply resulting from changes in federal regulation of interstate pipelines; competition with other gas sources for commercial and industrial customers; competition with alternative sources of energy; uncertainty in achieving an adequate return on invested capital due to inflation; difficulty in obtaining rate increases from regulatory authorities in adequate amounts and on a timely basis; attrition in earnings produced by the combination of increasing expenses and the costs of new capital which may exceed allowed rates of return; the availability of pipeline transportation capacity necessary to secure supplies of gas; volatility in the price of natural gas; increases in construction and operating costs; environmental regulations; and uncertainty in the projected rate of growth of customers' energy requirements. Sales of natural gas for heating are sensitive to fluctuations in temperatures. Rates in the industry are set at levels assuming normal temperatures. In an abnormally warm year, revenues from sales of gas to heating customers will be adversely affected. The service areas of the Corporation's utilities have experienced warmer than normal weather in two of the last five years. Factors Affecting the Corporation's Non-Utility Operations - ---------------------------------------------------------- The Corporation's nonutility operations are subject to market competition and the ability to meet and maintain competitive pricing. Morris Merchants has exclusive rights to represent certain manufacturers in New England and upstate New York; however, there is no assurance that these rights will continue. Absence of Public Market for Debentures - --------------------------------------- There is no public trading market for the Debentures and the Corporation does not intend to apply for listing of the Debentures on any national securities exchange or for quotation of the Debentures on any automated dealer quotation system. The Corporation has been advised by the Underwriters that they presently intend to make a market in the Debentures after the consummation of the offering contemplated hereby, although they are under no obligation to do so and may discontinue any market-making activities at any time without any notice. No assurance can be given as to the liquidity of the trading market for the Debentures or that an active public market for the Debentures will develop. If an active public trading market for the Debentures does not develop, the market price and liquidity of the Debentures may be adversely affected. If the Debentures are traded, they may trade at a discount from their initial offering price, depending on prevailing interest rates, the market for similar securities, the performance of the Corporation and certain other factors. Reliance of Corporation on Dividends and Other Payments from Subsidiaries; - -------------------------------------------------------------------------------- Dividend Restrictions Imposed on Subsidiaries - --------------------------------------------- The Corporation is a holding company, the principal assets of which are shares of the capital stock of its subsidiaries. As a holding company without independent means of generating revenues, the Corporation depends on dividends and other permitted payments from its subsidiaries to fund its obligations and meet its cash needs, including its payment obligations under the Debentures and the payment of dividends. Valley Gas Company ("Valley Gas") has 6 outstanding indebtedness which may increase and any of the subsidiaries could issue preferred stock in the future which would have a preference over its common stock as to dividends. Valley Gas is not in default in payment of interest or principal on its outstanding indebtedness. Under the terms of its outstanding indebtedness, Valley Gas is subject to restrictions on the payment of dividends on its common stock. Under the most restrictive of these provisions, approximately $1,721,400 of Valley Gas' retained earnings at February 28, 1997 was available for common stock dividends. There are no restrictions as to the payment of dividends by the other subsidiary companies. Reduced Probability of Change of Control or Acquisition of Corporation Due to - ----------------------------------------------------------------------------- Existence of Anti-Takeover Provisions - ------------------------------------- The Corporation's Articles of Incorporation and By-Laws contain certain provisions that reduce the probability of any change of control or acquisition of the Corporation. These provisions include, but are not limited to, the division of the Board of Directors into three classes with one class being elected each year for a term of three years, the ability of the Board of Directors to issue preferred stock in one or more series with such rights, obligations and preferences as the Board of Directors may determine without any further vote or action by the stockholders, and certain super-majority voting requirements for certain business combinations or for certain amendments of the Articles of Incorporation and By-laws. In addition, each share of Common Stock includes one preferred stock purchase Right which entitles the holder to purchase one one-hundredth of a share of Cumulative Participating Junior Preferred Stock, par value $100, upon the occurrence of certain events in excess of a stipulated percentage of ownership. See "Description of Common Stock." VALLEY RESOURCES, INC. Valley Resources, Inc. (the "Corporation"), a Rhode Island corporation organized in 1979, is a holding company whose principal subsidiary operations are natural gas distribution. The Corporation's principal executive offices are located at 1595 Mendon Road, Cumberland, Rhode Island 02864, and its telephone number is 401-334-1188. As a holding company, the Corporation's principal asset is the common stock of its subsidiaries. The Corporation has five active wholly-owned subsidiaries: Valley Gas and Bristol & Warren Gas Company ("Bristol & Warren") (Valley Gas and Bristol & Warren collectively, the "Utilities") --regulated natural gas distribution companies which accounted for 76% and 80% of the Corporation's revenues and net income, respectively, in fiscal 1996; Valley Appliance and Merchandising Company ("VAMCO")--a merchandising appliance rental, sales and service company; Valley Propane, Inc. ("Valley Propane")--a wholesale and retail propane company; Morris Merchants, Inc., d/b/a the Walter F. Morris Company ("Morris Merchants")--a manufacturer's representative of franchised lines in the plumbing and heating contractor supply and other energy related businesses. The Corporation also has an 80% interest in, and the obligation to acquire the remaining 20% interest of, Alternate Energy Corporation ("AEC"), which sells, installs and designs natural gas conversion systems and facilities. USE OF PROCEEDS The net proceeds to the Corporation from the sale of the securities offered hereby are expected to be approximately $13,313,000, after deducting the underwriting commissions and other expenses of the offering. The Corporation intends to contribute $6,663,100 of the net proceeds of the offering described herein to the Utilities as a capital contribution, subject to the approval of the Rhode Island Division of Public Utilities, and the remainder will be used to make loans to its other subsidiaries to repay short-term debt and for working capital requirements. The Utilities intend to use all of the capital contribution to retire a portion of their outstanding short-term debt, which was incurred principally for construction purposes. Utility construction expenditures for fiscal 1996 aggregated approximately $4,396,000 and are estimated at $4,233,400 for the year ending August 31, 1997. Additions to utility plant consist primarily of the construction of new mains and services and the installation of new meters in the service area. As of May 31, 1997, short-term bank notes aggregated $12,100,000. The interest rate on these borrowings ranged from 5.60% to 5.71% with maturities not exceeding 31 days. Pending such applications, the net proceeds may be held in temporary cash investments. 7 CAPITALIZATION The following table sets forth the capitalization of the Corporation as of February 28, 1997 and the pro forma capitalization which reflects the issuance of the Common Stock and Debentures offered hereby and the application of the proceeds therefrom. See "Use of Proceeds."
Actual Pro Forma(1) ------ ------------ (in thousands) Long Term Debt: 8% First Mortgage Bonds, due 2022..................................... $ 20,155 $ 20,155 Note Payable.......................................................... 1,405 1,405 9% Note Payable, due 1999............................................. 2,139 2,139 Debentures offered hereby............................................. - 7,000 -------- --------- Total ............................................................. 23,699 30,699 Common Equity: Common Stock.......................................................... 4,280 4,900 Paid in Capital....................................................... 18,170 24,213 Retained Earnings..................................................... 8,683 8,683 Less Accounts Receivable - Employee Stock Ownership Plan.............. (3,142) (3,142) -------- --------- Total.............................................................. 27,991 34,654 -------- --------- Total Capitalization...................................................... $ 51,690 $ 65,353 ======== ========= Short-Term Debt........................................................... $ 20,700 $ 7,387 ======== =========
(1) As adjusted for the estimated net proceeds from the sale of 620,000 shares of Common Stock (at an assumed price of $11-5/16 per share) being offered hereby and the issuance of the Debentures (at an assumed interest rate of 8.3%) offered hereby and the application of the estimated net proceeds of $13,313,100 therefrom. 8 SELECTED FINANCIAL DATA The following tables set forth selected financial data of the Corporation. The following data should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Prospectus.
February 28 August 31 ----------- --------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- (unaudited) (in thousands) Assets Utility plant - net................... $ 49,876 $48,679 $49,442 $47,411 $44,207 $42,313 $38,838 Leased property - net................. 2,638 1,732 2,945 2,014 2,436 2,395 3,343 Nonutility plant - net................ 3,657 3,550 3,568 3,547 3,519 3,334 2,180 Current assets........................ 27,843 23,163 19,307 18,409 18,358 20,727 20,908 Other assets.......................... 21,848 21,267 21,427 20,957 22,549 12,026 10,594 -------- ------- ------- ------- ------- ------- ------- Total.................................... $105,862 $98,391 $96,689 $92,338 $91,069 $80,795 $75,863 ======== ======= ======= ======= ======= ======= ======= Capitalization and liabilities Capitalization Common equity....................... $27,991 $27,602 $27,092 $25,993 $26,036 $24,943 $24,018 Long-term debt (less current maturities)......... 23,199 25,991 23,256 24,616 27,035 27,580 15,795 -------- ------- ------- ------- ------- ------- ------- Total........................... 51,190 53,593 50,348 50,609 53,071 52,523 39,813 -------- ------- ------- ------- ------- ------- ------- Revolving credit arrangement......... 2,300 -0- 2,200 -0- -0- -0- -0- Obligations under capital leases..... 1,760 1,107 2,134 1,255 1,747 1,847 1,790 Current liabilities.................. 31,068 26,299 24,005 23,932 18,530 18,982 26,922 Other liabilities.................... 19,544 17,392 18,002 16,542 17,721 7,443 7,338 -------- ------- ------- ------- ------- ------- ------- Total........................... $105,862 $98,391 $96,689 $92,338 $91,069 $80,795 $75,863 ======== ======= ======= ======= ======= ======= =======
For the six months ended February 28 For the year ended August 31 ----------------- ---------------------------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- (unaudited) (in thousands except for share and per share data) Operating revenues....................... $47,272 $44,345 $80,360 $74,870 $83,553 $77,286 $67,144 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Cost of gas sold..................... 20,578 17,798 31,951 30,229 38,234 33,410 28,963 Cost of sales - nonutility........... 7,720 7,277 13,689 13,190 12,784 12,715 11,893 Other operation and maintenance...... 10,081 9,784 19,379 18,288 17,784 17,300 15,107 Depreciation......................... 1,555 1,462 2,956 2,685 2,474 2,304 1,770 Taxes - other than Federal income... 2,224 2,153 4,091 4,002 4,463 4,073 3,557 - Federal income.............. 1,122 1,409 1,444 732 1,313 1,400 955 ------- ------- ------- ------- ------- ------- ------- Total......................... 43,280 39,883 73,510 69,126 77,052 71,202 62,245 ------- ------- ------- ------- ------- ------- ------- Operating income......................... 3,992 4,462 6,850 5,744 6,501 6,084 4,899 Other income - net of tax................ 158 271 460 115 227 253 267 Total interest charges................... 1,662 1,654 3,312 3,304 2,902 2,610 2,051 -------- -------- -------- ------- -------- -------- -------- Net income............................... $ 2,488 $ 3,079 $ 3,998 $ 2,555 $ 3,826 $ 3,727 $ 3,115 ======== ======== ======== ======= ======== ======== ======== Shares outstanding - average............. 4,261,672 4,250,996 4,258,877 4,222,662 4,205,760 4,203,398 4,201,105 Shares outstanding - period-end.......... 4,280,028 4,267,884 4,280,028 4,260,797 4,213,043 4,213,043 4,213,043 Earnings per share....................... $0.58 $0.72 $0.94 $0.61 $0.91 $0.89 $0.74 Dividends declared per share............. $0.365 $0.36 $0.725 $0.71 $0.69 $0.66 $0.63
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW - -------- The discussion and analysis that follows reflect the operations of the Corporation and its six active subsidiaries: Valley Gas and Bristol & Warren, both regulated natural gas distribution companies; VAMCO, a merchandising, appliance rental, and service company; Valley Propane, a propane sales and service company; Morris Merchants, a representative distributor of franchised lines; and AEC, which sells, installs and designs natural gas conversion systems and facilities. Operating results are derived from two major classifications - utility and nonutility. Utility earnings are generated from the operations of the regulated natural gas distribution companies and include the distribution and sale of natural gas to firm and seasonal customers. Nonutility revenues are a consolidation of the revenues of VAMCO, Valley Propane, Morris Merchants and AEC. The distribution and sale of natural gas to customers on a year-round basis for heating, water heating, cooking and processing are the source of firm utility revenues. Firm customers can be residential, commercial or industrial. The revenues from firm sales customers are determined by regulated tariff schedules and through 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 customers changes in gas costs from those included in the regulated tariffs, and provides for an adjustment to collect post-retirement benefits. Seasonal and dual-fuel sales (see "Business") are made when excess gas supplies are available and gas prices are competitive with alternative fuel markets. These sales are generally made in non-winter months and can be interrupted by the Utilities at any time. Margins from seasonal sales and 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. Prior to November 1995, Bristol & Warren retained all margins on seasonal sales. The Utilities also provide transportation through their distribution systems for customer-purchased natural gas received by the Utilities on an off-peak basis. Morris Merchants and VAMCO generate nonutility revenues through the wholesale and retail sales of plumbing and heating supplies and appliances. Additionally, VAMCO generates revenues from appliance rentals and a service contract repair program. All of the Corporation's propane operations are conducted through Valley Propane, which sells propane at retail and provides service to propane customers in Rhode Island and southeastern Massachusetts. AEC, acquired in May 1996, generates revenues through the conversion of vehicles and stationary engines to natural gas and through the design and installation of natural gas fueling facilities. The Corporation owns an 80% interest in AEC and has the obligation to acquire the remaining 20% of the company currently held by the management of AEC. The operations of AEC did not materially impact the operations of the Corporation in fiscal 1996 or for the first six months of fiscal 1997. Seasonality - ----------- The bulk of firm distribution and sales are made during the months of November through March. As a result, the highest levels of earnings and cash flow are generated in 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. 10 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. RESULTS OF OPERATIONS - --------------------- For the six months ended February 28, 1997 versus 1996 For the six months ended February 28, 1997, utility gas revenues were $36,123,400, an increase of 6.4% over the same period in fiscal 1996. A decrease in base revenues generated from firm customers was offset by increased collections through the PGPA and seasonal revenues. Base revenues generated from the regulated tariffs declined 4.2% as a result of decreased natural gas sales. PGPA revenues increased $2,971,300 over the prior year's six month period. Seasonal revenues in the six months ended February 28, 1997 increased by 27.4% over the same period in fiscal 1996 but the volume of seasonal gas sales increased only 4.7%. 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 Utilities. Gas sold to firm customers decreased 5% to 4,617,900 Mcf for the six months ended February 28, 1997 from the prior year period. The decrease in gas sales was the result of warmer weather which was partially offset by an increase in the number of customers. Weather, as measured by degree days, was 3.8% warmer in the six months ended February 28, 1997 than the prior year six month period. At February 28, 1997 there were 62,603 utility customers versus 62,149 at February 29, 1996. Nonutility revenues for the six months ended February 28, 1997 totaled $11,148,900, an increase of 7.4% over the fiscal 1996 period. The increase in nonutility revenues was the result of increases in retail and wholesale merchandise sales, revenues generated from propane operations and the addition of revenues generated by AEC. Conversions from electric heating, sales in the commercial markets and increases in the wholesale operation contributed to the increased revenues. Propane revenues increased despite a drop in volume resulting from the warmer weather due to price increases in the cost of propane being passed along to customers. Operating expenses for the 1997 six month period were impacted by increases in the cost of gas sold and nonutility cost of sales. The cost of gas sold increased 15.7% when compared to the same period last year. Increases in the purchase price of natural gas was the primary contributor to the increase in cost of gas sold. The average cost of gas distributed to firm customers was $4.43 per Mcf for the six months ended February 28, 1997 compared to $3.63 per Mcf in the prior year period. Nonutility cost of sales in the 1997 period increased 6.1% over the prior year period due to the increase in nonutility revenues. The decrease in other income of $112,900 for the 1997 six month period as compared to the same period in 1996 resulted from the decline in off-system sales. The decrease in other income was offset by increased interest income. Interest expense remained flat for the 1997 six month period as compared to the same period in 1996. Increased short-term borrowings were offset by a reduction in interest accrued on deferred fuel costs and lower borrowing rates. The PGPA requires a reconciliation of actual gas costs and the amount collected through the PGPA clause. This reconciliation results in either a deferred fuel cost liability (amounts owed to customers) or a deferred fuel cost receivable (amounts owed by customers to the Utilities). If there is a liability to customers, interest expense is accrued by the Utilities; if there is a receivable, interest income is recorded. For most of the first six months of fiscal 1997, the deferred fuel cost was a receivable from the customer, compared to a liability of the Utilities in fiscal 1996. This situation resulted from the rapid, unanticipated rise in natural gas prices this year. 11 Fiscal 1996 versus Fiscal 1995 Utility gas revenues in fiscal 1996 totaled $60,773,500, an increase of 8.5% over fiscal 1995. Revenues from sales to firm customers increased 9.8% over the prior fiscal year as a result of increased gas sales and rate relief. Offsetting the increase in revenues was a decrease of $2,654,800 in gas costs recovered through the PGPA. The PGPA does not impact operating income as it effectuates a dollar for dollar recovery of gas costs. In fiscal 1996, gas sold to firm customers increased 12.0% over fiscal 1995 and totaled 8,255,500 Mcf. The primary contributor to the increase in gas sales was the weather which was 17.0% colder than the prior year during the critical heating period, December through February. In October 1995, Valley Gas and Bristol & Warren were authorized by the RIPUC to consolidate their rate structures and to increase their tariffs to collect an additional $1,100,000 in revenues. The new tariffs collect an increased share of revenues through the customer charge, thus reducing sensitivity of utility revenues to weather. Approximately $825,000 of this revenue increase is reflected in fiscal 1996 revenues. Sales to seasonal customers in fiscal 1996 decreased 21.2% as compared to fiscal 1995. Seasonal sales are dependent on the availability of gas and the price of competing fuels. The colder winter period resulted in less gas available for sales to this market. Since profits on seasonal sales are returned to firm sales customers through the PGPA, seasonal sales have no impact on operating income. Transportation revenues declined by $124,800, or 24.6%, in fiscal 1996 as compared to fiscal 1995. The reduction in transportation revenues was the result of a decrease in gas delivered to Valley Gas on behalf of customers. Nonutility revenues totaled $19,586,600, an increase of 3.9% over fiscal 1995. Revenues from retail merchandising operations, inclusive of rental and service program revenues, increased 12.6% over the prior fiscal year. The focus on the commercial and industrial markets led to an increase in retail merchandising revenues and related gross profit, even though a lower profit margin percentage is earned on these sales. The service contract and rental program revenues increased due to new customers and price increases. The wholesale operations have faced gross profit margin declines because of pricing competition among manufacturers and consolidation of wholesale outlets within their market. Wholesale merchandise revenues declined slightly in fiscal 1996. The revenues generated from the propane company are included in nonutility revenues. Propane revenues increased 17.5% in fiscal 1996 over the prior fiscal year. The increase was due to a 12.3% increase in gallons of propane sold and an increase in the retail price of propane. Colder weather and sales to the construction heating market accounted for the increase in sales. Cost of gas sold includes the cost of natural gas, underground storage gas, liquefied natural gas and liquid propane gas to serve utility sales customers. The average cost per Mcf of natural gas distributed for utility operations in fiscal 1996 and fiscal 1995 was $3.84 and $3.21, respectively. Cold weather in November and December required the use of storage gas before the peak winter period which caused increased demands for natural gas supply during the winter period and resulted in increased natural gas prices. Changes in gas costs of the utility operations are passed through to firm sales customers in the calculations of the PGPA. Therefore, increases and decreases in gas costs do not impact the profit margins of the utility operations. The cost of sales for nonutility operations in fiscal 1996 increased 3.8% over the prior fiscal year. The increase was the result of increased retail sales and increased gallons sold of propane. The average cost of propane distributed was $0.48 per gallon in fiscal 1996 versus $0.44 per gallon in fiscal 1995. Other operation expenses increased 5.7% in fiscal 1996 over fiscal 1995 due to wages and increased costs associated with the operation of the peak shaving facilities. An increase in uncollectible expenses also contributed to the increase. 12 Maintenance expense in fiscal 1996 was $1,672,000, an increase of 8.9% over the prior year. Maintenance expense increased due to costs related to the record snowfall experienced during the winter period and computer maintenance. Operation and maintenance expenses are impacted by general inflation and wages. Taxes - other than Federal income increased 2.2% to $4,090,800 in fiscal 1996. Gross receipts taxes on increased utility revenues were responsible for the increase. The effective Federal income tax rates for the years ended August 31, 1996 and 1995 were 28% and 24%, respectively. Other income - net of tax totaled $459,900 in fiscal 1996 and $115,000 in fiscal 1995. The increase in fiscal 1996 was a result of off-system natural gas sales and investment income. Off-system natural gas sales are natural gas sales to customers outside the franchise area at market clearing prices. The opportunities for off-system sales are dependent upon market demand and the ability of other gas suppliers to meet their delivery requirements. Management believes it is unlikely that conditions will exist for this level of off-system sales in subsequent years. Fiscal 1996 interest expense was $3,311,700, an increase of 0.2% over the prior fiscal year. Interest expense was impacted by an increase in short-term debt only partially offset by a reduction in the deferred fuel cost liability and the related interest accrual. Fiscal 1995 versus Fiscal 1994 Fiscal 1995 utility gas revenues totaled $56,012,900, a 14.3% decrease from fiscal 1994. Firm revenues in fiscal 1995 decreased 16.1% from fiscal 1994 due to a $6,457,700 reduction in gas costs recovered through the PGPA and decreased gas sales. Gas sales to firm customers were 7,368,700 Mcf in fiscal 1995, a decrease of 6.7% from the prior year. The primary contributor to the sales decrease was warmer weather. Weather, as measured by degree days, in fiscal 1995 was 8.2% warmer than normal and 9.9% warmer than fiscal 1994. Weather during the critical heating period of December through February was 15.5% warmer than the prior year. In fiscal 1995, sales to seasonal customers increased 23.3% over the prior fiscal year. The warm weather made gas supplies available at competitive prices which was the primary reason for the sales increase. The profits from these sales for Valley Gas are returned to firm customers through the PGPA. Bristol & Warren's margin accrued to the benefit of stockholders in fiscal 1995 and 1994. Sales to dual fuel customers in fiscal 1995 increased by 24,600 Mcf over the prior fiscal year. Revenues from the transportation of customer-owned natural gas increased $134,800 in fiscal 1995. Nonutility revenues in fiscal 1995 were $18,857,200, an increase of 3.4% over fiscal 1994. VAMCO focused its retail merchandising attention on the commercial and industrial equipment market in response to the effects of the sluggish economy on the residential market. This led to increased retail sales of equipment to this market and an improvement in the gross margin of the retail operations. The rental and service contract programs continued to impact earnings positively. Wholesale operations experienced slight improvements in sales levels and gross margins as they continued their focus on higher margin lines. However, profitability decreased in the wholesale business due to expenses incurred from changes in management and the implementation of a computerized reporting system to improve communications between the customers and the sales force. As stated earlier, propane operations also are included in nonutility revenues. Propane revenues in fiscal 1995 decreased by 4.8% as a result of a 10.0% decrease in gallons sold, offset by increases in the wholesale price of propane. The warm weather was the major contributor to the decreased propane volume sold. Price competition continued to be a critical factor in the ability to expand these operations. The Utilities distribute natural gas, underground storage gas, liquefied natural gas and a limited amount of liquid propane gas to meet customer demands; the cost of these fuels is included in the cost of gas sold. The average cost per Mcf of gas distributed in fiscal 1995 was $3.21 versus $4.01 in fiscal 1994. The decrease in the cost per Mcf was the result of lower demand for natural gas as a result of the warmer weather. All changes in gas costs are passed through to firm customers through the workings of the PGPA. 13 Cost of sales - nonutility includes the cost of sales for the retail merchandising operation, the wholesale merchandising operation and the propane operation. Cost of merchandising goods sold increased 3.4% in fiscal 1995 over fiscal 1994 which was directly attributable to the increase in merchandise sales. The average cost of propane for the retail propane operations, included in cost of sales, was $0.44 per gallon in fiscal 1995 versus $0.40 per gallon in fiscal 1994. Operations expenses in fiscal 1995 increased 2.7% over fiscal 1994. Planned wage and benefit increases and an increase in uncollectible expenses accounted for a majority of this increases. A decreased use of peak shaving facilities and improved cost controls slightly offset these increases. Maintenance expense in fiscal 1995 was $1,535,200, an increase of 3.4% over fiscal 1994. Expenses related to the distribution system were responsible for the increase. Operation and maintenance expenses were impacted by wages and general inflation. Taxes - other than Federal income were $4,002,100 in fiscal 1995, a decrease of $461,300 from the prior year. A reduction in gross receipts taxes as a result of decreased revenues and the lowering of the gross receipts tax rate for manufacturing customers were responsible for the decrease. The effective Federal income tax rates for the years ended August 31, 1995 and 1994 were 24% and 27%, respectively. Fiscal 1995 other income - net of tax decreased $112,400 from the prior year. A decrease in funds available for overnight investments and interest earned on those investments were responsible for the decrease in other income. Interest expense in fiscal 1995 totaled $3,304,600, an increase of 13.8% over fiscal 1994. Increased short-term borrowing rates were responsible for the increase in interest expense. Liquidity And Capital Resources - ------------------------------- The sale of natural gas, propane and merchandise and revenues collected through rental and service contract programs generate cash flows to meet the cash requirements of the Corporation. Operations, external financings and investments are also used to meet corporate cash needs. Short-term financings under existing lines of credit are available to meet daily cash needs. Long-term and intermediate financings, and when appropriate, equity issues are used to refinance short-term debt when deemed appropriate by management. The cash position of the Corporation is impacted by the requirement to inventory supplemental gas supplies and the timing of inventory acquisitions to meet the peak winter demand of the Utilities. Supplemental gas inventories are filled in the summer period for use during the winter period which has a negative impact on cash flows. Effective November 1995, the Utilities, as authorized by the RIPUC, consolidated their rate structures and increased their rate tariffs to collect an additional $1,100,000 in revenues. Approximately $825,000 of this rate increase positively impacted liquidity in fiscal 1996. Colder weather and its positive influence on revenues similarly impacted cash flow. During fiscal 1996, actual gas costs were greater than expected, which resulted in the Utilities' under-recovery of gas costs through the PGPA; this caused the liability to customers at the end of fiscal 1995 to become a receivable from customers in fiscal 1996, negatively impacting liquidity. This under-recovery will be collected from customers through an increase in the PGPA in fiscal 1997, which should have a positive impact on fiscal 1997 cash flows. Interest costs and the timing of Federal and state tax payments also impact liquidity. Cash flows were negatively impacted for the first six months of fiscal 1997 by increases in the cost of natural gas and propane. Sales were less than anticipated due to warmer than normal winter weather which also negatively impacted liquidity. Additionally, the warmer weather resulted in the holding of supplemental fuel inventories which were anticipated to be sold. 14 Valley Gas entered into a revolving credit arrangement to fund the redemption of the Valley Gas 8% First Mortgage Bonds as they are redeemed by the current holders. During fiscal 1996, $2,200,000 of funds were borrowed under this arrangement, at a financing rate of less than 8%, which favorably impacted liquidity. Funding requirements are met through short-term borrowings under existing lines of credit. At February 28, 1997, the Corporation had $8,300,000 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 the 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 a letter of responsibility from the Rhode Island Department of Environmental Management ("DEM") with respect to releases from manufactured coal waste on its property that is the site of the former Tidewater plant in Pawtucket, Rhode Island. Valley Gas and Blackstone have submitted a site investigation report to DEM relating to certain releases on the site. Management cannot determine the future cash flow impact, if any, of this claim and related expenses. Management takes the position that it is indemnified by Blackstone for any such expenses. Valley Gas intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant period. Remediation of sites such as the former Tidewater plant is governed by a regulatory framework which now permits more flexibility in methods of remediation and in property reuse. Valley Gas received a letter of responsibility from DEM with respect to releases from manufactured coal waste on its property that is the site of the former Hamlet Avenue plant in Woonsocket, Rhode Island. Valley Gas and Blackstone have submitted a site investigation work plan to address certain releases at the site. Management cannot determine the future cash flow impact, if any, of this claim and related expenses. Management takes the position that it is indemnified by Blackstone for any such expenses. Valley Gas intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant period. Remediation of this site is also governed by a regulatory framework that permits more flexibility in methods of remediation and in property reuse. The Corporation's net cash from operating activities in fiscal 1996 was $3,669,000 versus $6,728,000 in fiscal 1995 and $8,342,900 in fiscal 1994. Cash from operations was impacted by the deferred fuel cost account which used funds of $3,977,800 in fiscal 1996 and provided funds in fiscal 1995 and 1994. Cash from investing activities in the amount of $5,058,100 in fiscal 1996, $5,929,300 in fiscal 1995 and $4,604,700 in fiscal 1994 was used primarily for capital expenditures. Financing activities in fiscal 1996 provided cash of $1,441,200 primarily from the issuance of the revolving credit arrangement and the issuance of short-term debt offset by the use of funds for the payment of dividends and the redemption of a portion of the 8% First Mortgage Bonds. Financing activities used cash of $931,400 in fiscal 1995 and $4,090,800 in fiscal 1994. Cash flows from operating activities were negatively impacted for the six months ended February 28, 1997 as a result of increased cost of natural gas and propane and lower sales as a result of the warmer than normal weather. Cash flows for the comparable six-months ended February 29, 1996 were positively impacted by increased sales and decreased cost of natural gas. Cash from investing activities were $2,099,000 for the six months ended February 28, 1997 versus $2,745,000 in the prior year six-month period. Financing activities provided cash of $4,254,000 for the six months ended February 28, 1997 primarily as a result of increased short-term borrowings compared to cash provided of $1,304,000 in the prior six-month period as a result of borrowings under a revolving credit arrangement to fund redemptions of the 8% First Mortgage Bonds. 15 Capital expenditures are primarily for the expansion and improvement of the gas utility plant and for the purchase of rental and propane equipment. In fiscal 1996, capital expenditures were $5,008,700 versus $5,915,900 in fiscal 1995 and $4,553,400 in fiscal 1994. Fiscal 1997 capital expenditures are estimated to be $4,942,500 and will be primarily for the expansion and improvements of gas utility property. It is anticipated that such expenditures will be financed through funds from operations and short-term borrowings. 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 and Bristol & Warren --regulated natural gas distribution companies; VAMCO --a merchandising and appliance rental company; Valley Propane--a wholesale and retail propane company; and 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 AEC which sells, installs and designs natural gas conversion systems and facilities. Bristol & Warren, acquired by the Corporation on April 1, 1992, was incorporated in the State of Rhode Island in 1953 to distribute natural gas to customers in Bristol and Warren, Rhode Island. In May 1996, the Corporation acquired its 80% interest in AEC. AEC was incorporated in the State of Rhode Island in April 1992 to design and install equipment for the conversion of vehicular and stationary engines to natural gas. The Corporation has the obligation to acquire the remaining 20% interest in AEC over the next five fiscal years. Such 20% interest is currently held by AEC management. Effective September 1995, all propane sales and service, some of which had formerly been conducted by the Corporation's now inactive subsidiary, The New England Gas Company, were combined into a single operation under the name Valley Propane. 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 will include the acquisition of new businesses. Utility Operations - ------------------ Gas Sales and Transportation The Corporation's utility operations are conducted through the Utilities, which had an average of 61,540 customers during the twelve months ended February 28, 1997, of which approximately 91% were residential and 9% were commercial and industrial. The Utilities provide natural gas service to residential, commercial and industrial customers and transportation services to industrial customers. Valley Gas' service territory is approximately 92 square miles located in the Blackstone Valley region in northeastern Rhode Island with a population of approximately 250,000. Bristol & Warren's service territory is approximately 15 square miles in eastern Rhode Island with a population of approximately 35,000. Effective November 1995, the Utilities operate under a single rate structure. 16 The following table shows the distribution of gas sold during the years since fiscal 1992 in millions of cubic feet ("MMcf"):
For the Fiscal Year Ended August 31, (1) ------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Residential 4,612 4,078 4,517 4,439 3,965 Commercial 2,252 1,953 2,078 1,978 1,680 Industrial-firm 1,391 1,338 1,299 1,185 1,152 Industrial-seasonal 1,047 1,298 996 818 1,010 ----- ----- ----- ----- ----- TOTAL 9,302 8,667 8,890 8,420 7,807 ===== ===== ===== ===== ===== (1) The operations of Bristol & Warren are included since April 1992.
