-----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, V1xl1D9dCbGXJN9Z2v+PbD2MgWn36i2Zf5PnIg1u12NY0vBkz8sqURWhr/hCKTbK JrujmrMnskja+ttijnWu9Q== 0000102710-97-000105.txt : 19971127 0000102710-97-000105.hdr.sgml : 19971127 ACCESSION NUMBER: 0000102710-97-000105 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971126 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALLEY RESOURCES INC /RI/ CENTRAL INDEX KEY: 0000102710 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 050384723 STATE OF INCORPORATION: RI FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07924 FILM NUMBER: 97729383 BUSINESS ADDRESS: STREET 1: 1595 MENDON RD CITY: CUMBERLAND STATE: RI ZIP: 02864 BUSINESS PHONE: 4013341188 MAIL ADDRESS: STREET 1: PO BOX 7900 CITY: CUMBERLAND STATE: RI ZIP: 02864-7900 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (MARK ONE) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended August 31, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____________________ to _____________________ Commission File number 1-7924 VALLEY RESOURCES, INC. (Exact name of Registrant as specified in its charter) Rhode Island 05-0384723 (State of Incorporation or Organization) (IRS Employer Identification No.) 1595 Mendon Road, Cumberland, Rhode Island 02864 (Address of principal executive offices) Registrant's Telephone Number, Including Area Code (401) 334-1188 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common Stock American Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [__] The aggregate market value of the common stock held by non-affiliates, computed on the basis of $11.19 per share (the closing price of such stock on October 21, 1997 on the American Stock Exchange) was $55,859,501. As of October 21, 1997 there were 4,993,028 shares of Valley Resources, Inc. Common Stock, $1 par value, outstanding. 'Continued' DOCUMENTS INCORPORATED BY REFERENCE The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Report of Independent Certified Public Accountants, Management's Discussion and Analysis, Summary of Consolidated Operations, Dividends, Market Data, and number of stockholders appearing on pages 1 and 7 of the Registrant's Annual Report to Stockholders for the fiscal year ended August 31, 1997 are incorporated by reference in Parts I, II and IV. Portions of the Proxy Statement dated November 4, 1997 as filed with the Securities and Exchange Commission are incorporated by reference in Part III. PART I Item 1 Business -------- The Corporation is a holding company organized in 1979 and incorporated in the State of Rhode Island. The Corporation has five wholly-owned active subsidiaries: Valley Gas Company ("Valley Gas") and Bristol & Warren Gas Company ("Bristol & Warren" and collectively with Valley Gas, the "Utilities")--regulated natural gas distribution companies; Valley Appliance and Merchandising Company ("VAMCO")--a merchandising and appliance rental company; Valley Propane, Inc. ("Valley Propane")--a wholesale and retail propane company; and Morris Merchants, Inc., d/b/a the Walter Morris Company ("Morris Merchants")--a wholesale distributor of franchised lines in plumbing and heating contractor supply and other energy-related business. The Corporation also has an 80% interest in Alternate Energy Corporation ("AEC") which sells, installs and designs natural gas conversion systems and facilities. 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 61,780 customers during the fiscal year ended August 31, 1997, of which approximately 91% were residential and 9% were commercial and industrial. For the fiscal year ended August 31, 1997, 48% of gas sales were to residential customers and 52% were to commercial and industrial customers. The Utilities provide natural gas service to residential, commercial and industrial customers and transportation services to industrial customers. Valley Gas' service territory is approximately 92 square miles located in the Blackstone Valley region in northeastern Rhode Island with a population of approximately 250,000. Bristol & Warren's service territory is approximately 15 square miles in eastern Rhode Island with a population of approximately 35,000. Effective November 1995, the Utilities operate under a single rate structure. The following table shows the distribution of gas sold during the years since fiscal 1993 in millions of cubic feet ("MMcf"): For the Fiscal Year Ended August 31, ------------------------------------------
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Residential............ 4,393 4,612 4,078 4,517 4,439 Commercial............. 2,161 2,252 1,953 2,078 1,978 Industrial-firm........ 1,440 1,391 1,338 1,299 1,185 Industrial-seasonal ... 1,110 1,047 1,298 996 818 ----- ----- ----- ----- ----- TOTAL.................. 9,104 9,302 8,667 8,890 8,420 ===== ===== ===== ===== =====
Firm customers of the Utilities use gas for cooking, heating, water heating, drying and commercial/industrial processing. Certain industrial customers use additional gas in the summer months, when it is available at lower prices. These customers are subject to having their service interrupted at the discretion of the Utilities with very little notice. This use is classified as seasonal use. As discussed further below, the margin on seasonal use is passed through the Purchased Gas Price Adjustment ("PGPA") to lower the cost of gas to all categories of firm customers. Bristol & Warren retained the margin on seasonal sales prior to November 1995. The primary source of utility revenues is firm use customers under tariffs which are designed to recover a base cost of gas, administrative and operating expenses and provide sufficient return to cover interest and profit. The Utilities also service dual fuel, interruptible and transportation customers under rates approved by the Rhode Island Public Utilities Commission ("RIPUC"). Additionally, Valley Gas services cogeneration customers under separate contract rates that were individually approved by the RIPUC. The Utilities' 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 per thousand cubic feet ("Mcf") of gas sold to dual fuel customers. This margin credit reduces rates to firm customers. This means of margin treatment