Firm customers of the Utilities use gas for cooking, heating, water heating, drying and commercial/industrial processing. Certain industrial customers use additional gas in the summer months, when it is available at lower prices. These customers are subject to having their service interrupted at the discretion of the Utilities with very little notice. This use is classified as seasonal use. As discussed further below, the margin on seasonal use is passed through the 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 RIPUC. Additionally, Valley Gas services cogeneration customers under separate contract rates that were individually approved by the RIPUC. The Utilities' tariffs include a PGPA which allows an adjustment of rates charged to customers in order to recover all changes in gas costs from stipulated base gas costs. The PGPA provides for an annual reconciliation of total gas costs billed with the actual cost of gas incurred. Any excess or deficiency in amounts collected as compared to costs incurred is deferred and either reduces the PGPA or is billed to customers over subsequent periods. The PGPA does not impact operating income as it effectuates a dollar for dollar recovery of gas costs. All margins from interruptible customers are returned to firm customers through the workings of the PGPA. Utility revenues include a surcharge on firm gas consumption to collect a portion of the costs to fund postretirement medical and life insurance benefits above the pay-as-you-go costs included in base tariffs. The surcharge was authorized by the RIPUC in a generic rate proceeding and 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 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. The Utilities business is seasonal. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Seasonality." 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. 17 On January 19, 1995, Valley Gas and Bristol & Warren filed revised tariffs with the RIPUC to consolidate their rate structures and to increase their combined annual revenues. On October 18, 1995, the RIPUC authorized the consolidated rate structure and allowed the Utilities to adjust their tariffs to annually collect $1,100,000 or 2.0%. These rates became effective November 21, 1995. On April 29, 1997, the Utilities were authorized to offer transportation rates to large commercial and industrial customers and to redesign the rates for other firm customer classes. The revenue-neutral rate redesign became effective June 1, 1997. 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 five 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, and that contract expires in 1999. Winter-Only Firm Supply - The Utilities are well-positioned with respect to winter-only firm supply in that their actual and prospective long-term contracts are with major 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 7,950 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, with an option to increase its maximum daily quantity to 7,500 dekatherms. There are no minimum takes. This 10-year contract is scheduled to go into effect November 1, 1999. Pawtucket Power Co-Generation Plant - Valley Gas is entitled under long-term contract to utilize up to 540 dekatherms per hour, with a maximum annual quantity of 333,000 dekatherms, of natural gas used by Pawtucket Power in its generation of electricity and steam. This firm gas supply originates in Alberta, Canada. Underground Storage - The Utilities have 1,543,958 dekatherms of underground storage capacity with CNG Transmission and National Fuel Gas Supply Corporation, 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. 18 Gas Supply Pipeline Capacity - Total year-round firm capacity is 24,902 Dth/day. Of this total, 86% expires by December 1, 2002. Storage Pipeline Capacity - The Utilities' storage-related pipeline capacity totals 11,349 Dth/day. About 37% of this capacity expires November 1, 2000, and the remainder extends from 2003 through 2012. On-Site LNG and Propane Storage - In addition to the gas delivered by the interstate pipeline, 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 should not 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 19 sales customers of the Utilities during the last five fiscal years were 71 MMcf in 1996, 66 MMcf in 1995, 77 MMcf in 1994, 69 MMcf in 1993, and 67 MMcf in 1992. 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 February 28, 1997, Valley Propane had 2,699 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. The Corporation owns an 80% interest in AEC and has the obligation over the next five 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." 20 PRICE RANGE OF COMMON STOCK AND DIVIDENDS The Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "VR." The following table sets forth for the periods indicated the high and low sale prices of the Common Stock as reported by AMEX and the cash dividends paid per share in such periods. The Corporation has paid cash dividends on its Common Stock each year since 1964. While it is the intention of the Board of Directors to continue to declare dividends on a quarterly basis, the frequency and amount of future dividends will depend upon the Corporation's earnings, financial requirements and other relevant factors, including limitations imposed by the indenture for the Debentures. See "Description of Common Stock." There were 2,824 record holders of the Corporation's Common Stock as of April 15, 1997.
Market Price Cash ------------ Dividend High Low -------- ---- --- Fiscal 1995 First Quarter $ .175 $ 13.25 $ 12.00 Second Quarter .175 12.63 10.75 Third Quarter .18 11.38 10.50 Fourth Quarter .18 11.50 10.38 Fiscal 1996 First Quarter $ .18 $ 11.50 $ 10.25 Second Quarter .18 11.38 10.50 Third Quarter .1825 11.88 10.88 Fourth Quarter .1825 12.63 11.88 Fiscal 1997 First Quarter $ .1825 $13.00 $11.75 Second Quarter .1825 12.00 11.00 Third Quarter (through June 15, 1997) .185 12.50 11.00
DESCRIPTION OF COMMON STOCK The following description relating to the Common Stock is summarized from, and subject to the provisions of, the Articles of Incorporation and the Bylaws of the Corporation, as amended. General - ------- The Corporation is authorized to issue 20,000,000 shares of Common Stock, $1 par value, of which 4,280,028 were issued and outstanding at May 31, 1997. The Corporation is also authorized to issue 500,000 shares of Preferred Stock, $100 par value, none of which is issued and outstanding. As of May 31, 1997, 41,125 shares of Common Stock were reserved for issuance under the Corporation's dividend reinvestment plan. Dividend Rights - --------------- Dividends are payable on the Common Stock when and as declared by the Board of Directors out of funds legally available therefor. Under Rhode Island law, dividends may be paid out of unreserved and unrestricted retained earnings. Inasmuch as the Corporation is structured as a holding company, the funds required to enable the Corporation to pay dividends on its Common Stock are derived from the dividends paid by its subsidiaries on their common stock, all 21 of which is held by the Corporation, except for 20% of AEC. See "Risk Factors--Reliance of Corporation on Dividends and Other Payments from Subsidiaries; Dividend Restrictions Imposed on Subsidiaries." Voting Rights - ------------- Each share of Common Stock is entitled to one vote on all matters submitted to stockholders. Directors. The Articles of Incorporation and Bylaws of the Corporation provide that the Board of Directors (presently numbering nine) shall be divided into three classes with each class to be as nearly equal in number as shall be possible, and that one class shall be elected each year for a term of three years. The Corporation's Bylaws provide that the affirmative vote of a majority of the outstanding shares of Common Stock is required to elect directors. Directors may be removed by stockholders from office at any time, but only for cause, by the affirmative vote of the holders of not less than 80% of the outstanding shares of Common Stock; however the 80% vote is not required when such action is recommended by a two-thirds vote of directors then in office. Certain Business Combinations. The Corporation's Articles of Incorporation provide that any "Business Combinations" involving a "Related Person" must be approved by the holders of 80% of the outstanding shares of its capital stock, provided that majority approval shall apply if (a) the proposed transaction has been approved by two-thirds of the Corporation's "Continuing Directors" or (b)(1) the consideration to be received by the holders of the Corporation's capital stock is at least equal to the highest of (i) the highest per share price paid by the Related Person for any shares acquired within two years of the first public announcement of the proposed transaction (the "Announcement Date") or in the transaction in which it became a Related Person, (ii) the fair market value (as defined in the Articles of Incorporation) per share of the capital stock on the Announcement Date or the date on which the Related Person become a Related Person, or (iii) in the case of the Corporation's Preferred Stock, an amount equal to the highest preferential amount per share in the event of any liquidation, dissolution or winding up of the Corporation, (2) the consideration to be received by the Corporation's shareholders is in the same form as that previously paid by the Related Person for its shares, and (3) a proxy statement containing a fairness opinion of an investment banking firm and the position of the Continuing Directors on the proposed transaction shall have been mailed to all of the Corporation's shareholders to solicit their approval of the proposed transaction. A "Business Combination" is defined to include mergers, consolidations, leases, sales and exchanges of assets and similar transactions involving the Corporation and its subsidiaries which amount to 20% or more of the fair market value of the consolidated assets of the Corporation, including any securities issued by a subsidiary, between the Corporation (or a subsidiary) and a Related Person. The definition also includes certain other transactions (including reclassifications and recapitalizations) which would have the effect of, directly or indirectly, increasing the Related Persons' proportionate share of capital stock in the Corporation and complete or partial liquidations or dissolutions proposed by a Related Person. A "Related Person" is defined to include a person, entity or affiliated group of persons or entities that beneficially owns 15% or more of the capital stock of the Corporation. A "Continuing Director" is defined as a director (a) unaffiliated with any Related Person who was a member of the Board immediately prior to the time the Related Person became a Related Person or (b) who was designated as a Continuing Director by a majority of the then Continuing Directors. Amendments to Articles and Bylaws. The Articles of Incorporation and Bylaws of the Corporation provide for amendment of the foregoing provisions of the Articles or the Bylaws by 80% and two-thirds, respectively, of the outstanding shares entitled to vote unless the proposed amendment has been approved by two-thirds of the Board of Directors, in which case majority approval by stockholders as required by applicable law is necessary. The Board of Directors may amend the Bylaws subject, however, to the rights, preferences and privileges to which the holder of any class of stock shall be entitled. The general purpose of the foregoing provisions is to make more difficult and deter efforts by another party to gain control of the Corporation on a non-negotiated basis. It is possible that such provisions might also deter non-negotiated tender offers at a premium over market price which might be, or might be viewed by stockholders as being, beneficial. In addition, to the extent such non-negotiated takeover attempts are deterred, the positions held by management are made more secure. 22 Liquidation Rights - ------------------ Shares of Preferred Stock, if any are issued in the future and then outstanding, will be preferred over Common Stock in the event of liquidation of the Corporation at the redemption price for such preferred shares in effect at the time of such liquidation, and in involuntary liquidation at prices not to exceed $100 par value per share, plus accrued dividends. In addition, in the event of liquidation of any of the Corporation's subsidiaries, all securities of the subsidiaries, other than common stock, including shares of preferred stock then issued and outstanding, would receive payment in full before any amounts would be available for distribution to the Corporation as the holder of the common stock of the subsidiaries. Subject to the foregoing, holders of the Common Stock will share ratably in assets available for distribution after payment in full of all obligations of the Corporation in the event of its liquidation. Rights - ------ Each share of Common Stock of the Corporation includes one preferred stock purchase Right which entitles the holder to purchase one one-hundredth of a share of Cumulative Participating Junior Preferred Stock, par value $100, at a price of $35 per one one-hundredth of a share subject to adjustment. 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 the acquisition or the commencement of a tender or an exchange offer by any person or group to acquire 10% or more of the issued and outstanding shares of Common Stock. 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 do not affect reported earnings per share. Dividend Reinvestment Plan - -------------------------- The Corporation offers holders of the Common Stock an opportunity through the Plan to reinvest their dividends automatically in shares of the Common Stock at a price equal to 95% of the average of the reported closing price of the Common Stock on the three trading days preceding the dividend payment date. The Plan also permits holders of Common Stock to make cash investments for the purchase of shares of Common Stock on the open market, without any discount. Such shares are offered only by means of a separate Prospectus available from the Corporation upon request. Transfer Agent & Registrar - -------------------------- The transfer agent and registrar of the Common Stock is The Bank of New York, New York, New York. DESCRIPTION OF DEBENTURES General - ------- The Debentures are to be issued under an Indenture dated as of September 1, 1997 (the "Indenture"), by and between the Corporation and Mellon Bank, N.A., as Trustee. A copy of the Indenture has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The terms of the Debentures include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act") as in effect on the date of the Indenture. Potential investors are referred to the Indenture and the Trust Indenture Act for a statement of such terms. The following statements relating to the Debentures and certain provisions of the Indenture are summaries, do not purport to be complete, and are subject to and are qualified in their entirety by reference to the provisions of the Indenture. Unless otherwise stated, capitalized terms defined in the Indenture have the same meanings when used herein. 23 The Corporation does not intend to list the Debentures on a national securities exchange. There is presently no trading market for the Debentures, and there can be no assurance that such a market will develop or, if developed, that it will be maintained. See "Risk Factors--Absence of Public Market for Debentures." Book-Entry Only System - ---------------------- The Debentures will be issued in the aggregate initial principal amount of $7,000,000 and will be represented by one certificate (the "Global Security") to be registered in the name of the nominee of The Depository Trust Company ("DTC") or any successor depository (the "Depository"). The Depository will maintain the Debentures in denominations of $1,000 and integral multiples thereof through its book-entry facilities. In accordance with its normal procedures, the Depository will record the interests of each Depository participating firm (e.g., brokerage firm) ("Participant") in the Debentures, whether held for its own account or as a nominee for another person. So long as the nominee of the Depository is the registered owner of the Debentures, such nominee will be considered the sole owner or holder of the Debentures for all purposes under the Indenture and any applicable laws, except as noted below. A Beneficial Owner, as hereinafter defined, of interests in the Debentures will not be entitled to receive a physical certificate representing such ownership interest and will not be considered an owner or holder of the Debentures under the Indenture, except as otherwise provided below. A Beneficial Owner is the person who has the right to sell, transfer or otherwise dispose of an interest in the Debentures and the right to receive the proceeds therefrom, as well as interest, principal and premium (if any) payable in respect thereof. A Beneficial Owner's interest in the Debentures will be recorded, in integral multiples of $1,000, on the records of the Participant that maintains such Beneficial Owner's account for such purpose. In turn, the Participant's interest in such Debentures will be recorded, in integral multiples of $1,000, on the records of the Depository. Therefore, the Beneficial Owner must rely on the foregoing arrangements to evidence its interest in the Debentures. Beneficial ownership of the Debentures may be transferred only by compliance with the procedures of a Beneficial Owner's Participant (e.g., brokerage firm) and the Depository. All rights of ownership must be exercised through the Depository and the book-entry system, except that a Beneficial Owner is entitled to exercise directly its rights under Section 316(b) of the Trust Indenture Act with respect to the payment of interest and principal on the Debentures. Notices that are to be given to registered owners by the Corporation or the Trustee will be given only to the Depository. It is expected that the Depository will forward the notices to the Participants by its usual procedures, so that such Participants may forward such notices to the Beneficial Owners. Neither the Corporation nor the Trustee will have any responsibility or obligation to assure that any notices are forwarded by the Depository to the Participants or by any Participants to the Beneficial Owners. DTC has advised the Corporation and the Underwriters as follows: DTC is a limited-purpose trust company organized under the Banking Law of the State of New York, a member of the Federal Reserve System, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities of Participants and facilitates the clearance and settlement of securities transactions among Participants in such securities transactions through electronic book-entry changes in accounts of Participants, thereby eliminating the need for physical movement of securities certificates. Participants include securities brokers and dealers (including the Underwriters), banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. Access to DTC's book-entry system is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by DTC only through Participants. Interest and Payment - -------------------- The Debentures will mature on September 1, 2027. The Debentures will bear interest from the date of issuance at the rate per annum stated on the cover page hereof, calculated on the basis of a 360-day year of twelve 30-day months, payable semi-annually on March 1 and September 1 of each year, commencing March 1, 1998 to the Persons in whose names the Debentures are registered at the close of business on the 15th day of the month prior to such Interest Payment Date. If any payment date would otherwise be a day that is a Legal Holiday, the payment will be postponed 24 to the next day that is not a Legal Holiday, and no interest on such payment shall accrue for the period from and after such otherwise scheduled payment date for the purposes of the payment to be made on such next succeeding day. So long as the nominee of the Depository is the registered owner of the Debentures, payments of interest, principal and premium (if any) in respect of the Debentures will be made to the Depository. The Depository will be responsible for crediting the amount of such payments to the accounts of the Participants entitled thereto, in accordance with the Depository's normal procedures. Each Participant will be responsible for disbursing such payments to the Beneficial Owners of the interests in Debentures that it represents. Neither the Corporation nor the Trustee will have any responsibility or liability for any aspect of the records relating to, notices to, or payments made on account of, beneficial ownership interests in the Debentures; maintaining, supervising or reviewing any records relating to such beneficial ownership interests; the selection of any Beneficial Owner to receive payment in the event of a partial redemption of the Global Security; or consents given or other action taken on behalf of any Beneficial Owner. Redemption at the Option of the Corporation - ------------------------------------------- The Debentures will be redeemable at any time on or after September 1, 2002, as a whole or in part, at the election of the Corporation, at a Redemption Price equal to the percentage of the principal amount set forth below if redeemed during the twelve-month period beginning September 1 of the year indicated:
Year Redemption Price % ---- ------------------ 2002 104% 2003 103% 2004 102% 2005 101% 2006 to maturity 100%
In each case, interest accrued to the Redemption Date shall also be paid. If less than all the Debentures are redeemed, the particular Debentures to be redeemed will be selected by the Trustee by lot. Notice of redemption will be mailed at least 30 days before the Redemption Date to each holder of Debentures to be redeemed at the holder's registered address. On and after the Redemption Date, interest will cease to accrue on Debentures or portions thereof called for redemption, unless the Corporation shall default in the payment of the Redemption Price. Limited Right of Redemption Upon Death of Beneficial Owner - ---------------------------------------------------------- Unless the Debentures have been declared due and payable prior to their maturity by reason of an Event of Default, the Representative (as hereinafter defined) of a deceased Beneficial Owner has the right to request redemption of all or part of his interest at par, expressed in integral multiples of $1,000 principal amount, in the Debentures for payment prior to maturity, and the Corporation will redeem the same subject to the limitations that the Corporation will not be obligated to redeem during the period from the original issuance of the Debentures through and including September 1, 1998 (the "Initial Period"), and during any twelve-month period which ends on and includes each September 1 thereafter (each such twelve-month period being hereinafter referred to as a "Subsequent Period"), (i) any interest in the Debentures which exceeds an aggregate principal amount of $25,000 or (ii) interests in the Debentures in an aggregate principal amount exceeding $210,000. A request for redemption may be presented to the Trustee by the Representative of a deceased Beneficial Owner at any time and in any principal amount. Representatives of deceased Beneficial Owners must make arrangements with the Participant through whom such interest is owned in order that timely presentation of redemption requests can be made by the Participant and, in turn, by the Depository to the Trustee. If the Corporation, although not obligated to do so, chooses to redeem interests of a deceased Beneficial Owner in the Debentures in the Initial Period or in any Subsequent Period in excess of the $25,000 limitation, such redemption, to the extent that it exceeds the $25,000 limitation for any deceased Beneficial Owner, shall not be 25 included in the computation of the $210,000 aggregate limitation for such Initial Period or such Subsequent Period, as the case may be, or for any succeeding Subsequent Period. Subject to the $25,000 and the $210,000 limitations, the Corporation will, upon the death of any Beneficial Owner, redeem the interest of the Beneficial Owner in the Debentures within 60 days following receipt by the Trustee of a Redemption Request (as hereinafter defined) from such Beneficial Owner's personal representative, or surviving joint tenant(s), tenant(s) by the entirety or tenant(s) in common, or other persons entitled to effect such a Redemption Request (each, a "Representative"). If Redemption Requests exceed the aggregate principal amount of interests in Debentures required to be redeemed during the Initial Period or any Subsequent Period, then such excess Redemption Requests will be applied to successive Subsequent Periods, regardless of the number of Subsequent Periods required to redeem such interests. A request for redemption of an interest in the Debentures may be made by delivering a request to the Depository, in the case of a Participant which is the Beneficial Owner of such interest, or to the Participant through whom the Beneficial Owner owns such interest, in form satisfactory to the Participant, together with evidence of the death of the Beneficial Owner and evidence of the authority of the Representative satisfactory to the Participant and Trustee. A Representative of a deceased Beneficial Owner may make the request for redemption and shall submit such other evidence of the right to such redemption as the Participant or Trustee shall require. The request shall specify the principal amount of interest in the Debentures to be redeemed. A request for redemption in form satisfactory to the Participant and accompanied by the documents relevant to the request as above provided, together with a certification by the Participant that it holds the interest on behalf of the deceased Beneficial Owner with respect to whom the request for redemption is being made (a "Redemption Request"), shall be provided to the Depository by a Participant, and the Depository will forward the request to the Trustee. Redemption Requests shall be in form satisfactory to the Trustee. The price to be paid by the Corporation for an interest in the Debentures to be redeemed pursuant to a request on behalf of a deceased Beneficial Owner is one hundred percent (100%) of the principal amount thereof plus accrued but unpaid interest to the date of payment. Subject to arrangements with the Depository, payment for interests in the Debentures which are to be redeemed shall be made to the Depository upon presentation of Debentures to the Trustee for redemption in the aggregate principal amount specified in the Redemption Requests submitted to the Trustee by the Depository which are to be fulfilled in connection with such payment. Any acquisition of Debentures by the Corporation or its Subsidiaries other than by redemption at the option of any Representative of a deceased Beneficial Owner shall not be included in the computation of either the $25,000 or the $210,000 limitation for the Initial Period or for any Subsequent Period. Interests in the Debentures held in tenancy by the entirety, joint tenancy or by tenants in common will be deemed to be held by a single Beneficial Owner and the death of a tenant in common, tenant by the entirety or joint tenant will be deemed the death of a Beneficial Owner. The death of a person who, during such person's lifetime, was entitled to substantially all of the rights of a Beneficial Owner of an interest in the Debentures will be deemed the death of the Beneficial Owner, regardless of the recordation of such interest on the records of the Participant, if such rights can be established to the satisfaction of the Participant and the Trustee. Such interest shall be deemed to exist in typical cases of nominee ownership, ownership under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, community property or other joint ownership arrangements between a husband and wife (including individual retirement accounts or Keogh plans maintained solely by or for the decedent or by or for the decedent and his or her spouse), and trust and certain other arrangements where one person has substantially all of the rights of a Beneficial Owner during such person's lifetime. In the case of a Redemption Request which is presented on behalf of a deceased Beneficial Owner and which has not been fulfilled at the time the Corporation gives notice of its election to redeem the Debentures, the interests in the Debentures which are subject of such Redemption Request shall not be eligible for redemption pursuant to the Corporation's option to redeem but shall remain subject to fulfillment pursuant to such Redemption Request. 26 Subject to the provisions of the immediately preceding paragraph, any Redemption Request may be withdrawn upon delivery of a written request for such withdrawal given to the Trustee by the Depository prior to payment for redemption of the interest in the Debentures by reason of the death of a Beneficial Owner. The Corporation is legally obligated to redeem Debentures and interests of Beneficial Owners therein properly presented for redemption pursuant to a Redemption Request in accordance with and subject to the terms, conditions and limitations of the Indenture, as summarized above. The Corporation's redemption obligation is not cumulative. Nothing in the Indenture prohibits the Corporation from redeeming, in fulfillment of Redemption Requests made pursuant to the Indenture, Debentures or interests therein of Beneficial Owners in excess of the principal amount the Corporation is obligated to redeem, nor does anything in the Indenture prohibit the Corporation from purchasing any Debentures or interests therein in the open market. However, the Corporation may not use any Debentures redeemed or purchased as described in the immediately preceding sentence as a credit against its redemption obligation. Because of the limitations of the Corporation's requirement to redeem, no Beneficial Owner can have any assurance that its interest in the Debentures will be paid prior to maturity. Sinking Fund; Non-Convertibility - -------------------------------- The Debentures are not subject to a sinking fund and are not convertible. Debentures Unsecured - -------------------- The Debentures will be unsecured and will rank on a parity with all of the other unsecured and unsubordinated Indebtedness of the Corporation outstanding from time to time. Subject only to the restrictive covenants described below (see "Restrictive Covenants"), the Indenture does not limit the amount of Indebtedness which the Corporation or its subsidiaries may incur. Restrictive Covenants - --------------------- The Corporation covenants in the Indenture that it will not declare or pay any dividends or make any other distribution upon its Common Stock (other than dividends and distributions payable only in shares of Common Stock) and will not directly or indirectly apply any of the assets of the Corporation to the redemption, retirement, purchase or other acquisition of any stock of the Corporation of any class, except purchases or redemptions in compliance with any mandatory sinking fund or purchase fund or redemption requirement in respect of any preferred stock of the Corporation, whether now or hereafter authorized or issued, unless after giving effect to such declaration, payment, distribution or application of assets the Consolidated Tangible Net Worth of the Corporation shall be at least equal to $20,000,000 as reflected on the Corporation's latest available balance sheet. Consolidated Tangible Net Worth is defined in the Indenture as the shareholders' equity of the Corporation, less intangible assets other than amounts recoverable from future ratepayers in accordance with RIPUC rate treatment. At February 28, 1997, after giving effect to the issuance of the Common Stock and the Debentures, Consolidated Tangible Net Worth of the Corporation would have been approximately $68,418,400. Subject to certain exceptions described in the Indenture, the Corporation also covenants that neither it nor any of its subsidiaries will issue, assume or guarantee any Indebtedness secured by a Lien (as defined in the Indenture) on any property or asset at any time owned by it, without effectively securing, prior to or concurrently with the issuance, assumption or guarantee of any such Indebtedness, the Debentures equally and ratably (or, at the Corporation's option, prior to) such Indebtedness. The Corporation also covenants that neither it nor any of its subsidiaries will issue, assume or guarantee any Funded Indebtedness (as defined in the Indenture) on any property or asset at any time owned by it, unless immediately thereafter, and after giving effect thereto and to the application of the proceeds thereof, Consolidated Net Utility Fixed Assets shall be at least equal to Consolidated Funded Indebtedness. 27 Except as described in the preceding paragraphs, the Indenture does not afford any protection to holders of Debentures solely on account of the Corporation's involvement in highly leveraged transactions. Successor Corporation - --------------------- The Corporation covenants in the Indenture that it will not consolidate with, merge into or transfer or lease all or substantially all of its assets to another corporation, unless immediately after such transaction no default will exist, such corporation assumes all the obligations of the Corporation under the Debentures and the Indenture, and certain other requirements are met. Events of Default; Notice and Waiver - ------------------------------------ The following constitute events of default under the Indenture: (a) default in the payment of principal (or premium, if any) of the Debentures when due; (b) default in the payment of any interest on the Debentures when due, continued for 30 days; (c) default in the performance of any other agreement of the Corporation in the Debentures or the Indenture, continued for 60 days after written notice; (d) acceleration of certain indebtedness of the Corporation or its Subsidiaries for borrowed money under the terms of any instrument under which indebtedness of $500,000 or more is issued or secured; and (e) certain events in bankruptcy, insolvency or reorganization. The Indenture provides that the Trustee will, within 90 days after the occurrence of a default, give the holders of Debentures notice of all continuing defaults (as defined) known to it; but, except in the case of a default in the payment of the principal or premium, if any, or interest in respect of any of the Debentures, the Trustee shall be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interest of such holders. If any event of default shall occur and be continuing, the Trustee or the holders of at least 25% in principal amount of outstanding Debentures may declare the Debentures immediately due and payable. Any such acceleration may be rescinded by the holders of a majority in principal amount of the Debentures then outstanding, upon the conditions provided in the Indenture. An existing default and its consequences may be waived by the holders of a majority in principal amount of the Debentures, upon the conditions provided in the Indenture, other than an uncured default in payment of principal, premium, if any, or interest in respect of the Debentures, an uncured failure to make any redemption payment or an uncured default with respect to a provision which cannot be modified under the terms of the Indenture without the consent of each holder affected. The Indenture includes a covenant that the Corporation will file annually with the Trustee, within 120 days after the end of each fiscal year, a statement regarding compliance by the Corporation with the terms thereof and specifying any defaults by the Corporation of which the signers may have knowledge. Modification of the Indenture - ----------------------------- Modifications and amendments of the Indenture which materially affect the rights of the holders of the Debentures may be made by the Corporation and the Trustee only with the consent of the holders of not less than a majority in principal amount of the Debentures then outstanding; provided that no such modification or amendment may change the stated maturity of any Debenture, or reduce the principal amount of or redemption premium, if any, or interest rate on any Debenture or change the interest payment date or otherwise modify the terms of payment of the principal of or redemption premium, if any, or interest on the Debentures, or reduce the percentage required for any consent, waiver or modification, or modify certain other provisions of the Indenture, without the consent of each holder of any Debenture affected thereby. 28 Discharge of the Indenture - -------------------------- The Indenture will be discharged and canceled upon payment of all the Debentures or upon deposit with the Trustee, within no more than one year prior to the maturity or the redemption of all the Debentures, of funds or U.S. Government Obligations sufficient to pay the principal of and premium, if any, and interest on the Debentures. UNDERWRITING The Underwriters named below (the "Underwriters") have severally agreed, subject to the terms and conditions of the Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement, to purchase from the Corporation the number of shares of Common Stock and the principal amounts of Debentures set forth opposite their respective names.
Number of Shares Principal Amount Underwriters of Common Stock of Debentures ------------ --------------- ------------- Edward D. Jones & Co., L.P. First Albany Corporation _______ __________ Total 620,000 $7,000,000 ======= ==========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the Common Stock and Debentures are subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the shares of Common Stock and Debentures offered hereby if any are taken (other than shares of Common Stock covered by the over-allotment option described below). The Underwriters have advised the Corporation that they propose to offer the Common Stock and Debentures being purchased by them directly to the public at the initial public offering prices set forth on the cover page of this Prospectus and in part to certain securities dealers, which are members of the National Association of Securities Dealers, Inc., at such prices less a concession of not more than $_____ per share of Common Stock and not more than __% of the principal amount of the Debentures. After the initial public offering, the public offering prices and concessions may be changed by the Underwriters. The offering of the Common Stock and Debentures is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offer without notice. The Underwriters reserve the right to reject any order for the purchase of Common Stock or Debentures in whole or in part. The Corporation has granted to the Underwriters an option for 30 days to purchase (at the Common Stock Price to Public less the Underwriting Discounts and Commissions shown on the cover page of this Prospectus) up to 93,000 additional shares of Common Stock. The Underwriters may exercise such option only to cover over-allotments of shares of Common Stock made in connection with the sale of the shares offered hereby. Until the distribution of the Common Stock and Debentures is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock and Debentures. As an exception to these rules, the Underwriters are permitted to engage in certain transactions that stabilize the price of the Common Stock and Debentures. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock and Debentures. If the Underwriters create a short position in the Common Stock or Debentures in connection with the Offering, i.e., if they sell more Common Stock or Debentures than are set forth on the cover page of this Prospectus, the Underwriters may reduce that short position by purchasing Common Stock or Debentures in the open market. 29 In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Corporation nor either of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock and Debentures. In addition, neither the Corporation nor either of the Underwriters makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The Corporation has agreed to indemnify the Underwriters and persons who control the Underwriters against certain liabilities that may be incurred in connection with the offering contemplated hereby, including liabilities under the Act or to contribute to payments the Underwriters may be required to make in respect thereof. LEGAL MATTERS The validity of the securities offered hereby has been passed upon for the Corporation by Edwards & Angell, 150 John F. Kennedy Parkway, Short Hills, New Jersey 07078-2701. Certain matters will be passed upon for the Underwriters by Armstrong, Teasdale, Schlafly & Davis, One Metropolitan Square, St. Louis, Missouri 63102. EXPERTS The consolidated financial statements of Valley Resources, Inc. and subsidiaries at August 31, 1996 and 1995 and for each of the three years in the period ended August 31, 1996, are included and incorporated by reference in this Prospectus, have been audited by Grant Thornton, LLP, independent certified public accountants, as indicated in their report with respect thereto, and are included and incorporated herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. 30 VALLEY RESOURCES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Certified Public Accountants............................32 Consolidated Statements of Earnings for the Six Months Ended February 28, 1997 and 1996 (unaudited) and the Fiscal Years Ended August 31, 1996, 1995 and 1994 (audited)....................................................33 Consolidated Statements of Cash Flows for the Six Months Ended February 28, 1997 and 1996 (unaudited) and the Fiscal Years Ended August 31, 1996, 1995 and 1994 (audited)....................................................34 Consolidated Balance Sheets as of February 28, 1997 (unaudited) and August 31, 1996 and 1995 (audited).........................................35 Consolidated Statements of Changes in Common Stock Equity for the Six Months Ended February 28, 1997 (unaudited) and the Fiscal Years Ended August 31, 1996, 1995 and 1994 (audited)...................................37 Consolidated Statements of Capitalization as of February 28, 1997 (unaudited) and August 31, 1996 and 1995 (audited).........................38 Notes to Consolidated Financial Statements....................................39 31 Valley Resources, Inc. Report of Independent Certified Public Accountants To the Stockholders of Valley Resources, Inc. We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Valley Resources, Inc. (a Rhode Island corporation) and subsidiaries as of August 31, 1996 and 1995 and the related consolidated statements of earnings, cash flows and changes in common stock equity for each of the three years in the period ended August 31, 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Valley Resources, Inc. and subsidiaries as of August 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. Grant Thornton, LLP Boston, Massachusetts September 24, 1996 32 Valley Resources, Inc. and Subsidiaries Consolidated Statements of Earnings
For the six months ended For the year ended February 28, August 31, ------------------------ --------------------------------- 1997 1996 1996 1995 1994 ---- ---- ---- ---- ---- (unaudited) Operating revenues: Utility gas revenues......................... $36,123,364 $33,961,825 $60,773,519 $56,012,913 $65,323,556 Nonutility revenues.......................... 11,148,942 10,383,606 19,586,615 18,857,277 18,229,362 ----------- ----------- ----------- ----------- ----------- Total...................................... 47,272,306 44,345,431 80,360,134 74,870,190 83,552,918 ----------- ----------- ----------- ----------- ----------- Operating expenses: Cost of gas sold............................. 20,577,710 17,797,975 31,951,154 30,229,359 38,233,511 Cost of sales - nonutility................... 7,719,820 7,276,754 13,688,935 13,189,797 12,783,575 Operations................................... 9,254,761 8,981,575 17,706,904 16,752,501 16,299,527 Maintenance.................................. 826,599 803,043 1,671,971 1,535,206 1,485,279 Depreciation (Note A)........................ 1,555,476 1,462,056 2,956,727 2,684,755 2,473,467 Taxes - other than Federal income............ 2,223,897 2,152,617 4,090,751 4,002,076 4,463,406 - Federal income (Notes A and F)....... 1,122,267 1,409,298 1,443,547 731,947 1,313,227 ----------- ----------- ----------- ----------- ----------- Total...................................... 43,280,530 39,883,318 73,509,989 69,125,641 77,051,992 ----------- ----------- ----------- ----------- ----------- Operating income................................ 3,991,776 4,462,113 6,850,145 5,744,549 6,500,926 Other income - net of tax (Notes A and F)....... 157,916 270,848 459,938 115,032 227,450 ----------- ----------- ----------- ----------- ----------- Total income before interest.................... 4,149,692 4,732,961 7,310,083 5,859,581 6,728,376 ----------- ----------- ----------- ----------- ----------- Interest charges: Long-term debt............................... 964,324 948,081 1,927,154 1,947,205 2,037,760 Other........................................ 697,292 705,460 1,384,569 1,357,451 864,590 ----------- ----------- ----------- ----------- ----------- Total...................................... 1,661,616 1,653,541 3,311,723 3,304,656 2,902,350 ----------- ----------- ----------- ----------- ----------- Net income available for common stock........... $ 2,488,076 $ 3,079,420 $ 3,998,360 $ 2,554,925 $ 3,826,026 ============ ============ =========== =========== =========== Average number of common shares outstanding..... 4,261,672 4,250,996 4,258,877 4,222,662 4,205,760 Earnings per average common share outstanding... $0.58 $0.72 $0.94 $0.61 $0.91 The accompanying Notes are an integral part of these statements.
33 Valley Resources, Inc. and Subsidiaries Consolidated Statements of Cash Flows
For the six months ended February 28, For the year ended August 31, ------------ ----------------------------- 1997 1996 1996 1995 1994 ---- ---- ---- ---- ---- (unaudited) Increase (decrease) in cash: Cash flows from operating activities: Net income.......................................... $2,488,076 $3,079,420 $3,998,360 $2,554,925 $3,826,026 Adjustments to reconcile net income to net cash: Depreciation...................................... 1,555,476 1,462,056 2,956,727 2,684,755 2,473,467 Provision for uncollectibles...................... 777,889 671,974 1,459,761 1,274,238 959,404 Deferred Federal income taxes..................... 1,409,855 773,927 922,007 619,918 1,040,691 Amortization of investment tax credits............ -0- -0- (49,452) (50,144) (44,940) Change in assets and liabilities: Accounts receivable............................... (7,578,235) (6,269,033) (718,826) (1,612,297) (492,220) Deferred fuel costs............................... (2,380,694) (1,303,800) (3,977,779) 2,629,056 1,752,484 Unbilled gas costs................................ (1,163,708) (1,380,835) (4,603) (4,617) (5,256) Fuel and other inventories........................ 1,332,327 1,873,988 (663,964) 502,202 331,499 Prepayments....................................... 708,354 742,579 (249,971) (72,088) (31,177) Common stock held for dividend reinvestment plan.. (46,322) 248,777 158,876 (271,315) 23,530 Prepaid pensions.................................. (462,373) (312,684) (625,374) (572,320) (784,454) Accounts payable.................................. 699,973 1,464,435 921,892 (275,189) (323,061) Security deposits................................. (5,310) (65,663) (65,258) 30,945 47,803 Taxes accrued..................................... 303,533 1,151,236 (317,791) (131,917) 69,422 Other............................................. 392,390 (54,219) (75,564) (578,144) (500,288) ---------- ---------- ---------- ---------- ---------- Total adjustments............................... (4,456,845) (997,262) (329,319) 4,173,083 4,516,904 ---------- ---------- ---------- ---------- ---------- Net cash (used) provided by operating activities.... (1,968,769) 2,082,158 3,669,041 6,728,008 8,342,930 ---------- ---------- ---------- ---------- ---------- Cash flows from investing activities: Utility capital expenditures........................ (1,708,160) (2,435,064) (4,396,081) (5,335,159) (3,953,702) Nonutility capital expenditures..................... (370,768) (297,754) (612,628) (580,772) (599,725) Other investments................................... (20,272) (12,013) (49,360) (13,400) (51,262) ---------- ---------- ---------- ---------- ---------- Net cash used by investing activities............... (2,099,200) (2,744,831) (5,058,069) (5,929,331) (4,604,689) ---------- ---------- ---------- ---------- ---------- Cash flows from financing activities: Dividends paid...................................... (1,555,034) (1,527,147) (3,083,369) (2,989,702) (2,900,408) Common stock transactions........................... (34,279) 56,579 184,615 391,278 (95,418) Issuance of revolving credit arrangement............ 100,000 2,200,000 2,200,000 -0- -0- Retirement of long-term debt........................ (57,000) (825,000) (860,000) (1,333,000) (95,000) Increase (decrease) in notes payable................ 5,800,000 1,400,000 3,000,000 3,000,000 (1,000,000) ---------- ---------- ---------- ---------- ---------- Net cash provided (used) by financing activities.... 4,253,687 1,304,432 1,441,246 (931,424) (4,090,826) ---------- ---------- ---------- ---------- ---------- Net increase (decrease) in cash....................... 185,718 641,759 52,218 (132,747) (352,585) Cash, beginning....................................... 506,813 454,595 454,595 587,342 939,927 ---------- ---------- ---------- ---------- ---------- Cash, ending.......................................... $ 692,531 $ 1,096,354 $ 506,813 $ 454,595 $ 587,342 =========== =========== =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ......................................... $ 1,657,523 $ 1,731,663 $ 3,311,577 $ 3,265,612 $ 2,895,752 =========== =========== =========== =========== =========== Federal income taxes.............................. $ -0- -0- $ 885,000 $ 380,000 $ 637,000 =========== =========== =========== =========== =========== Supplemental disclosures of noncash activity: Capital lease obligations incurred.................. $ 200,905 $ 98,756 $1,844,817 $ 300,972 $ 956,973 =========== =========== =========== =========== =========== The accompanying Notes are an integral part of these statements.
34 Valley Resources, Inc. and Subsidiaries Consolidated Balance Sheets
February 28, August 31, 1997 1996 1995 ---- ---- ---- (unaudited) Assets: Utility plant, at cost (Notes A and D) .............................. $ 78,079,856 $ 76,534,841 $ 72,759,666 Less: Accumulated provision for depreciation (Note A) .............. 28,204,219 27,092,766 25,348,673 ------------ ------------ ------------ Net utility plant ................................................... 49,875,637 49,442,075 47,410,993 ------------ ------------ ------------ Leased property-less accumulated amortization of $3,180,521, $2,789,155 and $2,088,737 ........................................ 2,638,145 2,944,581 2,013,647 ------------ ------------ ------------ Nonutility property-less accumulated provision for depreciation of $4,001,517, $3,850,692 and $3,434,784 (Note A) ................... 3,657,604 3,567,797 3,546,543 ------------ ------------ ------------ Other investments ................................................... 1,530,732 1,510,460 1,461,100 ------------ ------------ ------------ Current assets: Cash ............................................................ 692,531 506,813 454,595 Accounts receivable-less allowance for uncollectibles of $820,938, $719,721 and $655,951 .......................................... 16,745,826 9,945,481 10,686,414 Deferred fuel costs (Note A) ..................................... 3,207,706 827,012 -0- Deferred unbilled gas costs (Note A) ............................. 1,602,602 438,894 434,291 Fuel and other inventories (Note A) .............................. 4,716,120 6,048,447 5,384,483 Prepayments ...................................................... 700,948 1,409,302 1,159,331 Common stock held for dividend reinvestment plan (Note B) ........ 177,141 130,819 289,695 ------------ ------------ ------------ Total current assets ......................................... 27,842,874 19,306,768 18,408,809 ------------ ------------ ------------ Deferred debits: Recoverable postretirement benefit (Note H) ...................... 577,436 692,922 692,922 Recoverable vacations accrued .................................... 723,311 633,194 846,825 Recoverable deferred Federal income taxes (Note F) ............... 6,182,748 5,969,839 5,713,177 Recoverable transition obligation (Note H) ....................... 1,700,000 1,700,000 1,325,000 Unamortized debt discount and expense ............................ 1,494,127 1,523,092 1,581,023 Prepaid pensions (Note H) ........................................ 6,633,210 6,170,837 5,545,463 Other ............................................................ 3,006,534 3,227,420 3,792,004 ------------ ------------ ------------ Total deferred debits ........................................ 20,317,366 19,917,304 19,496,414 ------------ ------------ ------------ Total assets ................................................. $105,862,358 $ 96,688,985 $ 92,337,506 ============ ============ ============ The accompanying Notes are an integral part of these statements.
35 Valley Resources, Inc. and Subsidiaries Consolidated Balance Sheets
February 28, August 31, 1997 1996 1995 ---- ---- ---- (unaudited) Capitalization and liabilities: Capitalization (see Consolidated Statements of Capitalization) $ 51,189,998 $ 50,348,234 $ 50,608,628 ------------ ------------ ------------ Revolving credit arrangements (Note F) ....................... 2,300,000 2,200,000 -0- ------------ ------------ ------------ Obligations under capital leases (Note D) .................... 1,759,893 2,133,543 1,254,778 ------------ ------------ ------------ Current liabilities: Current maturities of long-term debt (Note D) ............. 500,000 500,000 500,000 Obligations under capital leases (Note D) ................. 878,252 811,036 758,870 Notes payable (Note C) .................................... 20,700,000 14,900,000 11,900,000 Accounts payable .......................................... 5,943,180 5,243,207 4,321,315 Security deposits ......................................... 1,091,437 1,096,747 1,162,005 Taxes accrued ............................................. 493,558 190,025 507,816 Deferred fuel costs (Note A) .............................. -0- -0- 3,150,767 Accrued interest .......................................... 554,923 551,979 655,045 Other ..................................................... 907,151 712,413 976,138 ------------ ------------ ------------ Total current liabilities ............................. 31,068,501 24,005,407 23,931,956 ------------ ------------ ------------ Commitments and contingencies (Note H) Deferred credits: Unamortized investment tax credit (Note A) ................ 723,688 723,688 773,141 Transition obligation (Note H) ............................ 1,700,000 1,700,000 1,325,000 Unfunded deferred Federal income taxes (Note F) ........... 1,922,773 1,922,773 1,930,375 Postretirement benefit obligation (Note H) ................ 577,436 692,922 692,922 Other ..................................................... 1,832,218 1,700,469 1,729,504 ------------ ------------ ------------ Total deferred credits ................................ 6,756,115 6,739,852 6,450,942 ------------ ------------ ------------ Deferred Federal income taxes (Notes A and F) ................ 12,787,851 11,261,949 10,091,202 ------------ ------------ ------------ Total liabilities ..................................... 54,672,360 46,340,751 41,728,878 ------------ ------------ ------------ Total capitalization and liabilities ......................... $105,862,358 $ 96,688,985 $ 92,337,506 ============ ============ ============ The accompanying Notes are an integral part of these statements.
36 Valley Resources, Inc. and Subsidiaries Consolidated Statements of Changes in Common Stock Equity
Common Shares Issued Paid in Retained & Outstanding Capital Earnings ------------- ------- -------- Number Amount ------ ------ Balance, August 31, 1993 ............. 4,213,043 $ 4,213,043 $17,790,573 $ 6,344,574 Add (deduct): Net income ........................ 3,826,026 Cash dividends on common stock .... (2,900,408) Other ............................. (95,418) --------- ----------- ----------- ----------- Balance, August 31, 1994 ............. 4,213,043 4,213,043 17,695,155 7,270,192 --------- ----------- ----------- ----------- Add (deduct): Net income ........................ 2,554,925 Cash dividends on common stock .... (2,989,702) Dividend reinvestment plan (Note B) 47,754 47,754 465,376 Other ............................. (121,852) --------- ----------- ----------- ----------- Balance, August 31, 1995 ............. 4,260,797 4,260,797 18,038,679 6,835,415 --------- ----------- ----------- ----------- Add (deduct): Net income ........................... 3,998,360 Cash dividends on common stock .... (3,083,369) Dividend reinvestment plan (Note B) 19,231 19,231 202,680 Other ............................. (37,296) --------- ----------- ----------- ----------- Balance, August 31, 1996 ............. 4,280,028 4,280,028 18,204,063 7,750,406 --------- ----------- ----------- ----------- Add (deduct): Net income ........................ 2,488,076 Cash dividends on common stock .... (1,555,033) Dividend reinvestment plan Other ............................. (34,279) --------- ----------- ----------- ----------- Balance, February 28, 1997 (unaudited) 4,280,028 $ 4,280,028 $18,169,784 $ 8,683,449 ========= =========== =========== =========== The accompanying Notes are an integral part of these statements.
37 Valley Resources, Inc. and Subsidiaries Consolidated Statements of Capitalization
February 28, August 31, 1997 1996 1995 ---- ---- ---- (unaudited) Common stock equity: Common stock, $1 par value (Note B) Authorized 20,000,000 shares Issued and outstanding 4,280,028, 4,280,028 and 4,260,797 shares....................................................... $ 4,280,028 $ 4,280,028 $ 4,260,797 Paid in capital (Note B)................................................... 18,169,784 18,204,063 18,038,679 Retained earnings (Notes B and E).......................................... 8,683,449 7,750,406 6,835,415 ----------- ------------ ------------ 31,133,261 30,234,497 29,134,891 Less: Accounts receivable from Valley Gas Employee Stock Ownership Plan (Note D).................................. 3,142,200 3,142,200 3,142,200 ----------- ------------ ------------ Total common stock equity............................................. 27,991,061 27,092,297 25,992,691 ----------- ------------ ------------ Long-term debt (Note D):..................................................... 8% First Mortgage Bonds, due 2022......................................... 20,155,000 20,212,000 21,072,000 9% Notes Payable, due 1999................................................ 2,138,937 2,138,937 2,138,937 Note payable.............................................................. 1,405,000 1,405,000 1,905,000 ----------- ------------ ------------ Total................................................................. 23,698,937 23,755,937 25,115,937 Less: Current maturities............................................... 500,000 500,000 500,000 ----------- ------------ ------------ Total long-term debt......................................................... 23,198,937 23,255,937 24,615,937 ----------- ------------ ------------ Total capitalization......................................................... $51,189,998 $50,348,234 $50,608,628 =========== =========== =========== The accompanying Notes are an integral part of these statements.
38 Valley Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Including Notes Applicable to Unaudited Periods) 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 1996 was 2.91% and was 2.72% for fiscal 1995 and fiscal 1994. Depreciation provisions for other subsidiary companies are provided on the straight-line and accelerated methods at rates ranging from 2.86% to 34%. Deferred Fuel Costs - 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. Pension Plans - Valley Gas maintains two non-contributory defined benefit pension plans covering substantially all of Valley Gas' employees. The plans provide benefits based on compensation and years of service. Valley Gas' policy is to fund pension costs that are deductible for Federal income tax purposes (see Note H). Additionally, Valley Gas maintains a 39 401(k) plan covering substantially all of Valley Gas' employees. In fiscal 1996, 1995 and 1994, plan expense was $126,100, $122,400 and $112,900, respectively. Morris Merchants maintains an employee profit sharing plan covering substantially all of the employees who have completed one year of service. Contributions to the plan are at the discretion of the Board of Directors. In fiscal 1996, 1995 and 1994 profit sharing expense was $68,400, $68,400 and $73,700, respectively. Bristol & Warren maintains a non-contributory defined contribution pension plan covering substantially all of its employees. The plan provides benefits based on hours worked and rate of pay. In fiscal 1996, 1995 and 1994 plan expense was $23,000, $27,500 and $23,100, respectively. New Accounting Standard - In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of", which will be effective for the Corporation's fiscal year ending August 31, 1997. This statement requires the Corporation to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Corporation intends to adopt this statement prospectively. The impact of the standard is not expected to have a material impact on the Corporation's financial condition or results of operations. Inventories - Fuel and other inventories are as follows:
February 28 August 31 1997 1996 1995 ---- ---- ---- Fuels (at average cost)...................... $2,139,556 $3,622,698 $3,254,439 Merchandise and other (at average cost)...... 1,106,199 1,199,856 1,051,585 Merchandise (at LIFO)........................ 1,470,365 1,225,893 1,078,459 ---------- ---------- ---------- $4,716,120 $6,048,447 $5,384,483 ========== ========== ==========
Merchandise (at LIFO), if valued at current cost, would have been greater by $327,300 in 1996 and $255,400 in 1995. Note B: Common Stock and Rights Pursuant to the Corporation's dividend reinvestment plan, stockholders can reinvest dividends and make limited additional cash investments. Shares issued through dividend reinvestment can be acquired on the open market or original issue. In fiscal 1996 and 1995, the Corporation issued 19,231 and 47,754 shares of common stock, respectively, under provisions of the dividend reinvestment plan. All shares issued pursuant to the plan in fiscal 1994 were open-market purchases. At August 31, 1996 and 1995, 10,813 and 26,190 shares, respectively, were held by the Corporation for issuance to the plan. On August 31, 1996, except as mentioned above, no shares of common stock of the Corporation were held by or for the account of the Corporation or were reserved for officers or employees or for options, warrants or other rights, except 41,125 shares of common stock reserved subject to sale under the Corporation's dividend reinvestment plan. Each share of common stock of the Corporation includes one preferred stock purchase Right which entitles the holder to purchase one one-hundredth of a share of Cumulative Participating Junior Preferred Stock, par value $100, at a price of $35 per one one-hundredth of a share subject to adjustment. 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. 40 Note C: Short-Term Debt The Corporation borrows on bank lines of credit at the prevailing interest rate available at the time of borrowing. The Corporation either pays commitment fees or maintains compensating balances in connection with these lines of credit. Commitment fees paid in fiscal 1996, 1995 and 1994 amounted to $114,800, $94,500, and $64,900, respectively. There are no legal restrictions on withdrawal of compensating balances. A detail of short-term borrowings for fiscal 1996, 1995 and 1994 is as follows:
1996 1995 1994 ---- ---- ---- At year end Weighted average interest rate 5.7% 5.9% 5.2% Unused lines of credit ....... $14,100,000 $15,100,000 $14,600,000 For the year ended Weighted average interest rate 6.0% 6.2% 3.9% Average borrowings ........... $12,908,300 $11,283,300 $10,991,700 Maximum month-end borrowings . $16,000,000 $16,000,000 $14,900,000 Month of maximum borrowings .. November December January
Note D: Long-Term Debt The composition of long-term debt is included in these financial statements in the separate Consolidated Statements of Capitalization. The aggregate amount of maturities and sinking fund requirements for each of the five fiscal years following fiscal 1996 are: 1997, $1,311,000; 1998, $3,901,100; 1999, $2,714,100; 2000, $568,400; and 2001, $135,500, inclusive of capitalized lease obligations. Valley Gas utility plant and equipment have been pledged as collateral to secure its long-term debt. In accordance with the redemption provisions of the Valley Gas 8% First Mortgage Bonds, $860,000 and $1,333,000 of the bonds were redeemed by holders in fiscal 1996 and fiscal 1995, respectively. The fair market value of the Corporation's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. Management believes the carrying value of the debt approximates the fair value at August 31, 1996. Regulatory treatment allows payments under capital leases to be recorded as rental expenses. Rental expenses for all leases in fiscal 1996, 1995 and 1994 were $1,437,900, $1,179,800, and $1,235,200, respectively. 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 1998, with the option to extend the termination date to November 30, 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 Valley Gas' Employee Stock Ownership Plan ("ESOP"). The receivable from the ESOP has been shown as a reduction of common stock equity. The financing by the ESOP is secured by the common stock of two unregulated subsidiaries and the unallocated shares held by the ESOP. The Corporation's common stock purchased by the ESOP with the borrowed money is held by the ESOP trustee in a "suspense account." As Valley Gas makes contributions to the plan, a portion of the common stock is released from the suspense account and allocated to participating employees. Any dividends on unallocated shares are used to pay loan interest. ESOP expense in fiscal 1996 was $100,000. There was no ESOP expense recorded in fiscal 1995 and 1994. 41 Note E: Restriction on Retained Earnings At August 31, 1996, $1,229,400 of the retained earnings of Valley Gas were available for the payment of cash dividends to 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, 1996, the Corporation has a liability of $5,969,800 on the Consolidated Balance Sheets as recoverable deferred income taxes and a corresponding recoverable deferred charge. The liability represents the tax effect of timing differences for which deferred income taxes had not been provided, increased in accordance with SFAS 109 for the tax effect of future revenue requirements. The Utilities are recovering unfunded deferred taxes from utility customers over the remaining book life of utility property. Federal income tax expense has been calculated based on filing a consolidated corporate tax return and is comprised of the following:
1996 1995 1994 ---- ---- ---- Current income tax expense: Operating expense ............... $ 521,540 $112,029 $ 272,536 Nonoperating expense ............ 147,065 71,230 82,678 ---------- -------- ---------- 668,605 183,259 355,214 ---------- -------- ---------- Deferred income tax expense: Accelerated depreciation ........ 276,474 194,537 269,823 Pensions ........................ 212,627 194,588 266,715 Deferred fuel costs ............. 293,801 -0- -0- Uncollectibles .................. (21,840) 2,142 (32,289) Directors' fees and interest .... (36,453) (8,744) (46,169) Bond premium .................... (6,240) (6,242) 176,387 Rate case expenses .............. (37,626) 174,290 (43,785) Capitalization of inventory costs (6,897) (2,079) 45,977 Consulting contracts ............ 64,392 64,389 150,111 Software amortization ........... 140,856 140,856 254,350 Alternative minimum tax ......... 8,617 (180,000) -0- Other ........................... 34,296 46,181 (429) ---------- -------- ---------- 922,007 619,918 1,040,691 ---------- -------- ---------- Total ........................... $1,590,612 $803,177 $1,395,905 ========== ======== ==========
The Federal income tax amounts included in the Consolidated Statements of Earnings differ from the amounts which result from applying the statutory Federal income tax rate to income from operations before income tax. The reasons, with related percentage effects, are shown below: 42
1996 1995 1994 ---- ---- ---- Statutory Federal rate ........................... 34% 34% 34% Maintenance costs capitalized for book purposes (3) (4) (4) Cost of removal ............................... (1) (1) (1) ESOP dividends ................................ (1) (2) (1) Prior year over accrual ....................... -0- (2) -0- Other ......................................... (1) (1) (1) -- -- -- Total ......................................... 28% 24% 27% == == ==
Temporary differences which gave rise to the following deferred tax assets and liabilities at August 31, 1996 and 1995 are:
1996 1995 ---- ---- Unbilled revenues .................................................. $ 271,504 $ 264,144 Directors' fees and interest ....................................... 215,477 179,024 Other .............................................................. 525,365 505,245 ------------ ------------ Total deferred tax assets ....................................... 1,012,346 948,413 ------------ ------------ Accelerated depreciation ........................................... (8,446,411) (7,905,673) Pensions ........................................................... (2,116,771) (1,904,144) Software amortization .............................................. (536,062) (395,206) Deferred fuel costs ................................................ (293,801) -0- Other .............................................................. (881,250) (834,592) ------------ ------------ Total deferred tax liabilities .................................. (12,274,295) (11,039,615) ------------ ------------ Total deferred taxes ............................................... $(11,261,949) $(10,091,202) ============ ============
The Corporation's nonutility operations are subject to state income taxes. For fiscal 1996, 1995 and 1994, state income taxes totaled $124,300, $131,800, and $125,300, respectively. Note G: Regulatory Matters In January 1995, the Utilities filed revised tariffs with the RIPUC to consolidate their rate structure and to increase their combined annual revenues. On October 18, 1995, the RIPUC authorized the Utilities to adjust their tariffs to collect $1,100,000 and consolidate their rate structure. Note H: Commitments and Contingencies Pension Plans - Valley Gas has two non-contributory defined benefit pension plans covering substantially all of its employees and a supplemental pension plan covering certain officers. Net periodic pension income for fiscal 1996, 1995 and 1994 included the following components:
1996 1995 1994 ---- ---- ---- Service cost - benefits earned during the period............. $ 534,961 $ 470,907 $ 472,621 Interest cost on projected benefit obligation................ 1,321,504 1,232,168 1,153,139 Actual return on plan assets................................. (3,266,264) (3,448,848) (251,149) Net amortization and deferral................................ 784,425 1,173,453 (2,159,065) ----------- ----------- ----------- Net periodic pension income.................................. $ (625,374) $ (572,320) $ (784,454) =========== =========== ===========
43
Plans Funded Status - July 31 1996 1995 - ----------------------------- ---- ---- Projected benefit obligations: Vested.......................................................... $15,511,957 $ 15,143,093 Nonvested....................................................... 225,232 140,275 ----------- ------------ Accumulated................................................... 15,737,189 15,283,368 Due to recognition of future salary increases................... 3,757,612 3,685,361 ----------- ------------ Total......................................................... (19,494,801) (18,968,729) Plan assets at fair value.......................................... 29,152,063 26,885,983 ----------- ------------ Plan assets in excess of projected benefit obligation.............. 9,657,262 7,917,254 Unrecognized transition amount..................................... (824,232) (971,756) Unrecognized net gains............................................. (2,662,193) (1,400,035) ----------- ------------ Prepaid pension costs.............................................. $ 6,170,837 $ 5,545,463 =========== ============
Plan assets are invested in common stock, short-term investments and various other fixed income securities. The weighted-average discount rate used in determining the projected benefit obligation were 7 3/4% and 7 1/2%, respectively, as of July 31, 1996 and 1995. 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. 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 a twenty-year period. Valley Gas' cost under this plan for fiscal 1996, 1995 and 1994 was $809,500, $815,100 and $841,500, respectively. The regulatory asset represents the excess of postretirement benefits on the accrual basis over amounts authorized to be recovered in rates. The RIPUC authorized 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:
1996 1995 ---- ---- Accumulated postretirement benefit obligation: Retirees..................................................................... $(2,787,993) $(2,719,221) Fully eligible active plan participants...................................... (775,563) (849,327) Other active plan participants............................................... (2,007,935) (2,156,452) ----------- ----------- (5,571,491) (5,725,000) Plan assets at fair value ...................................................... 951,546 481,494 ----------- ----------- Accumulated postretirement benefit obligation in excess of plan assets.......... (4,619,945) (5,243,506) Unrecognized transition obligation.............................................. 4,722,146 4,999,920 Unrecognized net (gain) from past experience different from that assumed........ and from changes in assumptions ............................................. (795,123) (449,336) ----------- ----------- Accrued postretirement benefit cost............................................. $ (692,922) $ (692,922) =========== ===========
44
Net periodic postretirement benefit cost consisted of the following: 1996 1995 1994 - ------------------------------------------------------------------- ---- ---- ---- Service cost - benefits attributable to service during the period......... $156,991 $140,882 $148,014 Interest cost on accumulated postretirement benefit obligation............ 417,117 420,725 424,964 Actual return (loss) on plan assets....................................... 33,712 (10,575) -0- Net amortization and deferral............................................. 201,640 264,026 268,511 -------- -------- -------- Net periodic postretirement benefit cost.................................. 809,460 815,058 841,489 Regulatory asset.......................................................... -0- 252,365 440,557 -------- -------- -------- Net expense............................................................... $809,460 $562,693 $400,932 ======== ======== ========
For measurement purposes, a 12% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995; the rate was assumed to decrease gradually to 5% by fiscal 2002 and to remain at that level thereafter. The rates of increase assumed for post-age 65 medical benefits were slightly lower. The health care cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by 1% in each year would increase the accumulated postretirement benefit obligation at August 31, 1996 by $434,000 and the aggregate of the service and the interest cost components of net periodic postretirement benefit cost ("NPPBC") for the year by $58,000. The discount rate was 7 1/2% for the development of the NPPBC. The assumed rate of future compensation increases was 5 1/2% per year. The trend rates were set by the RIPUC. Long-Term Obligations - 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 been required to unbundle their supply, storage and transportation services. This unbundling has caused the interstate pipeline companies to incur substantial costs in order to comply with Order 636. These transition costs include four types: (1) unrecovered gas costs (gas costs that have been incurred but not yet recovered by the pipelines when they were providing bundled service to local distribution companies); (2) gas supply realignment costs (the cost of renegotiating existing gas supply contracts with producers); (3) stranded costs (unrecovered costs of assets that cannot be assigned to customers of unbundled services); and (4) new facilities costs (costs of new facilities required to physically implement Order 636). Pipelines are expected to be allowed to recover prudently incurred transition costs from customers primarily through a demand charge, after approval by FERC. The Utilities' pipeline suppliers began direct billing these costs in fiscal 1994 as a component of demand charges. The Utilities estimate their remaining portion of transition costs to be $1,700,000 and have recognized a liability for these costs as of August 31, 1996. The RIPUC has allowed the recovery of transition costs through the PGPA. Under the provisions of SFAS 71, regulatory assets totaling $1,700,000 were recorded for the expected future recovery of the transition obligations. Actual transition costs to be incurred depend on various factors, and, therefore, future costs may differ from the amounts discussed above. Contingent Liability - 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 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 expected to be 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 a letter of responsibility from the Rhode Island Department of Environmental Management ("DEM") with respect to releases from manufactured coal waste on its property that is the site of the former Tidewater plant in Pawtucket, Rhode Island. Valley Gas and Blackstone have submitted a site investigation report to DEM relating 45 to certain releases on the site. Management cannot determine the future cash flow impact, if any, of this claim and related expenses. Management takes the position that it is indemnified by Blackstone for any such expenses. Valley Gas intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant period. Remediation of sites such as the former Tidewater plant is governed by a regulatory framework which now permits more flexibility in methods of remediation and in property reuse. Valley Gas received a letter of responsibility from DEM with respect to releases from manufactured coal waste on its property that is the site of the former Hamlet Avenue plant in Woonsocket, Rhode Island. Valley Gas and Blackstone have submitted a site investigation work plan to address certain releases at the site. Management cannot determine the future cash flow impact, if any, of this claim and related expenses. Management takes the position that it is indemnified by Blackstone for any such expenses. Valley Gas intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant period. Remediation of this site is also governed by a regulatory framework that permits more flexibility in methods of remediation and in property reuse. Note I: Segment Information In accordance with SFAS 14, the following information is presented relative to the gas, merchandising and other operations of the Corporation.
1996 1995 1994 ---- ---- ---- Gas Operations Operating revenues......................................... $60,773,250 $56,012,913 $65,323,556 Operating income before Federal income taxes............... 7,150,140 5,157,534 6,412,020 Identifiable assets at August 31........................... 84,646,797 83,952,630 83,070,742 Depreciation............................................... 2,364,999 2,131,425 2,060,071 Capital expenditures....................................... 4,396,081 5,335,159 3,953,702 Appliance & Contract Sales & Rentals Operating revenues......................................... $17,617,481 $17,216,397 $16,506,364 Operating income before Federal income taxes............... 986,920 1,111,530 1,183,132 Identifiable assets at August 31........................... 8,116,782 8,148,961 8,060,902 Depreciation............................................... 512,242 475,456 339,068 Capital expenditures....................................... 531,152 521,345 549,067 Other Operations, including Corporate & Eliminations Operating revenues......................................... $1,969,403 $1,640,880 $1,722,998 Operating income before Federal income taxes............... 156,632 207,432 219,001 Identifiable assets at August 31........................... 3,925,406 235,915 (62,447) Depreciation............................................... 79,486 77,874 74,328 Capital expenditures....................................... 81,476 59,427 50,658 Total Corporation Operating revenues......................................... $80,360,134 $74,870,190 $83,552,918 Operating income before Federal income taxes............... 8,293,692 6,476,496 7,814,153 Federal income tax expense................................. (1,443,547) (731,947) (1,313,227) Nonoperating income-net.................................... 459,938 115,032 227,450 Interest expense........................................... (3,311,723) (3,304,656) (2,902,350) Net income................................................. 3,998,360 2,554,925 3,826,026 Identifiable assets at August 31........................... 96,688,985 92,337,506 91,069,197 Depreciation............................................... 2,956,727 2,684,755 2,473,467 Capital expenditures....................................... 5,008,709 5,915,931 4,553,427
46 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. Note J: Summarized Quarterly Financial Data (Unaudited)
Three months ended November February May August -------- -------- --- ------ (in thousands, except as to earnings (loss) per average share) Fiscal 1996 Total operating revenues ........................... $ 14,095 $ 30,250 $ 23,665 $ 12,351 Income (loss) before Federal income taxes .......... $ (1,214) $ 5,817 $ 2,934 $ (1,948) Net income (loss) .................................. $ (775) $ 3,855 $ 1,995 $ (1,077) Earnings (loss) per average share .................. $ (.18) $ .90 $ .47 $ (0.25) Fiscal 1995 Total operating revenues ........................... $ 14,774 $ 26,965 $ 21,438 $ 11,693 Income (loss) before Federal income taxes .......... $ (1,186) $ 3,602 $ 2,242 $ (1,300) Net income (loss) .................................. $ (735) $ 2,382 $ 1,586 $ (678) Earnings (loss) per average share.................. $ (.17) $ .56 $ .38 $ (.16)
Note K: Notes to Unaudited Financial Information Earnings Per Share - The Corporation computes earnings per average common share based on the weighted average number of shares outstanding during the period. Results of Operations - In the opinion of the Corporation, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals and matters discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations") necessary to present fairly the financial position as of February 28, 1997 the results of operations for the six-months ended February 28, 1997 and 1996 and Statement of Cash Flows for the six-months ended February 28, 1997 and 1996. The results of operations for the six-month periods ended February 28, 1997 and 1996 are not necessarily indicative of the results to be expected for the full year. 47 No dealer, salesman or any other person has been authorized to give any information or to make any representations not contained in this Prospectus; any information or representation not contained herein must not be relied upon as having been authorized by the Corporation or any Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities other than the securities covered by this Prospectus; nor does it constitute an offer to sell, or a solicitation of an offer to buy, any of the securities covered by this Prospectus by the Corporation or any Underwriter in any state to any person to whom it is unlawful for the Corporation or any Underwriter to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Corporation since the date hereof. ________________________ TABLE OF CONTENTS Page ---- Available Information........................ 3 Incorporation of Certain Information by Reference................................ 3 Prospectus Summary........................... 4 Risk Factors................................. 6 Valley Resources, Inc........................ 7 Use of Proceeds.............................. 7 Capitalization............................... 8 Selected Financial Data...................... 9 Management's Discussion and Analysis of the Results of Operations and Financial Condition................................ 10 Business..................................... 16 Price Range of Common Stock and Dividends................................ 21 Description of Common Stock.................. 21 Description of Debentures.................... 23 Underwriting................................. 29 Legal Matters................................ 30 Experts...................................... 30 Index to Consolidated Financial Statements... 31 VALLEY RESOURCES, INC. 620,000 SHARES OF COMMON STOCK ($1 PAR VALUE) $7,000,000 OF ___% DEBENTURES DUE 2027 ____________________________ PROSPECTUS DATED , 1997 ____________________________ EDWARD D. JONES & CO., L.P. FIRST ALBANY CORPORATION 48 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the securities being registered, other than underwriting compensation, are: Filing Fee for Registration Statement........................ $ 5,019 Legal Fees and Expenses...................................... 50,000* Listing Fees................................................. 12,400 Accounting Fees and Expenses................................. 10,000* Blue Sky Fees Expenses....................................... 1,000* NASD Filing Fees............................................. 2,006 Printing and Engraving Fees.................................. 20,000* Transfer Agent's Fees........................................ 5,000* Trustee's Fees............................................... 5,000* Miscellaneous................................................ 4,575* -------- TOTAL........................................................ $115,000 ======== _________________ * Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 7-1.1-4.1 of the Rhode Island Business Corporation Act permits any director, officer or other employee of the Registrant or his legal representative to be indemnified by the Registrant against reasonable costs, expenses, and counsel fees paid or incurred in connection with any proceeding to which such director, officer or other employee or his legal representative may be a party by reason of his being a director, officer or employee, provided that such director, officer or other employee shall have acted in good faith, in what he reasonably believed to be in the best interests of the Registrant and, where criminal liability is charged, had no reasonable cause to believe that his conduct was unlawful. The Articles of Incorporation, as amended, of the Registrant also contain a provision eliminating the liability of a director to the Registrant or its stockholders for breach of fiduciary duty as a director, other than liability for (a) breach of the director's duty of loyalty to the corporation or its shareholders, (b) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) unlawful payment of a dividend or unlawful stock purchase or redemption, or (d) any transaction from which the director derived an improper personal benefit. ITEM 16. EXHIBITS. Number Description 1 Proposed form of Underwriting Agreement (to be filed by amendment). 3(a) Articles of Incorporation, as amended (Exhibit 3 to the Corporation'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). 49 4(a) Proposed form of Indenture between Valley Resources, Inc. and Mellon Bank, N.A., Trustee to be dated as of September 1, 1997, including form of Debenture. 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.) 5 Opinion of Edwards & Angell 10(a) Valley Gas Company Supplemental Retirement Plan (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1989 is hereby incorporated by reference.) 10(b) Valley Resources, Inc. 1988 Executive Incentive Plan (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1989 is hereby incorporated by reference.) 10(c) Termination agreement between Valley Resources, Inc. and Kenneth W. Hogan (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10(d) Valley Resources, Inc. Directors Retirement Plan. (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is hereby incorporated by reference.) 10(e) Termination agreement dated June 21, 1995 between Valley Resources, Inc. and Alfred P. Degen (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 Resources, Inc. and Charles K. Meunier. 10(g) 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(h) Storage Service Agreement dated July 3, 1985 between Valley Gas Company and Consolidated Gas Transmission Corporation (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10(i) Underground Storage Service Agreement dated October 3, 1984 between Valley Gas Company and Penn-York Energy Corporation (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10(j) Underground Storage Service Agreement dated August 19, 1983 between Valley Gas Company and Penn-York Energy Corporation (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1983 is hereby incorporated by reference. 10(k) Service agreement for storage of LNG dated June 30, 1982 between Valley Gas Company and Algonquin LNG, Inc. (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1982 is hereby incorporated by reference.) 10(l) Contract for the purchase of natural gas dated March 1, 1981, between Valley Gas Company and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 50 10(m) Storage Service Transportation contract dated May 15, 1981, between Valley Gas Company and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10(n) Storage Service Transportation contract dated May 26, 1981, between Valley Gas Company and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10(o) Storage Service Agreement dated February 18, 1980, between Valley Gas Company and Consolidated Gas Supply Corporation (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10(p) Precedent Agreement for Firm Services on Maritimes and Northeast Pipeline Project Phase II dated September 21, 1996, between Valley Gas Company and Maritimes and Northeast Pipeline L.L.C. 10(q) Gas Sales Agreement dated June 15, 1992 between Aquila Energy Marketing Corporation and Valley Gas Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is incorporated herein by reference.) 10(r) 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). 11 Statement re-computation of per share earnings (incorporated by reference to the Annual Report on Form 10-K for the year ended August 31, 1996 and the Quarterly Report on Form 10-Q referred to in (13) below). 12 Statement re-computation in support of earnings to fixed charges. 13 Quarterly Report on Form 10-Q for the quarter ended February 28, 1997. 23(a) Consent of Grant Thornton LLP. 23(b) Consent of Edwards & Angell (included in Exhibit 5.) 24 Power of Attorney of certain officers and directors (See signature pages). 25 Statement of Eligibility of Trustee (to be filed by amendment). ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration 51 statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b) (2) of the Act. 52 SIGNATURES Pursuant to the requirement of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirement for filing on Form S-2 and had duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the town of Cumberland, State of Rhode Island, on the 26th of June, 1997. VALLEY RESOURCES, INC. By: S/Alfred P. Degen --------------------- Alfred P. Degen President & Chief Executive Officer 53 POWER OF ATTORNEY AND SIGNATURES Each person whose signature appears below constitutes and appoints Alfred P. Degen and Kenneth W. Hogan his/her true and lawful attorneys-in-fact and agents, each acting alone, with full powers of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on June 26, 1997. Signature Title --------- ----- S/Alfred P. Degen - ------------------------ Alfred P. Degen President, Chief Executive Officer & Director S/K. W. Hogan - ------------------------ K. W. Hogan Vice President, Chief Financial Officer & Secretary S/Ernest N. Agresti - ------------------------ Ernest N. Agresti Director S/Melvin G. Alperin - ------------------------ Melvin G. Alperin Director S/C. Hamilton Davison - ------------------------ C. Hamilton Davison Director S/Don A. DeAngelis - ------------------------ Don A. DeAngelis Director - ------------------------ James M. Dillon Director S/Jonathan K. Farnum - ------------------------ Jonathan K. Farnum Director S/John F. Guthrie - ------------------------ John F. Guthrie Director S/Eleanor M. McMahon - ------------------------ Eleanor M. McMahon Director 54 EX-4.(A) 2 Exhibit 4(a) VALLEY RESOURCES, INC. and MELLON BANK, N.A. Trustee INDENTURE Dated as of September 1, 1997 ____________________________________________________ $7,000,000 ____% Debentures Due September 1, 2027 CROSS-REFERENCE TABLE TIA Indenture Section Section 310 (a) (1) 8.10 (a) (2) 8.10 (a) (3) 8.12 (a) (4) N.A. (a) (5) 8.10 (b) 8.08; 8.10; 11.02 (c) N.A. 311 (a) 8.11 (b) 8.11 (c) N.A. 312 (a) 2.05 (b) 11.03 (c) 11.03 313 (a) 8.06 (b) (1) N.A. (b) (2) 8.06 (c) 8.06; 11.02 (d) 8.06 314 (a) 5.02; 5.08; 11.02 (b) N.A. (c) (1) 11.04 (c) (2) 11.04 (c) (3) N.A. (d) N.A. (e) 11.05 (f) N.A. 315 (a) 8.01(b) (b) 8.05; 11.02 (c) 8.01(a) (d) 8.01(c) (e) 7.11 316 (a) (last sentence) 2.09 (a) (1) (A) 7.05 (a) (1) (B) 7.04 (a) (2) N.A. (b) 7.07 (c) 7.14 I. 317 (a) (1) 7.08 (a) (2) 7.09 (b) 2.04 318 (a) 11.01 N.A. means Not Applicable. NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a part of the Indenture. II. TABLE OF CONTENTS Article Section Heading Page 1 DEFINITIONS AND INCORPORATION BY REFERENCE......................... 1 1.01 Definitions.......................... 1 1.02 Other Definitions.................... 5 1.03 Incorporation by Reference of Trust Indenture Act................ 5 1.04 Rules of Construction................ 5 2 THE DEBENTURES....................... 7 2.01 Form and Dating...................... 7 2.02 Execution and Authentication......... 7 2.03 Registrar and Paying Agent........... 8 2.04 Paying Agent to Hold Money in Trust.............................. 8 2.05 Debentureholder Lists................ 8 2.06 Transfer and Exchange................ 9 2.07 Replacement Debentures............... 9 2.08 Outstanding Debentures............... 10 2.09 Treasury Debentures.................. 10 2.10 Temporary Debentures................. 10 2.11 Cancellation......................... 11 2.12 Defaulted Interest................... 11 2.13 Persons Deemed Owners................ 11 3 REDEMPTION OF DEBENTURES AT CORPORATION'S OPTION................. 12 3.01 Redemption Right at Corporation's Option............... 12 3.02 Notices to Trustee................... 12 3.03 Selection of Debentures to be Redeemed........................... 12 3.04 Notice of Redemption................. 12 3.05 Effect of Notice of Redemption....... 13 3.06 Deposit of Redemption Price.......... 13 3.07 Debentures Redeemed in Part.......... 13 4 REDEMPTION OF DEBENTURES AT DEBENTUREHOLDER'S OPTION............. 14 4.01 Redemption Right at Debenture- holder's Option.................... 14 III. 5 COVENANTS............................ 14 5.01 Payment of Debentures................ 14 5.02 Reporting............................ 14 5.03 Corporate Existence.................. 15 5.04 Payment of Taxes and Other Claims............................. 15 5.05 Limitation on Certain Funded Indebtedness....................... 15 5.06 Limitations on Dividends and Other Payments on Stock............. 15 5.07 Limitation on Secured Indebtedness.... 16 5.08 Compliance Certificate................ 17 5.09 Default Certificate................... 18 6 SUCCESSORS............................ 18 6.01 When Corporation May Merge, etc....... 18 7 DEFAULTS AND REMEDIES................. 18 7.01 Events of Default..................... 18 7.02 Acceleration.......................... 20 7.03 Other Remedies........................ 21 7.04 Waiver of Past Defaults............... 21 7.05 Control by Majority................... 21 7.06 Limitation on Suits................... 22 7.07 Rights of Holders to Receive Payment............................. 22 7.08 Collection Suit by Trustee............ 23 7.09 Trustee May File Proofs of Claim............................... 23 7.10 Priorities............................ 23 7.11 Undertaking for Costs................. 24 7.12 Waiver of Stay or Extension Laws................................ 24 7.13 Restoration of Rights and Remedies............................ 24 7.14 Record Date for Vote of Debentureholders.................... 24 8 TRUSTEE............................... 25 8.01 Duties of Trustee..................... 25 8.02 Rights of Trustee..................... 26 8.03 Individual Rights of Trustee.......... 26 8.04 Trustee's Disclaimer.................. 26 8.05 Notice of Defaults.................... 27 8.06 Reports by Trustee to Holders......... 27 IV. 8.07 Compensation and Indemnity............ 27 8.08 Replacement of Trustee................ 28 8.09 Successor Trustee by Merger, etc...... 29 8.10 Eligibility; Disqualification......... 29 8.11 Preferential Collection of Claims Against Corporation.......... 29 8.12 Appointment of Co-Trustee............. 29 9 DISCHARGE OF INDENTURE................ 31 9.01 Termination of Corporation's Obligations......................... 31 9.02 Application of Trust Money............ 32 9.03 Repayment to Corporation.............. 32 10 AMENDMENTS, SUPPLEMENTS AND WAIVERS............................. 32 10.01 Without Consent of Holders............ 32 10.02 With Consent of Holders............... 33 10.03 Compliance with Trust Indenture Act................................. 33 10.04 Revocation and Effect of Consents............................ 33 10.05 Notation on or Exchange of Debentures.......................... 34 10.06 Trustee Protected..................... 34 11 MISCELLANEOUS......................... 34 11.01 Trust Indenture Act Controls.......... 34 11.02 Notices............................... 34 11.03 Communication by Holders with Other Holders....................... 35 11.04 Certificate and Opinion as to Conditions Precedent................ 35 11.05 Statements Required in Certifi- cate or Opinion..................... 35 11.06 Rules by Trustee and Agent............ 36 11.07 Legal Holidays........................ 36 11.08 No Recourse Against Others............ 36 11.09 Duplicate Originals................... 36 11.10 Governing Law......................... 37 11.11 Table of Contents, Headings, etc...... 37 SIGNATURES................................................................ 37 EXHIBIT A -- FORM OF GLOBAL SECURITY...................................... A-38 EXHIBIT B -- FORM OF DEBENTURE............................................ B-48 V. INDENTURE dated as of September 1, 1997, between VALLEY RESOURCES, INC., a Rhode Island corporation ("Corporation"), and Mellon Bank, N.A., a corporation organized and existing under the laws in the State of _____________ ("Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Corporation's ____% Debentures Due September 1, 2027 ("Debentures"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01. Definitions. "Affiliate" means any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Corporation. "Agent" means any Registrar, Paying Agent or coregistrar or agent for service of notices and demands. See Section 2.03. "Board of Directors" means the Board of Directors of the Corporation or any authorized committee of the Board. "Board Resolution" means a copy of a resolution certified by the Corporate Secretary of the Corporation to have been duly adopted by the Board of Directors and to be in full force and effect. "Capital Stock" means any and all shares, interests, participations or other equivalents (however designated) of corporate stock. "Common Stock" means the common stock, $1.00 par value per share, of the Corporation as the same exists at the date of this Indenture or as such stock shall be constituted from time to time. "Consolidated", when used in connection with any accounting terms, means the Corporation and its Subsidiaries, the financial statements of which are consolidated in accordance with generally accepted accounting principles. "Consolidated Funded Indebtedness" means the outstanding Funded Indebtedness of the Corporation and its Consolidated Subsidiaries (excluding in all cases Funded Indebtedness owing to the Corporation or Consolidated Subsidiaries); provided, however, that if the Corporation owns, directly or indirectly, less than all of the voting stock of a Consolidated Subsidiary, only that portion of the Funded Indebtedness of such Consolidated Subsidiary equal to the proportion of its outstanding voting stock owned by the Corporation shall be included in determining Consolidated Funded Indebtedness. "Consolidated Net Utility Fixed Assets" means the aggregate value of Utility Fixed Assets of the Corporation and its Consolidated Subsidiaries less accumulated depreciation, determined on a consolidated basis in accordance with generally accepted accounting principles applied in a manner consistent with the most recent audited financial statements included in reports delivered to the Trustee pursuant to Section 5.02; provided, however, that if the Corporation owns, directly or indirectly, less than all of the outstanding voting stock of a Consolidated Subsidiary, only that portion of the Utility Fixed Assets of such Consolidated Subsidiary equal to the proportion of its outstanding voting stock owned by the Corporation shall be included in determining Consolidated Net Utility Fixed Assets. "Consolidated Tangible Net Worth" means an amount equal to the stockholders' ownership of the Corporation and its Consolidated Subsidiaries (including capital stock, capital in excess of par value and retained earnings, but eliminating any unpaid amounts due for sale of stock) less intangible assets other than amounts recoverable from future rate payers in accordance with Rhode Island Public Utilities Commission rate treatment, all determined on a consolidated basis in accordance with generally accepted accounting principles applied in a manner consistent with the most recent audited financial statements included in reports delivered to the Trustee pursuant to Section 5.02. "Corporate Trust Office" means the office of the Trustee located in __________, at which at any time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at _______________. "Corporation" means the party named as such above until a successor replaces it pursuant to the applicable provisions of the Indenture and thereafter means the successor. "Current Indebtedness" of a Person means, as of the date of determination thereof, all Indebtedness maturing on demand or not more than one year after the date as of which such determination is made (excluding any Indebtedness renewable or extendible at the option of the debtor, absolutely or conditionally, for a period or periods ending more than one year after the date of such determination, whether or not theretofore extended or renewed), fixed sinking fund payments (except to the extent that funds for the payment thereof shall have been deposited with a trustee for the application thereof) and other prepayments required to be made with respect to any Indebtedness not more than one year after such date, and all other items (including taxes accrued as estimated) which in accordance with generally 2 accepted accounting principles would be included as current indebtedness. "Debenture" means the Debentures described above issued under this Indenture. "Default" means any event which is, or after notice or passage of time would be, an Event of Default. "Depository" means The Depository Trust Company in the City of New York and any successor to such Person. "Exchange Act" means the Securities Exchange Act of 1934, as from time to time amended. "Funded Indebtedness" means all Indebtedness other than Current Indebtedness. "Global Security" means a security evidencing all of the Debentures issued to the Depository or its nominee and registered in the name of the Depository or its nominee. "Holder" or "Debentureholder" means a person in whose name a Debenture is registered; provided, however, that for purposes of Sections 7.06 and 7.07 hereof, such terms shall also include the Beneficial Owner (as defined in the Debentures) of any Debenture. "Indebtedness" of a Person means (i) all items of indebtedness or liability which in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liability side of a balance sheet as at the date as of which indebtedness is to be determined, (ii) indebtedness upon which the Person whose indebtedness is being determined customarily pays interest charges and indebtedness secured by any mortgage, pledge or lien existing on property owned by such Person, whether or not the indebtedness secured thereby shall have been assumed but, if (a) any such indebtedness shall not have been assumed or guaranteed by such Person, (b) such Person customarily does not pay any interest thereon, and (c) such mortgage, pledge or lien was created by others upon lands over which such Person has an easement or right of way, such indebtedness shall not be deemed to be Indebtedness of such Person except to the extent of the larger of the fair value or cost to such Person of such property (including any improvements thereon) covered by such mortgage, pledge or lien, and (iii) guaranties, endorsements (other than for purposes of collection in the ordinary course of business) and other contingent obligations in respect of, or to purchase or otherwise acquire, indebtedness of others. "Indenture" means this Indenture as amended from time to time. 3 "Interest Payment Date" means March 1 and September 1 of each year commencing March 1, 1998 through and including September 1, 2027. "Lien" means any lien, mortgage, pledge, security interest, charge or other encumbrance of any kind. "Officer" means the principal executive officer, principal financial officer, principal accounting officer, treasurer or President of the Corporation. "Officers' Certificate" means a certificate signed by two Officers of the Corporation. See Sections 11.04 and 11.05. "Opinion of Counsel" means a written opinion from legal counsel who may be an employee of or counsel to the Corporation or the Trustee and who is acceptable to the Trustee. See Sections 11.04 and 11.05. "Person" means any individual, corporation, partnership, joint venture, association, jointstock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principal" of the Debenture means the principal of the Debenture plus the premium, if any, on the Debenture. "Qualified Institution" means a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company located in the United States. "Record Date" means April 15 and August 15. "Redemption Date" when used with respect to any Debenture to be redeemed means the date fixed for such redemption pursuant to this Indenture. "Redemption Price" when used with respect to any Debenture to be redeemed means the price at which it is to be redeemed pursuant to this Indenture and the Debenture. "SEC" means the Securities and Exchange Commission. "Special Record Date" means the date set by the Corporation for determination of Debentureholders of record for purposes of paying any defaulted interest. "Subsidiary" means a corporation at least the majority of whose voting stock is owned by the Corporation or a Subsidiary. 4 "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa77bbbb) as in effect on the date shown above except as provided in Section 10.03. "Trustee" means the party named as such above until a successor replaces it pursuant to the applicable provisions of the Indenture and thereafter means the successor. "Trust Officer" means the Chairman of the Board, the President or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "United States" means the United States of America. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof. "Utility Fixed Assets" means all physical property owned by the Corporation and any Consolidated Subsidiaries and used or useful to the Corporation in the business of furnishing or distributing gas service, the cost of which is charged and properly chargeable to plant or plant addition account on the books of the Corporation or such Consolidated Subsidiary in accordance with sound accounting practices and generally accepted accounting principles. Utility Fixed Assets need not consist of a specific or complete accession, addition or improvement or complete new property, but may include construction work in progress or any work such as is carried in fixed property accounts in accordance with sound accounting practices and generally accepted accounting principles, whether capable of complete description and identification or not. 5 Section 1.02. Other Definitions. Term Defined in Section "Bankruptcy Law" 7.01 "Custodian" 7.01 "Event of Default" 7.01 "Legal Holiday" 11.07 "Paying Agent" 2.03 "Registrar" 2.03 Section 1.03. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Debentures. "indenture securityholder" means a Debentureholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. "obligor" on the indenture securities means the Corporation. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings assigned to them. Section 1.04. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; 6 (5) provisions apply to successive events and transactions; and (6) "Section" shall refer to a Section of this Indenture. ARTICLE 2 THE DEBENTURES Section 2.01. Form and Dating. The form of the Debentures to be originally issued as a Global Security shall be substantially in the form of Exhibit A, which is part of this Indenture. The form of the Debentures to be issued in exchange for a Global Security shall be substantially in the form of Exhibit B, which is part of this Indenture. The terms of such Exhibits A and B are hereby incorporated herein by reference. The Debentures may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Debenture shall be dated the date of its authentication. Section 2.02. Execution and Authentication. Two Officers shall sign the Debentures for the Corporation by manual or facsimile signature. The Corporation's seal shall be reproduced on the Debentures. If an Officer whose signature is on a Debenture no longer holds that Office at the time the Debenture is authenticated, the Debenture shall nevertheless be valid. A Debenture shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Debenture has been authenticated under this Indenture. The Trustee shall authenticate Debentures for original issue up to the aggregate principal amount of $7,000,000 upon a written order of the Corporation signed by two Officers. The aggregate principal amount of Debentures outstanding at any time may not exceed that amount except as provided in Section 2.07. The Trustee may appoint an authenticating agent acceptable to the Corporation to authenticate Debentures. An authenticating agent may authenticate Debentures whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Corporation or an Affiliate. 7 Section 2.03. Registrar and Paying Agent. The Corporation shall maintain an office or agency where Debentures may be presented for registration or transfer or for exchange ("Registrar"), an office or agency where Debentures may be presented for payment ("Paying Agent") and an office or agency where notices and demands to or upon the Corporation in respect of the Debentures and this Indenture may be served. The Registrar shall keep a register of the Debentures and of their transfer and exchange. The Corporation may appoint one or more coregistrars and one or more additional paying agents. The Corporation or any Subsidiary may act as Registrar or Paying Agent. The term "Paying Agent" includes any additional paying agent. The Corporation shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Corporation fails to maintain a Registrar, Paying Agent or agent for service of notices and demands or fails to give the foregoing notice, the Trustee shall act as such. The Corporation initially appoints __________ as Registrar, Paying Agent and agent for service of notices and demands. Section 2.04. Paying Agent to Hold Money in Trust. The Corporation shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Debentureholders or the Trustee all money held by the Paying Agent for the payment of Principal or interest on the Debentures, and will notify the Trustee of any Default by the Corporation in making any such payment. While any such Default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Corporation at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent shall have no further liability for the money. If the Corporation (or any Subsidiary) acts as Paying Agent, it shall segregate and hold as a separate trust fund all money held by it as Paying Agent. Section 2.05. Debentureholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Debentureholders. If the Trustee is not the Registrar, the Corporation shall furnish to the Trustee on or before each Interest Payment Date and at such other times as the Trustee may request in writing a list of the names and addresses of Debentureholders in such form and as of such date as the Trustee may reasonably require. 8 Section 2.06. Transfer and Exchange. When Debentures are presented to the Registrar or a coregistrar with a request to register the transfer or to exchange them for an equal principal amount of Debentures of other denominations, the Registrar shall register the transfer or make the exchange, provided that every Debenture presented or surrendered for registration of transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer in form satisfactory to the Registrar duly executed by the Holder thereof or by his attorney duly authorized in writing. To permit registrations of transfer and exchanges, the Trustee shall authenticate Debentures at the Registrar's written request (which written request may be waived by the Trustee so long as the Trustee and Registrar are one and the same). No service charge shall be made for any registration of transfer or exchange of Debentures to the Debentureholders, but the Corporation may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto, other than exchanges pursuant to Section 2.10 or 3.07. A Global Security shall be exchangeable pursuant to this Section for Debentures registered in the names of Persons other than the Depository or its nominee only as provided in this paragraph. A Global Security shall be exchangeable pursuant to this Section if (i) such Depository notifies the Corporation that it is unwilling or unable to continue as Depository for such Debentures or at any time ceases to be a clearing agency registered as such under the Exchange Act, (ii) the Corporation executes and delivers to the Trustee an Officers' Certificate providing that such Global Security shall be so exchangeable, or (iii) there shall have occurred and be continuing an Event of Default. Debentures so issued in exchange for a Global Security shall be of like tenor, in authorized denominations of $1,000 or integral multiples thereof and in the aggregate having the same principal amount as the Global Security to be exchanged, and shall be registered in such names as the Depository shall direct. Notwithstanding any other provision of this Section, a Global Security may not be transferred except as a whole by the Depository to a nominee of such Depository or by a nominee of such Depository to such Depository or another nominee of such Depository. Section 2.07. Replacement Debentures. If the Holder of a Debenture claims that the Debenture has been lost, destroyed or wrongfully taken, the Corporation shall issue and the Trustee shall authenticate a replacement Debenture if the Trustee's requirements are met. If required by the Trustee or the Corporation, an indemnity bond must be obtained 9 and be sufficient in the judgment of both to protect the Corporation, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Debenture is replaced. The Corporation and the Trustee may charge for their expenses in replacing a Debenture. Every replacement Debenture is an additional obligation of the Corporation. Section 2.08. Outstanding Debentures. The Debentures outstanding at any time are all the Debentures authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Debenture is replaced pursuant to Section 2.07, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Debenture is held by a bona fide purchaser. If Debentures are considered paid under Section 5.01, they cease to be outstanding and interest on them ceases to accrue. Except with the limitations set forth in Section 2.09, a Debenture does not cease to be outstanding because the Corporation or an Affiliate holds the Debenture. Section 2.09. Treasury Debentures. In determining whether the Holders of the required principal amount of Debentures have concurred in any direction, waiver or consent, Debentures owned by the Corporation or an Affiliate shall be disregarded, except for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent. Only Debentures which the Trustee knows are so owned shall be disregarded. Section 2.10. Temporary Debentures. Until definitive Debentures are ready for delivery, the Corporation may prepare and the Trustee shall authenticate temporary Debentures. Temporary Debentures shall be substantially in the form of definitive Debentures but may have variations that the Corporation considers appropriate for temporary Debentures. Without unreasonable delay, the Corporation shall cause to be issued and the Trustee shall authenticate definitive Debentures in exchange for temporary Debentures. 10 Section 2.11. Cancellation. The Corporation at any time may deliver Debentures to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Debentures surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Debentures surrendered for registration of transfer, exchange or payment and shall dispose of cancelled Debentures as the Corporation directs. The Corporation may not issue new Debentures to replace Debentures that it has paid for or delivered to the Trustee for cancellation. Section 2.12. Defaulted Interest. If the Corporation defaults in a payment of interest on the Debentures, it shall pay the defaulted interest in any lawful manner. It may pay the defaulted interest, plus any interest payable on the defaulted interest, to the Persons who are Debentureholders on a subsequent Special Record Date. The Corporation shall fix the Special Record Date and payment date in a manner satisfactory to the Trustee. At least 15 days before the Special Record Date, the Corporation shall mail to Debentureholders a notice that states the Special Record Date, the payment date and the amount of interest to be paid. Section 2.13. Persons Deemed Owners. Prior to due presentment of a Debenture for registration of transfer, the Corporation, the Trustee and any Agent of the Corporation or the Trustee may treat the Person in whose name such Debenture is registered as the owner of such Debenture for the purpose of receiving payment of Principal of and (subject to Section 2.12) interest, if any, on such Debenture and for all other purposes whatsoever, whether or not such Debenture be overdue, and neither the Corporation, the Trustee nor any Agent of the Corporation or the Trustee shall be affected by notice to the contrary. All such payments so made to any such Person, or upon such Person's order, shall be valid, and, to the extent of the sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debenture. Except to the extent provided in Sections 7.06 and 7.07 hereof, no holder of any beneficial interest in any Global Security held on its behalf by a Depository shall have any rights under this Indenture with respect to such Global Security, and such Depository may be treated by the Corporation, the Trustee, and any Agent of the Corporation or the Trustee as the owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall impair, as between a Depository and such holders of 11 beneficial interests, the operation of customary practices governing the exercise of the rights of the Depository as Holder of any Debenture. ARTICLE 3 REDEMPTION OF DEBENTURES AT CORPORATION'S OPTION Section 3.01. Redemption Right at Corporation's Option. The Corporation has the right to redeem the Debentures at its sole option, in whole or in part, at any time and from time to time on or after September 1, 2002, at the Redemption Prices specified in paragraph 5 of the Debenture, subject to the terms and conditions set forth in this Article 3. The election of the Corporation to redeem any Debenture shall be evidenced by a Board Resolution. Section 3.02. Notices to Trustee. If the Corporation wishes to redeem Debentures pursuant to paragraph 5 of the Debenture, it shall notify the Trustee in writing of the Redemption Date and the principal amount of Debentures to be redeemed. The Corporation shall give the notice provided for in this Section not less than 60 days prior to the Redemption Date or such shorter time as may be satisfactory to the Trustee. Section 3.03. Selection of Debentures to be Redeemed. If less than all the Debentures are to be redeemed, the Trustee shall select the Debentures to be redeemed by lot. The Trustee shall, not less than 45 days before the Redemption Date or such shorter time as may be mutually satisfactory to the Trustee and the Corporation, inform the Corporation in writing of those specific Debentures selected for redemption. The Trustee may select for redemption portions of the principal of Debentures that have denominations larger than $1,000. Debentures and portions of Debentures that the Trustee selects shall be in amounts of $1,000 or integral multiples of $1,000. Provisions of this Indenture that apply to Debentures called for redemption also apply to portions of Debentures called for redemption. Section 3.04. Notice of Redemption. At least 30 days before a Redemption Date, the Corporation shall mail notice of redemption to each Holder whose Debentures are to be redeemed. A copy of each such notice shall be mailed to the Trustee. 12 The notice shall state: (1) the Redemption Date; (2) the Redemption Price; (3) the name and address of the Paying Agent; (4) that Debentures called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (5) that interest on Debentures called for redemption ceases to accrue on and after the Redemption Date (unless the Corporation shall default in the payment of the Redemption Price); and (6) if less than all of the Debentures outstanding are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the Debentures to be redeemed. At the Corporation's written request, the Trustee shall give notice of redemption in the Corporation's name and at the expense of the Corporation. Section 3.05. Effect of Notice of Redemption. Once notice of redemption is mailed as provided in Section 3.04, Debentures called for redemption become due and payable on the Redemption Date at the Redemption Price, subject, however to the provisions of Section 3.08. Section 3.06. Deposit of Redemption Price. On or before the Redemption Date, the Corporation shall deposit with the Paying Agent cash sufficient to pay the Redemption Price and accrued interest on all Debentures to be redeemed. Section 3.07. Debentures Redeemed in Part. Upon surrender of a Debenture that is redeemed in part, the Trustee shall authenticate for the Holder a new Debenture equal in principal amount to the unredeemed portion of the Debenture surrendered. 13 ARTICLE 4 REDEMPTION OF DEBENTURES AT DEBENTUREHOLDER'S OPTION Section 4.01. Redemption Right at Debentureholder's Option. Representatives of deceased Debentureholders and, in the case of a Global Security, representatives of deceased beneficial owners of such Global Security, have certain optional redemption rights all as set forth in the forms of Debenture attached hereto as Exhibits A and B. ARTICLE 5 COVENANTS Section 5.01. Payment of Debentures. The Corporation shall pay the Principal of and interest on the Debentures on the dates and in the manner provided in the Debentures. Principal and interest shall be considered paid on the date due if the Trustee or any Paying Agent holds on that date money sufficient to pay all Principal and interest then due, provided that if Debentures are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made. The Corporation shall pay interest on overdue principal at the rate borne by the Debentures; it shall pay interest on overdue installments of interest at the same rate to the extent lawful. Section 5.02. Reporting. The Corporation shall file with the Trustee within 15 days after it files them with the SEC copies of the annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Corporation is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. The Corporation also shall comply with the other provisions of TIA Section 314(a). Section 5.03. Corporate Existence. Subject to Article 6, the Corporation will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the rights (articles and statutory) of the Corporation; provided, however, that the Corporation shall not be required to preserve any such right if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Corporation taken as a whole and that the loss thereof is 14 not, and will not be, adverse in any material respect to the Holders. Section 5.04. Payment of Taxes and Other Claims. The Corporation will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all material taxes, assessments and governmental charges levied or imposed upon it or any Subsidiary or upon the income, profits or property of the Corporation or any Subsidiary and (ii) all material lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Corporation or any of its Subsidiaries; provided, however, that the Corporation shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. Section 5.05. Limitation on Certain Funded Indebtedness. Neither the Corporation nor a Subsidiary will create, issue, incur, guarantee or assume any Funded Indebtedness which ranks prior to or on a parity with the Debentures in right of payment unless immediately thereafter, and after giving effect thereto and to the application of the proceeds thereof, Consolidated Net Utility Fixed Assets shall be at least equal to Consolidated Funded Indebtedness. Section 5.06. Limitations on Dividends and Other Payments on Stock. The Corporation will not declare or pay any dividends or make any distributions upon any Common Stock of the Corporation (other than dividends and distributions payable only in shares of Common Stock of the Corporation) and will not directly or indirectly apply any of the assets of the Corporation to the redemption, retirement, purchase or other acquisition of any stock of the Corporation of any class, except purchases or redemptions in compliance with any mandatory sinking fund or purchase fund or redemption requirement in respect of any preferred stock of the Corporation, whether now or hereafter authorized or issued, unless after giving effect to such declaration, payment, distribution or application of assets the Consolidated Tangible Net Worth of the Corporation shall be at least equal to $20,000,000 as reflected on the Corporation's latest available balance sheet, which in no event shall be as of a date more than three months prior to the date of declaration of a dividend or application of assets. 15 Section 5.07. Limitation on Secured Indebtedness Neither the Corporation nor a Subsidiary will issue, assume or guarantee any Indebtedness secured by a Lien on any property or asset at any time owned by it, without effectively securing, prior to or concurrently with the issuance, assumption or guarantee of any such Indebtedness, the Debentures equally and ratably with (or, at the Corporation's option, in a prior position to) such Indebtedness. The foregoing described restriction does not apply to or prevent the creation of: (i) existing Liens on property or Indebtedness of a corporation which is merged with or into or consolidated with the Corporation or a Subsidiary provided that the Liens do not apply to any property theretofore owned by the Corporation; (ii) any Lien existing on the effective date of this Indenture, and, if the Corporation purchases in fee real property and acquires or constructs improvements thereon to be used by the Corporation as office space, a Lien on such real property and improvements to secure Indebtedness incurred for the purchase of such real property and improvements, so long as such Lien is limited to such real property and improvements and such Indebtedness does not exceed 75% of the purchase price thereof; (iii) Liens on moneys or U.S. Government Obligations deposited with the Trustee pursuant to the provisions of the Indenture summarized under Article 9 below; (iv) Liens (which term for purposes of theis Subsection (iv) shall include conditional sale agreements or other title retention agreements and leases in the nature of title retention agreements) upon motor vehicles or office equipment acquired by the Corporation or a Subsidiary after the effective date of this Indenture, under credit terms customarily extended to purchasers by the manufacturers or other sellers, provided that no such Lien shall extend to or cover any property of the Corporation or any Subsidiary, as the case may be, other than the property then being acquired; (v) Liens for the sole purpose of extending, renewing or replacing, in whole or in part, Liens securing Indebtedness of the type referred to in the foregoing Subsections (i) through (iv) above, provided, however, that the principal amount of the Indebtedness so secured at the time of such extension, renewal or replacement shall not be increased and that such 16 extension, renewal or replacement shall be limited to all or part of the property or Indebtedness which secured the Lien so extended, renewed or replaced (plus improvements on such property): (vi) Liens for taxes or assessments or other governmental charges or levies not yet due and payable; (vii) Materialmen's, mechanics' workers', repairmen's or other like Liens arising in the ordinary course of business so long as the obligations giving rise to such Liens are satisfied in a timely manner; (viii)Liens created by or existing from any litigation or legal proceeding which is currently being contested in good faith by appropriate proceedings, and as to which execution is effectively stayed; or (ix) Liens to secure Indebtedness having an outstanding principal balance aggregating not more than $_______________ exclusive of Indebtedness described in the foregoing Subsections (i) through (viii) above. The Corporation further covenants that it will not incur any such Lien unless the instruments and collateral documents equally and ratably securing the Debentures are approved by the Trustee, and in the opinion of independent counsel selected by the Trustee, the transaction creating such Lien complies with the requirements of this Section. Section 5.08. Compliance Certificate. The Corporation shall deliver to the Trustee within 120 days after the end of each fiscal year of the Corporation an Officers' Certificate as to the Corporation's compliance with all conditions and covenants under the Indenture, and further stating whether or not the signers know of any Default that occurred during the fiscal year. If the signers know of any such Default, the Officers' Certificate shall describe the Default and its status, and the Corporation's compliance shall be determined without regard to any grace period or notice requirements under this Indenture. The certificate need not comply with Section 11.05. 17 Section 5.09. Default Certificate. The Corporation shall deliver to the Trustee, within seven (7) days of obtaining knowledge of the existence of a Default hereunder, or within seven (7) days of any event of default as described in Section 7.01(4) herein, a certificate signed by one of its Officers, setting forth the nature of the Default and the steps taken, if any, to cure such Default. ARTICLE 6 SUCCESSORS Section 6.01. When Corporation May Merge, etc. The Corporation shall not consolidate with or merge into, or transfer or lease all or substantially all of its assets to, any Person unless: (1) the Person is a corporation organized and existing under the laws of the United States, or any State thereof or the District of Columbia; (2) the Person assumes by supplemental indenture all the obligations of the Corporation under the Debentures and this Indenture; (3) immediately after the transaction no Default exists; and (4) the Corporation has delivered to the Trustee an Officers' Certificate and Opinion of Counsel each stating that the transaction and supplemental indenture comply with this Article. The surviving transferee or lessee corporation shall be the successor Corporation and deemed to and be substituted for the Corporation under the Indenture, and the predecessor Corporation in the case of a transfer or lease shall be released from all obligations and covenants under the Indenture and the Debentures. ARTICLE 7 DEFAULTS AND REMEDIES Section 7.01. Events of Default. An "Event of Default" occurs if: (1) the Corporation defaults in the payment of interest on any Debenture when the same becomes due and payable and the Default continues for a period of 30 days; 18 (2) the Corporation defaults in the payment of the Principal of any Debenture when the same becomes due and payable at maturity, upon redemption or otherwise; (3) the Corporation fails to comply with any of its other agreements in the Debentures or this Indenture and the Default continues for the period and after the notice specified below; (4) an event of default as defined in any mortgage, indenture or instrument under which there may be issued, or by which there may be secured or evidenced, any Indebtedness for money borrowed for which the Corporation or any Consolidated Subsidiary is responsible or liable as obligor, guarantor or otherwise or obligations of the Corporation or any Consolidated Subsidiary as a lessee under leases required to be capitalized under generally accepted accounting principles, in an aggregate principal amount of $500,000 or more, whether such Indebtedness or obligation now exists or shall hereafter be created, shall happen and shall result in such Indebtedness or obligation becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, and such acceleration shall not be rescinded or annulled, or such Indebtedness or obligation shall not have been discharged, within a period of 10 days after written notice has been given to the Corporation by the Trustee or to the Corporation and the Trustee by the Holders of at least 25% in principal amount of the Debentures then outstanding, specifying such event of default and requiring the Corporation to cause such acceleration to be rescinded or annulled or to cause such Indebtedness or obligation to be discharged and stating that such notice is a "Notice of Default" hereunder; (5) the Corporation pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, or (D) makes a general assignment for the benefit of its creditors; or 19 (6) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law, and the order or decree remains unstayed and in effect for 60 days, that: (A) is for relief against the Corporation in an involuntary case, (B) appoints a Custodian of the Corporation for all or substantially all of its property, or (C) orders the liquidation of the Corporation. The term "Bankruptcy Law" means title 11, U.S. Code or any similar Federal or State law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. A Default under clause (3) is not an Event of Default until (i) the Trustee or the Holders of at least 25% in principal amount of the Debentures then outstanding notify the Corporation of the Default, or (ii) the Corporation provides notice to the Trustee pursuant to the provisions of Section 5.09 hereof, and the Corporation does not cure the Default within 60 days after receipt of such respective notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." The Trustee shall, if requested to do so by the Holders of 25% in principal amount of the Debentures, notify the Corporation of the Default pursuant to this Section. Subject to the provisions of Sections 8.01 and 8.02, the Trustee shall not be charged with knowledge of any Event of Default unless written notice thereof shall have been given to a Trust Officer of the Trustee at the Corporate Trust Office by the Corporation, the Paying Agent, the Holder of a Debenture or an agent of such Holder or, in the case of an Event of Default under clause (4), by the trustee acting under any mortgage, indenture or other instrument under which the event of default shall have occurred or by the holder or the agent of any holder of such Indebtedness. Section 7.02. Acceleration. If an Event of Default occurs and is continuing, the Trustee, by notice to the Corporation, or the Holders of at least 25% in principal amount of the Debentures then outstanding, by notice to the Corporation and the Trustee, may declare the Principal of, and accrued interest on, all the Debentures to be due and payable. Upon such declaration the Principal and interest shall be due and payable immediately. 20 The Holders of a majority in principal amount of the Debentures then outstanding, by notice to the Trustee, may rescind an acceleration of all the Debentures and its consequences if (i) all existing Events of Default have been cured or waived except nonpayment of the Principal and interest that has become due solely because of the acceleration and (ii) if the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. No such rescission shall affect any subsequent default or impair any right consequent thereon. Section 7.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Debentures or to enforce the performance of any provision of the Debentures or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Debentures or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Debentureholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in such Event of Default. All remedies are cumulative to the extent permitted by law. Section 7.04. Waiver of Past Defaults. The Holders of a majority in principal amount of the Debentures, by notice to the Trustee, on behalf of all Debentureholders, may waive a past Default and its consequences, except a Default in the payment of the Principal of or interest on any Debenture, an uncured failure to make any redemption payment or an uncured Default with respect to a provision which cannot be modified under the terms of this Indenture without the consent of each Holder affected. Section 7.05. Control by Majority. The Holders of a majority in principal amount of the Debentures then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, is unduly prejudicial to the rights of other Debentureholders, or would involve the Trustee in personal liability; provided, that the Trustee may take any other action deemed proper by the Trustee which is not 21 inconsistent with such direction. However, the Trustee is under no duty or obligation to exercise its discretion in determining whether such directions may conflict with law or this Indenture, or are unduly prejudicial to the rights of Debentureholders. Section 7.06. Limitation on Suits. A Debentureholder may pursue a remedy with respect to this Indenture or the Debentures only if: (1) the Holder gives to the Trustee written notice of a continuing Event of Default; (2) the Holders of at least 25% in principal amount of the Debentures then outstanding make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request by Debentureholders pursuant to Section 7.06(2) above, within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60day period the Holders of a majority in principal amount of the Debentures then outstanding do not give the Trustee a direction inconsistent with the request. A Debentureholder may not use this Indenture to prejudice the rights of another Debentureholder or to obtain a preference or priority over another Debentureholder. Section 7.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Debenture to receive payment of Principal and interest on the Debenture, on or after the respective due dates expressed in the Debenture, or to bring suit for the enforcement of any such payment on or after such respective dates, is absolute and unconditional and shall not be impaired or affected without the consent of the Holder. 22 Section 7.08. Collection Suit by Trustee. If an Event of Default in payment of interest or Principal specified in Section 7.01(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Corporation for the whole amount of unpaid Principal and accrued interest remaining unpaid. Section 7.09. Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Debentureholders allowed in any judicial proceedings relative to the Corporation upon the Debentures, its creditors or its property, and shall be entitled and empowered to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same, and any Custodian in any such judicial proceeding is hereby authorized by each Debentureholder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Debentureholders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses and disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 8.07. Section 7.10. Priorities. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 8.07; Second: to Debentureholders for amounts due and unpaid on the Debentures for Principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Debentures for Principal and interest, respectively; and Third: to the Corporation. The Trustee may fix a record date and payment date for any payment to Debentureholders pursuant to this Article. 23 Section 7.11. Undertaking for Costs. Subject to the provisions of Section 8.02 hereof, in any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 7.07 or a suit by Holders of more than 10% in principal amount of the Debentures. Section 7.12. Waiver of Stay or Extension Laws. The Corporation covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of the Indenture; and the Corporation (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 7.13. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under the Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Corporation, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 7.14. Record Date for Vote of Debentureholders. The Corporation may set a record date for purposes of determining the identity of Debentureholders entitled to vote or consent to any action by vote or consent authorized or permitted by Sections 7.04 and 7.05 of this Indenture. Such record date shall be the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Holders 24 furnished to the Trustee pursuant to Section 2.05 of this Indenture prior to such solicitation. ARTICLE 8 TRUSTEE Section 8.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (1) The Trustee need perform only those duties that are specifically set forth in this Indenture and no others. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own gross negligent failure to act or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 7.05. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. 25 (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as otherwise agreed with the Corporation. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Section 8.02. Rights of Trustee. Except as otherwise provided in Section 8.01: (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on the Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. Section 8.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Debentures and may otherwise deal with the Corporation or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 8.10 and 8.11. Section 8.04. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Debentures, it shall not be accountable for the Corporation's use of the proceeds from the 26 Debentures, and it shall not be responsible for any statement in the Debentures other than its authentication. Section 8.05. Notice of Defaults. If a Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Debentureholders, in the manner and to the extent provided in TIA Section 313(c), a notice of the Default within 90 days after it occurs. Except in the case of a Default in payment of the principal of or interest on any Debenture, the Trustee may withhold the notice if and so long as the Board of Directors, the Executive Committee or a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Debentureholders. Section 8.06. Reports by Trustee to Holders. On or before each ________ beginning with the ________ following the date of this Indenture, the Trustee shall mail to each Debentureholder a brief report, dated as of such reporting date, with respect to any of the events listed in TIA Section 313(a) which may have occurred within the previous 12 months, but if no such event has occurred within such period no such report need be mailed. The Trustee also shall comply with TIA Section 313(b)(2). A copy of each report required in this Section shall be mailed to such Debentureholders as required by TIA Section 313(c) and shall, at the time of its mailing to such Debentureholders, be filed with the Corporation, the SEC and each stock exchange on which the Debentures are listed. The Corporation shall notify the Trustee when the Debentures are listed on any stock exchange. Section 8.07. Compensation and Indemnity. The Corporation shall pay to the Trustee from time to time reasonable compensation for its services. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. If an Event of Default should occur, the Trustee shall be entitled to reasonable additional compensation for all additional or extraordinary services rendered and expenses (including counsel fees) incurred in connection with said Event of Default. The Corporation shall indemnify the Trustee against any loss or liability incurred by it. The Trustee shall notify the Corporation promptly of any claim for which it may seek indemnity. The Corporation shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel, and the Corporation shall pay the reasonable fees and expenses of such counsel. The Corporation need not pay for any settlement made without its consent. 27 The Corporation need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. To secure the Corporation's payment obligations in this Section, the Trustee shall have a lien prior to the Debentures on all money or property held or collected by the Trustee. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 7.01(5) or (6) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. Section 8.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign by so notifying the Corporation. The Holders of a majority in principal amount of the Debentures may remove the Trustee by so notifying the Trustee and the Corporation. The Corporation may remove the Trustee if: (1) the Trustee fails to comply with Section 8.10; (2) the Trustee is adjudged a bankrupt or an insolvent; (3) a receiver or public officer takes charge of the Trustee or its property; (4) the Trustee becomes incapable of acting; or (5) the Trustee fails to comply with TIA Section 310(b) after an Event of Default. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Corporation shall promptly appoint a successor Trustee. Within one year after the successor Trustee assumes office, the Holders of a majority in principal amount of the Debentures may appoint a successor Trustee to replace the successor Trustee appointed by the Corporation. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Corporation or the Holders of at least 10% in principal amount of the Debentures then outstanding may petition 28 any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 8.10, any Debentureholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Corporation. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Debentureholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 8.07. Section 8.09. Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the resulting, surviving or transferee corporation without any further act shall be the successor Trustee. Section 8.10. Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee shall always have a combined capital and surplus of at least $15,000,000 as set forth in its most recent published annual report of condition. Neither the Corporation nor any Affiliate shall serve as Trustee upon the Debentures or pursuant to this Indenture. The Trustee is subject to TIA Section 310(b). Section 8.11. Preferential Collection of Claims Against Corporation. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed is subject to TIA Section 311(a) to the extent indicated. Section 8.12. Appointment of CoTrustee. It is the purpose of this Indenture that there shall be no violation of any law of any jurisdiction denying or restricting 29 the right of banking corporations or associations to transact business as trustee in such jurisdiction. It is recognized that in case of litigation under this Indenture, and in particular in case of the enforcement of an Event of Default, or in case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee in trust, as herein granted, or take any other action which may be desirable or necessary in connection therewith, it may be necessary that an additional individual or institution be appointed as a separate or CoTrustee. At any time or times, for the purpose of meeting the legal requirements of any jurisdiction, the Trustee and the Corporation may appoint an additional individual or institution as a separate or CoTrustee, in which event each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by this Indenture, to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or CoTrustee but only to the extent necessary to enable such separate or CoTrustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or CoTrustee shall run to and be enforceable by either of them. If the Corporation does not join in such appointment within 15 days after receipt by it of a request so to do, or in case an Event of Default has occurred and is continuing, the Trustee alone shall have power to make such appointment. Should any deed, conveyance or instrument in writing from the Corporation be required by the separate or CoTrustee so appointed by the Trustee for more fully and certainly vesting in and confirming to it such properties, rights, powers, trusts, duties and obligations, including particularly the right to be paid its fees for services rendered, any and all such deeds, conveyances and instruments in writing shall, on request, be executed, acknowledged and delivered by the Corporation. In case any separate or CoTrustee, or a successor to either, shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such separate or CoTrustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new Trustee or successor to such separate or CoTrustee. The rights, powers, duties and obligations hereby conferred or imposed upon the Trustee in respect of this Indenture shall be conferred or imposed upon and exercised or performed by the Trustee or by the Trustee and such separate or CoTrustee jointly, as shall be provided in the instrument appointing such separate or CoTrustee, except to the extent that under any law of any 30 jurisdiction in which any particular act is to be performed, the Trustee shall be incompetent or unqualified to perform such act, in which event such rights, powers, duties and obligations shall be exercised and performed by such separate or CoTrustee. ARTICLE 9 DISCHARGE OF INDENTURE Section 9.01. Termination of Corporation's Obligations. The Corporation may at any time terminate all of its obligations under this Indenture if: (1) the Corporation provides written notice to the Trustee of the Corporation's intent to terminate its obligation under this Indenture; (2) the Debentures mature within one year of the Corporation's written notice of its intent to terminate or all of the Debentures are to be called for redemption within one year of the Corporation's written notice of its intent to terminate under arrangements satisfactory to the Trustee for giving the notice of redemption; and (3) the Corporation irrevocably deposits in trust with the Trustee money or U.S. Government Obligations sufficient to pay Principal and interest on the Debentures at maturity or on redemption, as the case may be. The Corporation may make the deposit only during the oneyear period referred to in paragraph (2) above. However, the Corporation's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 5.01, 8.07, 8.08 and 9.03 shall survive until the Debentures are no longer outstanding. Thereafter, the Corporation's obligations in Sections 8.07 and 9.03 shall survive. After a deposit the Trustee upon request shall acknowledge in writing the discharge of the Corporation's obligations under this Indenture except for those surviving obligations specified above. In order to have money available on a payment date to pay Principal or interest on the Debentures, the U.S. Government Obligations shall be payable as to principal or interest on or before such payment date in such amounts as will provide the necessary money. The U.S. Government Obligations shall not be callable at the issuer's option. 31 Section 9.02. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 9.01. It shall apply the deposited money and the money from the U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of Principal and interest on the Debentures. Section 9.03. Repayment to Corporation. The Trustee and the Paying Agent shall promptly pay to the Corporation upon request any excess money or securities held by the Trustee as a result of the Corporation's making payments to the Trustee and Paying Agent in excess of that required under the provisions of this Indenture. The obligation of the Trustee and the Paying Agent to pay such excess money or securities to the Corporation shall survive the payment and/or cancellation of all of the Debentures until all such excess funds or securities have been so paid. The Trustee and the Paying Agent shall pay to the Corporation annually as of ________ of each year any money held by them for the payment of Principal or interest that remains unclaimed for two years. After payment to the Corporation, Debentureholders entitled to the money must look to the Corporation for payment as general creditors unless an applicable abandoned property law designates another person. ARTICLE 10 AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 10.01. Without Consent of Holders. The Corporation and the Trustee may amend or supplement this Indenture or the Debentures without notice to or consent of any Debentureholder: (1) to cure any ambiguity, omission, defect or inconsistency; (2) to comply with Section 6.01; (3) to provide for uncertificated Debentures in addition to or in place of certificated Debentures; or (4) to make any change that does not materially adversely affect the rights of any Debentureholder. 32 Section 10.02. With Consent of Holders. The Corporation and the Trustee may amend or supplement this Indenture or the Debentures with the written consent of the Holders of at least a majority in principal amount of the Debentures then outstanding. Without the consent of each Debentureholder affected, however, an amendment under this Section may not: (1) reduce the amount of Debentures whose Holders must consent to an amendment or waiver; (2) reduce the rate of or change the time for payment of interest on any Debenture; (3) reduce the Principal of or change the maturity of any Debenture; (4) waive a Default in the payment of the Principal of or interest on any Debenture; (5) make any Debenture payable in money other than that stated in the Debenture; or (6) modify the provisions of Sections 7.04, 7.07 and 10.02 (second sentence). After an amendment or supplement under this Section becomes effective, the Corporation shall mail to Debentureholders a notice briefly describing the amendment. Section 10.03. Compliance with Trust Indenture Act. Every amendment to or supplement of this Indenture or the Debentures shall be set forth in a supplemental indenture that complies with the TIA as then in effect. Section 10.04. Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Debenture is a continuing consent by the Holder and every subsequent Holder of a Debenture or portion of a Debenture that evidences the same debt as the consenting Holder's Debenture, even if notation of the consent is not made on any Debenture. However, any such Holder or subsequent Holder may revoke the consent as to his Debenture or portion of a Debenture if the Trustee receives the notice of revocation before the date the amendment, supplement or waiver becomes effective. 33 Section 10.05. Notation on or Exchange of Debentures. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Debenture thereafter authenticated. The Corporation in exchange for all Debentures may issue and the Trustee shall authenticate new Debentures that reflect the amendment, supplement or waiver. Section 10.06. Trustee Protected. The Trustee need not sign any supplemental indenture that adversely affects its rights. ARTICLE 11 MISCELLANEOUS Section 11.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies, or conflicts with the duties imposed by operation of TIA Section 318(c), the imposed duties shall control. Section 11.02. Notices. Any notice or communication by the Corporation or the Trustee to the other is duly given if in writing and when delivered in person or mailed by firstclass mail addressed as follows: if to the Corporation: VALLEY RESOURCES, INC. 1595 Mendon Road Cumberland, RI 02864 Attention: Chief Financial Officer if to the Trustee: The Corporation or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Debentureholder shall be mailed by firstclass mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Debentureholder or any defect in it shall not affect its sufficiency with respect to other Debentureholders. 34 If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Corporation mails a notice or communication to Debentureholders, it shall mail a copy to the Trustee and each Agent at the same time. All notices or communications shall be in writing, except as set forth below. In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice required by this Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient mailing of such notice. Section 11.03. Communication by Holders with Other Holders. Debentureholders may communicate pursuant to TIA Section 312(b) with other Debentureholders with respect to their rights under this Indenture or the Debentures. The Corporation, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). Section 11.04. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Corporation to the Trustee to take any action under this Indenture, the Corporation shall furnish to the Trustee: (1) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (2) an Opinion of Counsel addressed to the Trustee and upon which the Trustee may rely, stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 11.05. Statements Required in Certificate or Opinion. Each Officers' Certificate or Opinion of Counsel with respect to compliance with a condition or covenant provided for in this Indenture shall include: 35 (1) a statement that the persons making such Officers' Certificate or Opinion of Counsel have read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such Officers' Certificate or Opinion of Counsel are based; (3) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such persons, such condition or covenant has been complied with. Section 11.06. Rules by Trustee and Agent. The Trustee may make reasonable rules for action by, or a meeting of, Debentureholders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. Section 11.07. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday, or a day on which banking institutions in _________, are not required to be open. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 11.08. No Recourse Against Others. No liability under the Debentures shall inure to any director, officer, employee or stockholder, as such, of the Corporation and each Debentureholder, by accepting the Debenture, waives and releases all such liability. Section 11.09. Duplicate Originals. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. 36 Section 11.10. Governing Law. The laws of the State of Rhode Island shall govern this Indenture and the Debentures. Section 11.11. Table of Contents, Headings, etc. The table of contents, crossreference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SIGNATURES Dated: ______________, 1997 VALLEY RESOURCES, INC. ("Corporation") (SEAL) By: _________________________ Its: President and Chief Executive Officer Attest: _________________________ Its: Corporate Secretary Dated: ______________, 1997 _____________________________ ("Trustee") (SEAL) By: _________________________ Its: Trust Officer Attest: _________________________ 37 FORM OF GLOBAL SECURITY EXHIBIT A THIS DEBENTURE IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR NOMINEE OF A DEPOSITORY. THIS GLOBAL SECURITY IS EXCHANGEABLE FOR DEBENTURES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE ONLY IN LIMITED CIRCUMSTANCES HEREINAFTER DESCRIBED AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY. Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to Valley Resources, Inc., a Rhode Island corporation, or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein. VALLEY RESOURCES, INC. _____% Debenture Due September 1, 2027 $7,000,000 No._______________________ CUSIP No. ______________ VALLEY RESOURCES, INC., a Rhode Island corporation, for value received, hereby promises to pay to CEDE & CO., or registered assigns, the principal sum of SEVEN MILLION DOLLARS on _______, 2027, and to pay interest on said principal sum at the rate of ____% per annum calculated on the basis of a 360day year of twelve 30day months. A-38 1. Interest. VALLEY RESOURCES, INC. ("Corporation"), a Rhode Island corporation, promises to pay interest on the principal amount of this Debenture at the rate per annum shown above. The Corporation will pay interest semi-annually on March 1 and September 1 of each year (each such date being an "Interest Payment Date"), commencing March 1, 1998. Interest on the Debentures will accrue from the most recent date to which interest has been paid, or, if no interest has been paid previously, from the date of original issuance of this Debenture; provided that, if there is no existing default in the payment of interest, and if this Debenture is authenticated between a "Record Date" (as hereinafter defined) and the next succeeding Interest Payment Date, interest shall accrue from the next Interest Payment Date. The term "Record Date" as used herein shall mean the April 15 or August 15, as the case may be, immediately preceding each Interest Payment Date. 2. Method of Payment. The Corporation will pay interest on the Debentures (except defaulted interest) to the Paying Agent who will then pay such interest to the Persons who are registered Holders of Debentures at the close of business on the Record Date next preceding the Interest Payment Date. The Corporation shall pay appropriate amounts to the Paying Agent in immediately available funds at least one (1) business day preceding the Interest Payment Date. The Paying Agent will pay interest to such Holders on the next Interest Payment Date even though Debentures are canceled after the Record Date but on or before the Interest Payment Date. Holders must surrender Debentures to the Paying Agent to collect Principal payments; except that, with respect to a Global Security, the Depository need not surrender the Global Security to collect payments of Principal other than the final payment of Principal of such Global Security, provided that the Depository makes appropriate endorsement on such Global Security of such prepayments on the Table of Prepayments. The Paying Agent will pay Principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, except as set forth in the last sentence of this paragraph: (i) the Paying Agent may pay Principal and interest by check payable in such money; and (ii) the Paying Agent may mail an interest check to a Holder's registered address. Any Holder of at least $1,000,000 aggregate principal amount of Debentures shall have the right to receive payment of Principal of and interest on the Debentures by wire transfer of funds, provided that such Debentureholder requests such form of payment, accompanied by appropriate wire transfer instructions, by written notice to the Trustee and the Paying Agent given not later than the Record Date immediately preceding such payment. A-39 3. Paying Agent and Registrar. Initially, _________, [address], will act as Paying Agent and Registrar. The Corporation may change any Paying Agent, Registrar or CoRegistrar without notice. The Corporation or any of its Subsidiaries may act in any such capacity. 4. Indenture. The Corporation issued the Debentures under an Indenture dated as of September 1, 1997 ("Indenture"), between the Corporation and the Trustee. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa77bbbb) (the "Act") as in effect on the date of the Indenture. The Debentures are subject to all such terms, and Debentureholders are referred to the Indenture and the Act for a statement of such terms. Capitalized terms used but not otherwise defined herein shall have the same meanings such terms are given in the Indenture. The Debentures are unsecured general obligations of the Corporation limited to $7,000,000 in aggregate principal amount. 5. Redemption at Corporation's Option. The Corporation may, at its option, at any time on or after September 1, 2002, redeem all the Debentures or some of them from time to time at the following Redemption Prices (expressed in percentages of principal amount of the Debentures) plus unpaid accrued interest to the Redemption Date.
If redeemed during the 12month period beginning September 1: Year Percentage 2002 104% 2003 103 2004 102 2005 101 2006 until maturity 100
Notice of redemption at the Corporation's option will be mailed at least 30 days before the Redemption Date to each Holder of Debentures to be redeemed at his registered address as set forth in the register. Debentures in denominations larger than $1,000 may be redeemed in part but only in integral multiples of $1,000. On and after the Redemption Date (if there is no default in the payment of the Redemption Price by the Corporation), interest ceases to accrue on Debentures or portions thereof called for redemption. A-40 6. Redemption at Beneficial Owner's Option. For purposes hereof, a "Beneficial Owner" means the Person who has the right to sell, transfer or otherwise dispose of an interest in this Debenture and the right to receive the proceeds therefrom, as well as the interest and Principal payable to the Holder hereof. In general, a determination of beneficial ownership in this Debenture will be subject to the rules, regulations and procedures governing the Depository and institutions that have accounts with the Depository or a nominee thereof ("Participants"). Participants may hold interests in this Debenture as Beneficial Owners for their own accounts, or as nominees for other persons. Unless the Debentures have been declared due and payable prior to their maturity by reason of an Event of Default, the Representative (as hereinafter defined) of a deceased Beneficial Owner has the right to request redemption of all or part of his interest, expressed in integral multiples of $1,000 principal amount, in this Debenture for payment prior to its maturity, and the Corporation will redeem the same subject to the limitations that the Corporation will not be obligated to redeem, during the period from the original issuance of the Debentures through and including September 1, 1998 (the "Initial Period"), and during any twelvemonth period which ends on and includes each September 1 thereafter (each such twelve-month period being hereinafter referred to as a "Subsequent Period"), (i) on behalf of a deceased Beneficial Owner any interest in this Debenture which exceeds an aggregate principal amount of $25,000 or (ii) interests in this Debenture in an aggregate principal amount exceeding $210,000. In the case of interests in this Debenture owned by a deceased Beneficial Owner, a request for redemption may be presented to the Trustee at any time and in any principal amount. If the Corporation, although not obligated to do so, chooses to redeem interests of any deceased Beneficial Owner in this Debenture in the Initial Period or any Subsequent Period in excess of the $25,000 limitation, such redemption, to the extent that it exceeds the $25,000 limitation for any deceased Beneficial Owner, shall not be included in the computation of the $210,000 limitation for such Initial Period or such Subsequent Period, as the case may be, or for any succeeding Subsequent Period. Subject to the $25,000 and $210,000 limitations, the Corporation will, upon the death of any Beneficial Owner, redeem the interest of such Beneficial Owner in this Debenture within 60 days following receipt by the Trustee of a Redemption Request (as herein defined) from such Beneficial Owner's personal representative, or surviving joint tenant(s), tenant(s) by the entirety or tenant(s) in common, or other Persons entitled hereunder to effect such a Redemption Request (each, a "Representative"). If Redemption Requests exceed the aggregate principal amount of interests in Debentures required to be A-41 redeemed during the Initial Period or during any Subsequent Period, then such excess Redemption Requests will be applied to successive Subsequent Periods, regardless of the number of Subsequent Periods required to redeem such interests. A request for redemption of an interest in this Debenture may be made by delivering a request to the Depository, in the case of a Participant which is the Beneficial Owner of such interest, or to the Participant through whom the Beneficial Owner owns such interest, in form satisfactory to the Participant, together with evidence of the death of the Beneficial Owner and evidence of the authority of the Representative satisfactory to the Participant and Trustee. A Representative of a deceased Beneficial Owner may make the request for redemption and shall submit such other evidence of the right to such redemption as the Participant or Trustee shall require. The request shall specify the principal amount of the interest in this Debenture to be redeemed. A request for redemption in the form satisfactory to the Participant and accompanied by the documents relevant to the request as above provided, together with a certification by the Participant that it holds the interest on behalf of the deceased Beneficial Owner with respect to whom the request for redemption is being made (a "Redemption Request"), shall be provided to the Depository by a Participant and the Depository will forward the request to the Trustee. Redemption Requests shall be in form satisfactory to the Trustee. The price to be paid by the Corporation for interests in the Debentures to be redeemed pursuant to a Redemption Request from a deceased Beneficial Owner's Representative is 100% of the principal amount thereof plus accrued but unpaid interest to the date of payment. Subject to arrangements with the Depository, payment for interests in the Debentures which are to be redeemed shall be made to the Depository upon presentation of Debentures to the Trustee for redemption in the aggregate principal amount specified in the Redemption Requests submitted to the Trustee by the Depository which are to be fulfilled in connection with such payment. Any acquisition of Debentures by the Corporation or its Subsidiaries other than by redemption at the option of any Representative of a deceased Beneficial Owner pursuant to this paragraph 6 shall not be included in the computation of either the $25,000 or the $210,000 limitation for the Initial Period or for any Subsequent Period. For purposes of this paragraph 6, an interest in a Debenture held in tenancy by the entirety, joint tenancy or by tenants in common will be deemed to be held by a single Beneficial Owner and the death of a tenant by the entirety, joint tenant or tenant in common will be deemed the death of a Beneficial Owner. The death of a person, who, during his lifetime, was entitled to substantially all of the rights of a Beneficial Owner of an interest in this Debenture will be deemed the death of the Beneficial Owner, regardless of the recordation of such interest on the records of the Participant, if such rights can be A-42 established to the satisfaction of the Participant and the Trustee. Such interests shall be deemed to exist in typical cases of street name or nominee ownership, ownership under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, community property or other joint ownership arrangements between a husband and wife (including individual retirement accounts or Keogh [H.R. 10] plans maintained solely by or for the decedent or by or for the decedent and his spouse), and trust and certain other arrangements where one Person has substantially all of the rights of a Beneficial Owner during his lifetime. Beneficial interests shall include the power to sell, transfer or otherwise dispose of an interest in this Debenture and the right to receive the proceeds therefrom, as well as interest and Principal payable with respect thereto. In the case of any Redemption Request which is presented pursuant to this paragraph 6 and which has not been fulfilled at the time the Corporation gives notice of its election to redeem Debentures pursuant to paragraph 5, such interest or portion thereof shall not be subject to redemption pursuant to paragraph 5 but shall remain subject to redemption pursuant to this paragraph 6. Subject to the provisions of the immediately preceding sentence, any Redemption Request may be withdrawn by the Person(s) presenting the same upon delivery of a written request for such withdrawal given by the Depository to the Trustee prior to the issuance of a check in payment of such Redemption Request. 7. Denominations, Transfer, Exchange. The Debentures are in registered form without coupons in denominations of $1,000 and integral multiples thereof. The transfer of Debentures shall be registered and Debentures may be exchanged as provided in the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Debenture or portion of a Debenture selected for redemption. Also, it need not exchange or register the transfer of any Debentures during that period of time subsequent to any Record Date and prior to the next succeeding Interest Payment Date. 8. Persons Deemed Owners. The registered Holder of a Debenture may be treated as its owner for all purposes. 9. Amendments, Supplements and Waivers. Subject to certain exceptions, the Indenture or the Debentures may be amended or supplemented, and any existing A-43 Default may be waived, with the consent of Holders of a majority in principal amount of the Debentures then outstanding. Without the consent of any Debentureholder, the Indenture or the Debentures may be amended or supplemented, among other reasons, to cure any ambiguity, defect or inconsistency, to provide for assumption of Corporation obligations to Debentureholders or to make any change that does not materially adversely affect the rights of any Debentureholder. 10. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Debentures; default in payment of Principal of the Debentures; failure by the Corporation for 60 days after notice to it to comply with any of its other agreements in the Indenture or the Debentures; default in the payment of Indebtedness having an outstanding principal balance of $500,000 or more under certain circumstances; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Debentures may declare all the Debentures to be due and payable immediately. Debentureholders may not enforce the Indenture or the Debentures except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Debentures. Subject to certain limitations, Holders of a majority in principal amount of the Debentures may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Debentureholders notice of any continuing Default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Corporation must furnish an annual Officers' Certificate to the Trustee. The Trustee shall not be charged with knowledge of any Event of Default as defined in the Indenture, unless written notice thereof shall have been given to a Trust Officer of the Trustee at the Corporate Trust Office by the Corporation, the Paying Agent, the Holder of a Debenture or an agent of such Holder. 11. Trustee Dealings with Corporation. _____________, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Corporation or its Affiliates, and may otherwise deal with the Corporation or its Affiliates, as if it were not Trustee, subject to any limitations imposed by the Act. 12. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Corporation shall not have any liability for any obligations of the Corporation under the Debentures or the Indenture or for any claim based on, in respect of or by reason of such A-44 obligations or their creation. Each Debentureholder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Debentures. 13. Authentication. This Debenture shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 14. Abbreviations. Customary abbreviations may be used in the name of a Debentureholder or an assignee, such as TEN COM ( = tenants in common), TEN ENT ( = tenants by the entireties), JT TEN ( = joint tenants with right of survivorship and not as tenants in common), CUST ( = Custodian), and U/G/M/A ( = Uniform Gifts to Minors Act). Dated: Authenticated: _______________, VALLEY RESOURCES, INC. as Trustee By:___________________________ By:___________________________ Its: Authorized Signer Its: President By:___________________________ Its: Corporate Secretary (SEAL) _________________________ The Corporation will furnish to any Debentureholder upon written request and without charge a copy of the Indenture, which has in it the text of this Debenture in larger type. Requests may be made to: Chief Financial Officer, Valley Resources, Inc., 1595 Mendon Road, Cumberland, RI 02864. _________________________ A-45 TABLE OF PREPAYMENTS Upon all partial payments of principal of the within Debenture, this Debenture shall be surrendered to the Trustee for issuance of a new Debenture unless the registered Holder hereof shall make appropriate endorsements on the table below indicating the amount of principal so prepaid, prior to any transfer to this Debenture. Any purchaser or transferee of this Debenture shall verify with the Trustee the principal balance outstanding prior to the purchase or transfer hereof. Principal Remaining Unpaid Date Amount Paid Principal Balance Signature - -------------------------------------------------------------------------------- A-46 ASSIGNMENT FORM I/We assign and transfer this Debenture to [__________________] (Insert assignee's social security or tax I.D. number) _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ (Print or type name, address and zip code of assignee) and irrevocably appoint _________________________________________ ________________________________________ agent to transfer this Debenture on the books of the Corporation. The agent may substitute another to act for him. Date: _____________________ Signature: _________________________ (Sign exactly as your name appears on this Debenture) Signature Guarantee _________________________ 349\023\5522\059.EXH A-47 FORM OF DEBENTURE EXHIBIT B (Face of Debenture) VALLEY RESOURCES, INC. _____% Debenture Due 2027 No. ______________________ $_________________________ VALLEY RESOURCES, INC., a Rhode Island corporation, for value received, hereby promises to pay to ________________________, or registered assigns, the principal sum of_______________________ DOLLARS on September 1, 2027, and to pay interest on said principal sum at the rate of _____% per annum calculated on the basis of a 360 day year of twelve 30day months. Interest Payment Dates: March 1 and September 1 Record Dates: April 15 and August 15 Dated: Authenticated: _____________, VALLEY RESOURCES, INC. as Trustee By:__________________________ By:___________________________ Its: Authorized Signer Its: President By:___________________________ Its: Corporate Secretary (SEAL) B-48 (Back of Debenture) VALLEY RESOURCES, INC. _____% Debenture Due September 1, 2027 1. Interest. VALLEY RESOURCES, INC. ("Corporation"), a Rhode Island corporation, promises to pay interest on the principal amount of this Debenture at the rate per annum shown above. The Corporation will pay interest semi-annually on March 1 and September 1 of each year (each such date being an "Interest Payment Date"), commencing March 1, 1998. Interest on the Debentures will accrue from the most recent date to which interest has been paid, or, if no interest has been paid previously, from the date of original issuance of this Debenture; provided that, if there is no existing default in the payment of interest, and if this Debenture is authenticated between a Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from the next Interest Payment Date. 2. Method of Payment. The Corporation will pay interest on the Debentures (except defaulted interest) to the Paying Agent who will then pay such interest to the Persons who are registered Holders of Debentures at the close of business on the Record Date next preceding the Interest Payment Date. The Corporation shall pay appropriate amounts to the Paying Agent in immediately available funds at least one (1) business day preceding the Interest Payment Date. The Paying Agent will pay interest to such Holders on the next Interest Payment Date even though Debentures are canceled after the Record Date but on or before the Interest Payment Date. Holders must surrender Debentures to the Paying Agent to collect Principal payments. The Paying Agent will pay Principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, except as set forth in the last sentence of this paragraph: (i) the Paying Agent may pay Principal and interest by check payable in such money; and (ii) the Paying Agent may mail an interest check to a Holder's registered address. Any Holder of at least $1,000,000 aggregate principal amount of Debentures shall have the right to receive payment of Principal of and interest on the Debentures by wire transfer of funds, provided that such Debentureholder requests such form of payment, accompanied by appropriate wire transfer instructions, by written notice to the Trustee and the Paying Agent given not later than the Record Date immediately preceding such payment. B-49 3. Paying Agent and Registrar. Initially, ___________, [address], will act as Paying Agent and Registrar. The Corporation may change any Paying Agent, Registrar or CoRegistrar without notice. The Corporation or any of its Subsidiaries may act in any such capacity. 4. Indenture. The Corporation issued the Debentures under an Indenture dated as of September 1, 1997 ("Indenture"), between the Corporation and the Trustee. The terms of the Debentures include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa77bbbb) (the "Act") as in effect on the date of the Indenture. The Debentures are subject to all such terms, and Debentureholders are referred to the Indenture and the Act for a statement of such terms. Capitalized terms used but not otherwise defined herein shall have the same meanings such terms are given in the Indenture. The Debentures are unsecured general obligations of the Corporation limited to $7,000,000 in aggregate principal amount. 5. Redemption at Corporation's Option. The Corporation may, at its option, at any time on or after September 1, 2002, redeem all the Debentures or some of them from time to time at the following Redemption Prices (expressed in percentages of principal amount of the Debentures) plus unpaid accrued interest to the Redemption Date. If redeemed during the 12month period beginning September 1:
Year Percentage 2002 104% 2003 103 2004 102 2005 101 2006 until maturity 100
Notice of redemption at the Corporation's option will be mailed at least 30 days before the Redemption Date to each Holder of Debentures to be redeemed at his registered address as set forth in the register. Debentures in denominations larger than $1,000 may be redeemed in part but only in integral multiples of $1,000. On and after the Redemption Date (if there is no default in the payment of the Redemption Price by the Corporation), interest ceases to accrue on Debentures or portions thereof called for redemption. B-50 6. Redemption at Holder's Option. Unless the Debentures have been declared due and payable prior to their maturity by reason of an Event of Default, the Representative (as hereinafter defined) of a deceased Debentureholder has the right to present Debentures for payment prior to their maturity, and the Corporation will redeem the same subject to the limitations that the Corporation will not be obligated to redeem, during the period from the original issuance of the Debentures through and including September 1, 1998 (the "Initial Period"), and during any twelvemonth period which ends on and includes each September 1 thereafter (each such twelve-month period being hereinafter referred to as a "Subsequent Period"), (i) Debentures presented on behalf of a deceased Debentureholder exceeding an aggregate principal amount of $25,000 or (ii) Debentures in an aggregate principal amount exceeding $210,000. In the case of Debentures owned by a deceased Holder, Debentures may be presented to the Trustee for redemption at any time and in any principal amount. If the Corporation, although not obligated to do so, chooses to redeem Debentures of any deceased Debentureholder in any such period in excess of the $25,000 limitation, such redemption, to the extent that it exceeds the $25,000 limitation for any deceased Debentureholder, shall not be included in the computation of the $210,000 limitation for such Initial Period or such Subsequent Period, as the case may be, or for any succeeding Subsequent Period. Subject to the $25,000 and $210,000 limitations, the Corporation will, upon the death of any Debentureholder, redeem Debentures within 60 days following receipt by the Trustee of a request therefor from such Debentureholder's personal representative, or surviving joint tenant(s), tenant(s) by the entirety or tenant(s) in common, or other Persons entitled hereunder to request such redemption (each, a "Representative"). If Debentures presented for redemption exceed the aggregate principal amount of Debentures required to be redeemed during the Initial Period or during any Subsequent Period, then such excess Debentures presented for redemption will be applied to successive Subsequent Periods, regardless of the number of Subsequent Periods required to redeem such Debentures. Debentures may be presented for redemption by delivering to the Trustee: (i) a written request for redemption, in form satisfactory to the Trustee, signed by the Representative of the deceased Debentureholder, (ii) the Debenture(s) to be redeemed and (iii) appropriate evidence of death of the Debentureholder and appropriate evidence of the authority of the Representative of the deceased Debentureholder. No particular forms of request for redemption or authority to request redemption are necessary. The price to be paid by the Corporation for all Debentures presented to it pursuant to the provisions described in this paragraph 6 is 100% of the principal amount thereof plus accrued B-51 but unpaid interest to the date of payment. Any acquisition of Debentures by the Corporation or its Subsidiaries other than by redemption at the option of any Representative of a deceased Debentureholder pursuant to this paragraph 6 shall not be included in the computation of either the $25,000 or the $210,000 limitation for the Initial Period or for any Subsequent Period. For purposes of this paragraph 6, a Debenture held in tenancy by the entirety, joint tenancy or by tenants in common will be deemed to be held by a single Debentureholder and the death of a tenant by the entirety, joint tenant or tenant in common will be deemed the death of a Debentureholder. The death of a person, who, during his lifetime, was entitled to substantially all of the beneficial interests of ownership of a Debenture will be deemed the death of the Debentureholder, regardless of the registered Debentureholder, if such beneficial interest can be established to the satisfaction of the Trustee. Such beneficial interest shall be deemed to exist in typical cases of street name or nominee ownership, ownership under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, community property or other joint ownership arrangements between a husband and wife (including individual retirement accounts or Keogh [H.R. 10] plans maintained solely by or for the decedent or by or for the decedent and his spouse), and trust and certain other arrangements where one person has substantially all of the beneficial ownership interests in the Debenture during his lifetime. Beneficial interests shall include the power to sell, transfer or otherwise dispose of a Debenture and the right to receive the proceeds therefrom, as well as interest and Principal payable with respect thereto. In the case of Debentures held by Qualified Institutions on behalf of beneficial owners, the $25,000 limitation shall apply to each such beneficial owner and the death of such beneficial owner shall entitle a Qualified Institution to seek redemption of such Debentures as if the deceased beneficial owner were the record Debentureholder. Such Qualified Institutions, in their request for redemption on behalf of such beneficial owners, must submit evidence, satisfactory to the Trustee, that they hold Debentures on behalf of such beneficial owners and must certify that the aggregate requests for redemption tendered by such Qualified Institution on behalf of each such beneficial owner in the Initial Period or any Subsequent Period does not exceed $25,000. In addition, any request for redemption made by a Qualified Institution on behalf of a beneficial owner must be delivered to the Trustee by registered mail, return receipt requested. In the case of any Debenture which is presented for redemption in part only, upon such redemption the Corporation shall execute and the Trustee shall authenticate and deliver to or on the order of the Holder of such Debenture, without service charge to the Debentureholder, a new Debenture or Debentures, of any authorized denomination or denominations as requested by such B-52 Holder, in aggregate principal amount equal to the unredeemed portion of the principal of the Debenture so presented. In the case of any Debenture or portion thereof which is presented for redemption pursuant to this paragraph 6 and which has not been redeemed at the time the Corporation gives notice of its election to redeem Debentures pursuant to paragraph 5, such Debenture or portion thereof shall not be subject to redemption pursuant to paragraph 5 but shall remain subject to redemption pursuant to this paragraph 6. Subject to the provisions of the immediately preceding sentence, any Debentures presented for redemption at the option of the Representative of a deceased Debentureholder may be withdrawn by the Person(s) presenting the same upon delivery of a written request for such withdrawal given to the Trustee prior to the issuance of a check in payment of such Debentures presented by reason of the death of a Debentureholder. 7. Denominations, Transfer, Exchange. The Debentures are in registered form without coupons in denominations of $1,000 and integral multiples thereof. The transfer of Debentures shall be registered and Debentures may be exchanged as provided in the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Debenture or portion of a Debenture selected for redemption. Also, it need not exchange or register the transfer of any Debentures during that period of time subsequent to any Record Date and prior to the next succeeding Interest Payment Date. 8. Persons Deemed Owners. The registered Holder of a Debenture may be treated as its owner for all purposes. 9. Amendments, Supplements and Waivers. Subject to certain exceptions, the Indenture or the Debentures may be amended or supplemented, and any existing Default may be waived, with the consent of Holders of a majority in principal amount of the Debentures then outstanding. Without the consent of any Debentureholder, the Indenture or the Debentures may be amended or supplemented, among other reasons, to cure any ambiguity, defect or inconsistency, to provide for assumption of Corporation obligations to Debentureholders or to make any change that does not materially adversely affect the rights of any Debentureholder. B-53 10. Defaults and Remedies. An Event of Default is: default for 30 days in payment of interest on the Debentures; default in payment of Principal of the Debentures; failure by the Corporation for 60 days after notice to it to comply with any of its other agreements in the Indenture or the Debentures; default in the payment of Indebtedness having an outstanding principal balance of $500,000 or more under certain circumstances; and certain events of bankruptcy or insolvency. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the Debentures may declare all the Debentures to be due and payable immediately. Debentureholders may not enforce the Indenture or the Debentures except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Debentures. Subject to certain limitations, Holders of a majority in principal amount of the Debentures may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Debentureholders notice of any continuing Default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Corporation must furnish an annual Officers' Certificate to the Trustee. The Trustee shall not be charged with knowledge of any Event of Default as defined in the Indenture, unless written notice thereof shall have been given to a Trust Officer of the Trustee at the Corporate Trust Office by the Corporation, the Paying Agent, the Holder of a Debenture or an agent of such Holder. 11. Trustee Dealings with Corporation. ____________, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Corporation or its Affiliates, and may otherwise deal with the Corporation or its Affiliates, as if it were not Trustee, subject to any limitations imposed by the Act. 12. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Corporation shall not have any liability for any obligations of the Corporation under the Debentures or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Debentureholder by accepting a Debenture waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Debentures. 13. Authentication. This Debenture shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. B-54 14. Abbreviations. Customary abbreviations may be used in the name of a Debentureholder or an assignee, such as TEN COM ( = tenants in common), TEN ENT ( = tenants by the entireties), JT TEN ( = joint tenants with right of survivorship and not as tenants in common), CUST ( = Custodian), and U/G/M/A ( = Uniform Gifts to Minors Act). __________________________ The Corporation will furnish to any Debentureholder upon written request and without charge a copy of the Indenture, which has in it the text of this Debenture in larger type. Requests may be made to: Chief Financial Officer, Valley Resources, Inc., 1595 Mendon Road, Cumberland, Rhode Island 02864. __________________________ B-55 ASSIGNMENT FORM I/We assign and transfer this Debenture to [__________________] (Insert assignee's social security or tax I.D. number) _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ (Print or type name, address and zip code of assignee) and irrevocably appoint _________________________________________ ________________________________________ agent to transfer this Debenture on the books of the Corporation. The agent may substitute another to act for him. Date: ___________________ Signature: ______________________ (Sign exactly as your name appears on the other side of this Debenture) Signature Guarantee _________________________ 349\023\5522\060.EXH B-56 EX-5 3 Exhibit 5 June 26, 1997 Valley Resources, Inc. 1595 Mendon Road Cumberland, RI 02864 Ladies and Gentlemen: We are furnishing this opinion in connection with the filing by Valley Resources, Inc. (the "Corporation") of a Registration Statement on Form S-2 (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") relating to the issuance by the Corporation of up to 713,000 shares of the Corporation's Common Stock, $1.00 par value (the "Shares"), and $7,000,000 aggregate principal amount of __% Debentures due 2027 (the "Debentures"). In connection with this opinion, we have examined such corporate records, certificates and other documents, and reviewed such questions of law, as we have deemed necessary or appropriate in order to express the opinions contained herein. Based upon such examination, it is our opinion that: 1. The Shares, when issued and delivered in the manner and for the consideration stated in the Prospectus constituting a part of the Registration Statement (the "Prospectus"), will be legally issued, fully paid and non-assessable. 2. The Debentures, when issued and delivered in the manner and for the consideration stated in the Prospectus, will be legally issued and binding obligations of the Corporation. We consent to the use of this opinion as an Exhibit to the Registration Statement and to the use of our name in the Registration Statement and Prospectus. Very truly yours, EDWARDS & ANGELL By:/s/ Christine M. Marx --------------------- Partner EX-10.(F) 4 Exhibit 10(f) January 2, 1997 Mr. Charles K. Meunier Vice President Operations Valley Resources, Inc. 1595 Mendon Road Cumberland, RI 02864 Dear Mr. Meunier: 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) 2 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 3 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 4 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 reasonable 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 thereof 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 Operations or a substantial alteration in the nature or 5 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 6 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 7 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 8 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 diligence. 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 accordance with this Subsection. Amounts paid under this Subsection are in addition 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). 9 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; 10 (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; 11 (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 thereunder 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 (determined 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 12 "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, 13 (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 payment 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 14 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 15 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. 16 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 16th day ---- of May, 1997 --- s/Charles K. Meunier - -------------------- Charles K. Meunier 17 EX-10.(P) 5 Exhibit 10(p) PRECEDENT AGREEMENT FOR FIRM SERVICES ON MARITIMES & NORTHEAST PIPELINE PROJECT PHASE II This PRECEDENT AGREEMENT FOR FIRM SERVICES ("Precedent Agreement") is made and entered into this 21 day of September, 1996, by and between Maritimes & Northeast Pipeline, L.L.C., a limited liability company formed under the laws of the State of Delaware (referred to hereinafter as "Maritimes & Northeast-U.S."), Maritimes & Northeast Pipeline Management Ltd., a corporation formed under the Canada Business Corporations Act (referred to hereinafter as "Maritimes & Northeast-Canada"), and Valley Gas Company, a Rhode-Island corporation (referred to hereinafter as "Customer"). From time to time herein, Maritimes & Northeast-U.S. and Maritimes & Northeast-Canada may be referred to jointly and collectively as "Maritimes & Northeast". Notwithstanding such references, however, Maritimes & Northeast-U.S. and Maritimes & Northeast-Canada are and shall remain separate legal entities for tax and other purposes; and to that end, each of said entities will enter into and maintain its own separate service agreements with Customer and other customers; and the fact that both entities are parties to this Precedent Agreement is solely for the purpose of facilitating and simplifying certain U.S. and Canadian regulatory filings described below. Maritimes & Northeast and Customer may sometimes be collectively referred to herein as the "Parties" and singly as a "Party". WITNESSETH: WHEREAS, Maritimes & Northeast-U.S. is a limited liability company formed for the purpose of constructing, owning and operating the below-described Phase I and Phase II-U.S. Segment of the Pipeline Project, the members of which are subsidiaries and/or affiliates of PanEnergy Corp., Westcoast Energy, Inc. and Mobil Corporation; and WHEREAS, pursuant to a "Canadian Formation Agreement" dated as of January 31, 1996 among PanEnergy Corp., Westcoast Energy, Inc., Mobil Oil Canada Properties, and Eastern Enterprises, the parties to that agreement have committed to form a Canadian limited partnership to be called "Maritimes & Northeast Pipeline, L.P." for the purpose of constructing, owning and operating the below-described Phase II-Canadian Segment of the Pipeline Project, to which end said parties have authorized Maritimes & Northeast Pipeline Management Ltd., as the General Partner of such to-be-formed Canadian limited partnership, to enter into this Precedent Agreement for the benefit of such partnership, it being the intent of such parties that, upon formation of such Canadian limited partnership, Maritimes & Northeast Pipeline Management Ltd. will assign its rights and obligations under this Precedent Agreement to such partnership (following such assignment such partnership shall constitute "Maritimes & Northeast - Canada" for purposes of this Agreement); and WHEREAS, Maritimes & Northeast is developing and proposes to construct and operate a natural gas pipeline project ("Pipeline Project") extending from Country Harbour, Nova Scotia, Canada, through the Provinces of Nova Scotia and New Brunswick to the Canada-United States border, and then through the states of Maine and New Hampshire into the Commonwealth of Massachusetts for delivery of natural gas from the Sable Offshore Energy Project for various customers which execute agreements with them; and WHEREAS, the Pipeline Project is currently proposed to be constructed in two (2) phases: Phase I will extend from a point of interconnection with Tennessee Gas Pipeline Company ("Tennessee') near Dracut, Massachusetts, to a point of interconnection with Granite State Gas Transmission, Inc. near Wells, Maine; and Phase II will extend from Wells, Maine to an interconnection with the Sable Offshore Energy Project gas processing plant in Country Harbour, Nova Scotia, Canada; and WHEREAS, Phase I is not contingent on Phase II and Phase II may encompass or incorporate the facilities currently proposed for Phase I; and WHEREAS, as a result of an "open season" conducted by Maritimes & Northeast-U.S. from October 23, 1995 through November 21, 1995, Maritimes & Northeast-U.S. has entered into certain Precedent Agreements with various customers for firm transportation service through Phase I of the Pipeline Project; and Maritimes & Northeast-U.S. has filed an Application for a Certificate of Public Convenience and Necessity with the Federal Energy Regulatory Commission ("FERC") pursuant to Section 7(c) of the Natural Gas Act for authority to "pre-build" Phase I of the Pipeline Project, to be placed in service as early as November 1, 1997; and WHEREAS, based upon the results of the recent "Request for Services" offering of Maritimes & Northeast which ended April 17, 1996, Maritimes & Northeast now desires to proceed with the development and authorization of Phase II of the Pipeline Project, subject to the commitment of Customer and other customers to obtain firm service under the terms of this and other similar Precedent Agreements for firm service (i) through the Canadian segment of said Phase II of the Pipeline Project extending from Country Harbour, Nova Scotia, Canada to a point on the Canadian-U.S. border near St. Stephen, New Brunswick (the "Phase II Canadian Segment") where it will interconnect with the Phase II-U.S. Segment described below; (ii) through the U.S. Segment of the Pipeline Project extending from a point on the Canadian-U.S. border near Woodland, Maine through an interconnection with Granite State Gas Transmission, Inc. near Wells, Maine to Dracut, Massachusetts (the "Phase II-U.S. Segment"); and (iii) through capacity leased by Maritimes & Northeast from Tennessee or constructed by Maritimes & Northeast between Dracut and Mendon, Massachusetts; and WHEREAS, Customer desires to obtain firm service from Maritimes & Northeast-U.S. to be made available from the Phase II-U.S. Segment of the Pipeline Project, and from Maritimes & Northeast-Canada to be made available from the Phase II-Canadian Segment of the Pipeline Project. 2 NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements herein contained, and intending to be legally bound, Maritimes & Northeast-U.S., Maritimes & Northeast-Canada and Customer agree to the following: 1. This Precedent Agreement is subject to the good faith determination by Maritimes & Northeast not later than August 1, 1996, that Phase II of the Pipeline Project satisfies the economic criteria of Maritimes & Northeast for proceeding with Phase II of the Pipeline Project. Maritimes & Northeast shall give Customer written notice under this Paragraph 1 no later than August 15, 1996, as to whether it will proceed with Phase II of the Pipeline Project as provided in this Precedent Agreement or will terminate the project; provided, however, if Maritimes & Northeast extends the time for making such determination, any such notice will be given within five (5) days after the end of such extended period. In connection therewith, the Parties recognize that the April 17, 1996 Request for Services was a starting point for negotiations and that Maritimes & Northeast received nominations in excess of planned capacity. As a result, the MDQ provided in Paragraph 5(a) hereof may be adjusted. The written notice provided for in this Paragraph 1 shall set forth the adjusted MDQ, if any, and such adjusted MDQ shall be referenced in Appendix A hereto. If such adjustment results in a reduction in the MDQ contained in Customer's original request, Customer may cancel this Precedent Agreement due to such reduction by written notice to Maritimes & Northeast within seven (7) days of receipt of the Maritimes and Northeast notice under this Paragraph 1. 2. Subject to the terms and conditions of this Precedent Agreement, Maritimes & Northeast shall proceed with due diligence to obtain from all governmental and regulatory authorities within the United States and Canada having valid jurisdiction over the premises such authorizations and/or exemptions which it determines are necessary, including without limitation, authorizations from the FERC (i) for Maritimes & Northeast-U.S. to construct, own and operate (or cause to be constructed and operated) the Phase II-U.S. Segment of the Pipeline Project and to render the services as contemplated in this Precedent Agreement and in other similar Precedent Agreements with other customers, (ii) for Maritimes & Northeast-U.S. to perform its obligations as contemplated in this Precedent Agreement and in other similar Precedent Agreements with other customers for the Phase II-U.S. Segment of the Pipeline Project, and (iii) for Section 3 authorization and a Presidential Permit to site, construct, operate and maintain pipeline facilities at the U.S.-Canada International Boundary to interconnect the Phase II-U.S. Segment and the Phase II-Canadian Segment of the Pipeline Project; and authorizations from the National Energy Board of Canada ("NEB") (i) for Maritimes & Northeast-Canada to construct and operate (or cause to be constructed and operated), the Phase II-Canadian Segment of the Pipeline Project and to render the services as contemplated in this Precedent Agreement and in other similar Precedent Agreements with other customers, and (ii) for Maritimes & Northeast-Canada to perform its obligations as contemplated in this Precedent Agreement and in other similar Precedent Agreements with other customers for the Phase II-Canadian Segment of the Pipeline Project. Maritimes & Northeast-U.S. and Maritimes & Northeast-Canada reserve the right to file and prosecute (or cause to be filed and prosecuted) any and all applications for such authorizations and/or exemptions, any supplements and amendments thereto, and, if necessary, any court review, in such manner as they each deem to be in their best interest. Customer expressly agrees to 3 support and cooperate, and to not oppose, obstruct or otherwise interfere with in any manner whatsoever the efforts of Maritimes & Northeast-U.S. and Maritimes & Northeast-Canada to obtain all authorizations and/or exemptions and supplements and amendments thereto necessary for them to construct, own and operate (or to cause the construction and operation of) Phase II of the Pipeline Project as contemplated in this Precedent Agreement and to perform their obligations as contemplated by this Precedent Agreement. 3. Within sixty (60) days after Customer executes this Precedent Agreement, Customer will advise Maritimes & Northeast in writing of the facilities, by in-service date, and/or any other authorization or contractual arrangements necessary for Customer to utilize the services contemplated under this Precedent Agreement. Subject to the terms and conditions of this Precedent Agreement, Customer shall proceed in good faith and with due diligence to obtain from all governmental and regulatory authorities having competent jurisdiction over the premises all authorizations and/or exemptions necessary for Customer to construct and operate (or cause to be constructed and operated) any facilities and to take any other actions necessary to enable Customer to utilize the services as contemplated in this Precedent Agreement. Customer reserves the right to file and prosecute applications for such authorizations and/or exemptions, any supplements or amendments thereto, and, if necessary, any court review, in such manner as it deems to be in its best interest; provided, however, Customer shall pursue such authorizations and/or exemptions and any supplements and amendments thereto in a manner designed to implement Phase II of the Pipeline Project in a timely manner and in no event shall Customer take any action that would obstruct, interfere with or delay the receipt by Maritimes & Northeast of the authorizations and/or exemptions and supplements and amendments thereto contemplated hereunder or otherwise jeopardize implementation of Phase II of the Pipeline Project. Maritimes & Northeast agrees to use reasonable efforts to assist Customer in obtaining all authorizations and/or exemptions and any supplements and amendments thereto necessary for Customer to effectuate the services contemplated in this Precedent Agreement. Customer agrees to proceed with due diligence to construct, or cause to be constructed, any and all facilities included in Customer's written notice to Maritimes & Northeast pursuant to the first sentence of this Paragraph 3 of this Precedent Agreement, subject to the receipt of necessary authorizations and/or exemptions contemplated in this Paragraph 3 of this Precedent Agreement. 4. Pursuant to the April 17, 1996 Request for Services, Customer requested Maritimes & Northeast to share the request submitted by Customer with the Sable Offshore Energy Project producers on a confidential basis as a first step in arranging for supplies of gas. Customer shall make its own arrangements for such gas supplies, either directly or by use of a third party agent, by contracting with one or more suppliers for such supply. Customer shall proceed in good faith, either directly or by use of a third party agent, with reasonable efforts to negotiate and enter into supply agreements with one or more third party suppliers on or before December 1, 1996, on terms and conditions satisfactory to Customer. In the event Customer is successful in contracting with such supplier(s) in the manner aforesaid, Customer shall have the right, on a one-time basis, on or before August 15, 1997, to assign its rights under this Precedent Agreement and the related service agreement(s) to such supplier(s); provided, that such supplier(s) meets the qualifications as a shipper under the FERC Gas Tariff of Maritimes & Northeast-U.S. and the Tariff established by Maritimes & Northeast-Canada and filed with the 4 NEB, including the creditworthiness requirements; and provided, further, that following commencement of service, any subsequent assignment(s) contemplated by the initial assignee shall be subject to the capacity release requirements and procedures set forth in such tariffs. In the event Customer is unsuccessful in contracting with such supplier(s) in the manner aforesaid by December 1, 1996, Customer may terminate this Precedent Agreement as provided in Paragraph 11 hereof. 5. (a) Customer and Maritimes & Northeast-U.S. and Maritimes & Northeast Canada, as appropriate, agree to execute within twenty-five (25) days after the later of the dates that (i) the FERC issues an order authorizing the Phase II-U.S. Segment of the Pipeline Project, and (ii) the NEB issues an order authorizing the Phase II-Canadian Segment of the Pipeline Project: (A) a firm service agreement under the Rate Schedule MN 151, included in the FERC Gas Tariff of Maritimes & Northeast-U.S. ("U.S. Service Agreement") which shall provide for the transportation of up to a Maximum Daily Quantity ("MDQ") of 7,000 dekatherms of natural gas on the Phase II-U.S. Segment of the Pipeline Project; and (B) a firm service agreement under the NEB Gas Tariff of Maritimes & Northeast-Canada ("Canadian Service Agreement") which shall provide for the transportation of an equivalent MDQ of natural gas adjusted for final applicable fuel usage on the Phase II-Canadian Segment of the Pipeline Project. Service under the U.S. Service Agreement and under the Canadian Service Agreement will commence as provided under Paragraph 5(b) of this Precedent Agreement. After service commences under the respective Service Agreement(s), such service will continue for a primary term of ten (10) years. (b) Service under the U.S. Service Agreement and under the Canadian Service Agreement will commence on the date specified in the written notice to Customer pursuant to Paragraph 5(c) of this Precedent Agreement, which date will be the later of.- (i) November 1, 1999; (ii) the date all necessary facilities comprising the Phase II Pipeline Project are completed and such facilities are available for active gas service; or (iii) the date by which all of the conditions precedent set forth in Paragraph 8 of this Precedent Agreement have been satisfied or waived by the Party for whose benefit the condition was imposed. (c) Prior to commencement of service pursuant to the U.S. Service Agreement and pursuant to the Canadian Service Agreement, Maritimes & Northeast shall notify Customer in writing that all of the conditions precedent set forth in Paragraph 8 of this Precedent Agreement have been satisfied or waived, and that service under the U.S. Service Agreement and under the Canadian Service Agreement will commence on a date certain, which date will not be prior to November 1, 1999. As of the date for commencement of service under the U.S. Service Agreement and under the Canadian Service Agreement, Maritimes & Northeast-U.S. will stand ready to provide firm transportation service for Customer pursuant to the terms of the U.S. Service Agreement and Maritimes & Northeast-Canada will stand ready to provide firm service for Customer pursuant to the terms of the Canadian Service Agreement; and Customer will pay Maritimes & Northeast-U.S. for all applicable charges associated with the U.S. Service, Agreement and will pay Maritimes & Northeast-Canada for all applicable charges associated with the Canadian Service Agreement. 6. Upon execution of this Precedent Agreement and other satisfactory Precedent 5 Agreements with other customers, Maritimes & Northeast will undertake the preliminary design of the necessary Phase II Pipeline Project pipeline facilities and any other preparatory actions necessary to complete and file the necessary certificate applications with the FERC for the Phase II-U.S. Segment facilities and with the NEB for the Phase II-Canadian Segment facilities. Upon satisfaction of the conditions precedent set forth in Paragraphs 8 (a)(i), 8 (a)(ii), 8 (a)(iv), 8 (a)(vi) and 8 (b)(ii) of this Precedent Agreement, or waiver of the same by Maritimes & Northeast, Maritimes & Northeast shall proceed (subject to the continuing commitments of Customer and all other firm transportation customers committed to Phase II of the Pipeline Project) with due diligence in the necessary final design of facilities, acquisition of materials, supplies, properties, rights-of-way and any other necessary preparations to implement the transportation service contemplated by the U.S. Service Agreement and the Canadian Service Agreement. 7. Upon satisfaction of the conditions precedent set forth in Paragraphs 8 (a)(i), 8 (a)(iii), 8 (a)(iv), 8 (a)(vi), 8 (b)(i) and 8 (b)(iii) of this Precedent Agreement, or waiver of the same by Maritimes & Northeast, Maritimes & Northeast shall proceed (subject to the continuing commitments of Customer and other firm transportation customers committed to Phase II of the Pipeline Project) with due diligence to construct the authorized Phase II Pipeline Project pipeline facilities necessary to implement the firm transportation service contemplated in the Precedent Agreement on or about November 1, 1999. Notwithstanding Maritimes & Northeast's due diligence, if Maritimes & Northeast is unable to commence the transportation service for Customer as contemplated herein by November 1, 1999, Maritimes & Northeast will continue to proceed with due diligence to complete arrangements for such transportation service, and commence the transportation service for Customer at the earliest practicable date thereafter. Maritimes & Northeast will neither be liable nor will this Precedent Agreement or the U.S. Service Agreement or the Canadian Service Agreement be subject to cancellation if Maritimes & Northeast is unable to complete the construction of such authorized and necessary Phase II Pipeline Project pipeline facilities and commence the firm transportation service contemplated herein by November 1, 1999. 8. The commencement of service under the U.S. Service Agreement and under the Canadian Service Agreement and the rights and obligations of Maritimes & Northeast-U.S. and Customer under the U.S. Service Agreement and of Maritimes & Northeast-Canada and Customer under the Canadian Service Agreement are expressly made subject to satisfaction of the following conditions precedent; provided, however, that any such condition may be waived by the Party for whose benefit the condition is imposed: (a) Conditions Precedent of Maritimes & Northeast: i) Receipt and acceptance by Maritimes & Northeast-U.S. by March 1, 1998, of all necessary certificates and other authorizations, including without limitation authorizations from the FERC for the Phase II-U.S. Segment and receipt and acceptance by Maritimes & Northeast-Canada by July 1, 1998 of all necessary certificates and other authorizations, including without limitation authorization from the NEB for the Phase II-Canadian Segment of the Pipeline Project, authorizations of initial rates as contemplated in Paragraph 9 (b) of this Precedent Agreement, authorizations to construct and operate Phase II of the Pipeline 6 Project pipeline facilities and to provide transportation for Customer under the U.S. Service Agreement and under the Canadian Service Agreement as contemplated in this Precedent Agreement and for other customers under other Service Agreements; and ii) Receipt and acceptance by Maritimes & Northeast by October 1, 1998, of a financial commitment or commitments from financial institutions acceptable to each of them to make the capital expenditures necessary to enable them to construct Phase II of the Pipeline Project to provide transportation for Customer under the U.S. Service Agreement and under the Canadian Service Agreement as contemplated in this Precedent Agreement and under other Service Agreements; and iii) Receipt by Maritimes & Northeast of all other necessary governmental authorizations, approvals, permits and exemptions to construct Phase II of the Pipeline Project and perform the services as contemplated in this Precedent Agreement and the U.S. Service Agreement and the Canadian Service Agreement; and iv) Receipt of an affirmative vote of the Management Committee of Maritimes & Northeast-U.S. and of Maritimes & Northeast-Canada to construct the authorized Phase II Pipeline Project pipeline facilities subsequent to receipt of the authorizations contemplated in Paragraph 8 (a)(i) of this Precedent Agreement; and v) Completion by Maritimes & Northeast of construction of the Phase II Pipeline Project pipeline facilities required to render firm transportation service for Customer pursuant to the U.S. Service Agreement and the Canadian Service Agreement with Customer, and Maritimes & Northeast being ready and able to place such facilities into gas service; and vi) Receipt by the Sable Island Energy Project producers of all governmental authorizations and exemptions necessary to construct the facilities required to deliver gas to the Phase II of the Pipeline Project facilities at Country Harbour, Nova Scotia, Canada; and vii) Completion by the Sable Island Energy Project producers of construction of thefacilities required to deliver gas to the Phase II of the Pipeline Project pipeline facilities at Country Harbour, Nova Scotia, Canada. (b) Conditions Precedent of the Customer: i) Receipt by Customer of the necessary governmental authorizations, approvals, permits and exemptions to construct the facilities contained in Customer's Notice under Paragraph 3 of this Precedent Agreement for the relevant service; and ii) Completion by Customer of construction of the facilities contained in Customer's Notice under Paragraph 3 of this Precedent Agreement for the relevant service; and iii) Completion by Customer of necessary gas supply arrangements 7 pursuant to Paragraph 4 of this Precedent Agreement on terms and conditions satisfactory to Customer. 9. (a) All governmental permits, certificates, exemptions and other authorizations required in Paragraph 8 (a) of this Precedent Agreement must be in form and substance, satisfactory to Maritimes & Northeast,. and with respect to the FERC and NEB authorizations, must be satisfactory to all Parties, including mutually satisfactory rate treatment and rate levels. Customer shall notify Maritimes & Northeast in writing not later than ten (10) days after the issuance of each of the respective FERC and NEB orders issuing the certificates, including any orders issued as a preliminary determination on non-environmental issues, contemplated in Paragraph 2 of this Precedent Agreement, if such certificate is not satisfactory to Customer. All governmental approvals and exemptions required by this Precedent Agreement must be duly granted respectively by the FERC and the NEB, and/or other governmental agency or authority having valid jurisdiction, and must be final and nonappealable; but with respect to the authorization from the FERC and the NEB, the Parties may waive the condition that any such approval or exemption be final and nonappealable. (b) In connection with the Phase II Pipeline Project initial rate design methodology, Customer expressly agrees: (i) with this rate design methodology; (ii) to support such rate design methodology; and (iii) to pay Maritimes & Northeast-U.S. and Maritimes & Northeast-Canada, as applicable, the initial rates as contemplated herein. 10. The Parties expressly agree that the execution of this Precedent Agreement and the performance of the transportation services contemplated in this Precedent Agreement are without prejudice to any rights or obligations the Parties have to each other under separate and distinct agreements. 11. If the conditions precedent set forth in Paragraph 8 (a)(i), 8 (a)(ii) and 8 (b)(iii) of this Precedent Agreement have not been fully satisfied, or waived by the Party for whose benefit such condition was imposed, by the applicable dates specified therein, then, any Party may thereafter terminate this Precedent Agreement by giving ninety (90) days prior written notice of its intention to terminate to the non-terminating Party; but if the conditions precedent are satisfied or waived within said ninety (90) day notice period, then termination will not be effective. In addition, and notwithstanding other provisions hereof, Maritimes & Northeast may terminate this Precedent Agreement at any time upon fifteen (15) days' prior written notice given to Customer if termination by customers, other than by reason of commencement of service, of other precedent agreements and service agreements for service from Maritimes & Northeast renders the Pipeline Project uneconomic, as determined by Maritimes & Northeast. 12. If this Precedent Agreement is not terminated pursuant to Paragraph 11 hereof, then this Precedent Agreement will terminate by its express terms on the date of commencement of service under the U.S. Service Agreement and the Canadian Service Agreement referenced in Paragraph 5 of this Precedent Agreement, and thereafter the Parties' rights and obligations related to the transportation transactions contemplated herein shall be determined pursuant to the terms 8 and conditions of the U.S. Service Agreement and the Canadian Service Agreement and the terms and conditions of the FERC and NEB Rate Schedules specified in Paragraph 5 (a) hereof, as effective from time to time, and the General Terms and Conditions of the FERC and NEB Gas Tariffs, as effective from time to time. 13. This Precedent Agreement may not be modified or amended unless the Parties execute written agreements to that effect. 14. Any company which succeeds by purchase, merger, or consolidation of title to the properties, substantially as an entirety, of Maritimes & Northeast-U.S., Maritimes & Northeast-Canada or the Customer, will be entitled to the rights and will be subject to the obligations of its predecessor in title under this Precedent Agreement. Otherwise, except as provided in Paragraph 4 hereof, assignment of this Precedent Agreement or any of the rights or obligations hereunder may not be made unless the written consent of the other Party is first obtained; provided, however, upon formation of the Canadian limited partnership referred to in the recitals to this Precedent Agreement, Maritimes & Northeast-Canada may assign its rights and obligations hereunder to such partnership without any need to obtain the written consent of any other Party. No Party will be relieved, by virtue of any such assignment, of its obligations and liabilities hereunder without the express written consent of the other Party. 15. (a) Any dispute arising out of or relating to this Precedent Agreement, whether in contract, tort, under statutory law, or otherwise, and including without limitation any dispute arising from an assertion of the rights of Maritime & Northeast under Paragraph 9, which can not be resolved after discussion between the Parties or by voluntary non-binding mediation in conformity with applicable procedures of the Texas Alternate Dispute Resolution Procedures Act, Texas Civil Practices and Remedies Code, Title 7, Ch. 154, shall be submitted to binding arbitration. Either Party may commence such arbitration proceedings by serving written notice on the other. The notice shall contain the name of one arbitrator and a statement of the matter in dispute. The Party receiving such notice shall have fifteen (15) days to respond in writing, naming a second arbitrator and designating any other matter for arbitration. The two named arbitrators shall select a third arbitrator. If the two named arbitrators fail to select a third arbitrator within fifteen (15) days after the second arbitrator was named, the third arbitrator shall be selected in accordance with the commercial arbitration rules of the American Arbitration Association. All arbitrators shall be qualified by education or experience to decide matters relating to the questions in dispute. In addition, the arbitrators shall have professional experience in the natural gas industry and shall not be evidently partial under the standards of section 10(b) of the Federal Arbitration Act, 9 U.S.C. Section 10(b). The third arbitrator shall not have been previously employed by either Party. The arbitration shall be held at a location to be mutually agreed to, and failing agreement, in Houston, Texas. At any time after the naming of the second arbitrator, the Parties may engage in discovery. Each Party shall be permitted to serve on the other Party requests for production of documents relevant to any dispute which is the subject of the arbitration and one set of interrogatories addressing any issues relevant to any dispute which is the subject of the arbitration, which requests and interrogatories shall be answered or otherwise responded to within 20 days after service. Each Party shall also have the right to take four depositions. Additional discovery may be ordered by a majority of the arbitrators upon application by one or both of the Parties on a showing of good cause. Any discovery disputes shall be resolved by the decision of a 9 majority of the arbitrators. (b) After presentation of evidence has been concluded, each party shall submit to the arbitrators a final offer of its proposed resolution of the dispute. No responses to a final offer may be submitted. The arbitrators shall approve the final offer of one Party, without modification, and reject that of the other. In considering the evidence and deciding which final offer to approve, the arbitrators shall be guided by the criteria described in the appropriate section of this Precedent Agreement. (c) The decision of the arbitrators shall be rendered on or before 120 days following the notice of arbitration. The arbitrators' decision shall be deemed to be part of this Precedent Agreement and incorporated by reference herein. (d) If at any time prior to rendition of the decision of the arbitrators, an arbitrator named by one of the Parties becomes unable or unwilling to serve, the Party that named that arbitrator shall select a replacement arbitrator within 10 days after receiving notice of the arbitrator's inability or unwillingness to serve. If at any time prior to rendition of the decision of the arbitrators the third arbitrator becomes unable or unwilling to serve, a replacement arbitrator shall be selected utilizing the same procedures for selection of the third arbitrator set forth above, except that the 15 day period for selection of the third arbitrator shall run from the date both named arbitrators receive notice of the third arbitrator's inability or unwillingness to serve. The naming or selection of a replacement arbitrator shall have no effect on the conduct of the proceedings unless the arbitration hearing has already commenced, in which case the hearing will be recommenced as if no portion of the hearing had been conducted. (e) Each Party shall pay its own costs incurred in connection with arbitration Proceedings, except for the fees and expenses of the third arbitrator, which shall be equally divided between the Parties. The decision of the arbitrators shall be final, conclusive and binding on both Parties. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it is necessary to enforce such award, all costs of enforcement, including reasonable attorney's fees (for in-house or outside counsel) shall be payable by the Party against whom such award is enforced. (f) The substantive law chosen in Paragraph 17, as well as applicable federal law, will apply to the proceedings in arbitration. The Federal Arbitration Act, 9 U.S.C. Section 1, et seq., shall govern the enforceability of this paragraph 15, and to the extent not inconsistent with the provisions hereof, it shall also govern the procedures to apply in arbitration and the enforcement, vacation, or modification of any award. The Parties stipulate that this Precedent Agreement evidences a transaction "involving commerce" as that phrase is used in 9 U.S. C. Section 2. 16. The recitals and representations appearing first above are hereby incorporated in and made a part of this Precedent Agreement. 17. The Precedent Agreement shall be governed by and construed, interpreted and performed in accordance with the laws 10 of the State of Texas, without recourse to any laws governing the conflict of laws. 18. Except as herein otherwise provided, any notice, request, demand, statement, or bill provided for in this Precedent Agreement, or any notice which either Party desires to give to the other, must be in writing and will be considered duly delivered when mailed by registered or certified mail to the other Party's Post Office address set forth below: Maritimes & Northeast-U.S.: Attn: 5400 Westheimer Court Houston, Texas 77056 Maritimes & Northeast-Canada: Attn: 50 Keil Drive North Chatham, Ontario N7M 5Ml Customer: 1595 Mendon Road Cumberland, RI 02864 or at such other address as either Party designates by written notice. Routine communications, including monthly statements, will be considered duly delivered when mailed by either registered, certified, or ordinary mail. For purposes hereof, any notice required to be given by Customer to Maritimes & Northeast shall be delivered to each of Maritimes & Northeast-U.S. and Maritimes & Northeast-Canada. 11 IN WITNESS WHEREOF, the Parties hereto have caused this Precedent Agreement to be duly executed in several counterparts by their duly authorized officers as of the day and year first above written. MARITIMES & NORTHEAST PIPELINE, L.L.C. BY: ______________________________________ TITLE:_____________________________________ M & N Management Company Managing Member MARITIMES & NORTHEAST PIPELINE MANAGE LTD. BY: _______________________________________ TITLE: ____________________________________ VALLEY GAS COMPANY BY: _______________________________________ TITLE: ____________________________________ Signature page for Precedent Agreement dated September 21, 1996 between Maritimes & Northeast Pipeline, L.L.C., Maritimes & Northeast Pipeline Management Ltd. and Valley Gas Company. jsg\01752agt-96 12 APPENDIX A TO PRECEDENT AGREEMENT FOR FIRM OR INTERRUPTIBLE SERVICE FROM PHASE II OF MARITIMES & NORTHEAST PIPELINE, L.L.C. MDQ Contained in Adjusted Customer's Original Request MDQ MMBtu MMBtu _______________________________ _______________________ [This Appendix A may be developed in the event Maritimes & Northeast Pipeline is required to adjust Customer's MDQ as contemplated in Paragraph 1 of the Precedent Agreement.] rgr\maritime\appendxa.pre 13 EX-12 6 Exhibit 12 VALLEY RESOURCES, INC. AND SUBSIDIARIES COMPUTATION OF THE CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
For the six months ended For the year ended February 28, August 31, ------------ ---------- 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- Earnings: Net Income...................... $2,488,076 $3,079,420 $3,998,360 $2,554,925 $3,826,026 $3,727,230 $3,114,599 Provisions for income taxes..... 1,164,344 1,523,401 1,541,160 753,033 1,350,965 1,444,936 1,012,043 Fixed Charges................... 1,845,798 1,837,404 3,683,294 3,599,618 3,191,174 2,860,700 2,350,821 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total........................ $5,498,218 $6,440,225 $9,222,814 $6,907,576 $8,368,165 $8,032,866 $6,477,463 ========== ========== ========== ========== ========== ========== ========== Fixed Charges: Interest on debt................ 1,633,103 1,628,167 3,259,495 3,247,752 2,846,880 2,572,082 2,091,019 Amortization of debt expense.... 28,965 28,965 57,931 57,931 57,931 53,056 57,710 Interest component of rent...... 183,730 180,272 365,868 293,935 286,363 235,562 202,092 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total........................ $1,845,798 $1,837,404 $3,683,294 $3,599,618 $3,191,174 $2,860,700 $2,350,821 ========== ========== ========== ========== ========== ========== ========== Ratio of Earnings to Fixed Charges.. 3.0 3.5 2.5 1.9 2.6 2.8 2.8 Pro Forma: Actual fixed charges............ $1,845,798 $3,683,294 Pro forma interest on debt to be sold, assuming a rate of 8.3% 290,500 581,000 Actual interest on debt to be retired...................... (373,629) (774,498) ---------- ---------- Pro forma fixed charges......... $1,762,669 $3,489,796 ========== ========== Pro forma ratio of earnings to fixed charges................ 3.1 2.6
EX-23.(A) 7 Exhibit 23(a) Consent of Independent Certified Public Accountants We have issued our reports dated September 24, 1996, accompanying the consolidated financial statements and schedule incorporated by reference or included in the Annual Report of Valley Resources, Inc. and subsidiaries on Form 10-K for the year ended August 31, 1996. We hereby consent to the inclusion and incorporation by reference of said reports in the Prospectus and Registration Statement of Valley Resources, Inc. and subsidiaries filed on Form S-2. S/Grant Thornton LLP GRANT THORNTON LLP Boston, Massachusetts June 26, 1997 -----END PRIVACY-ENHANCED MESSAGE-----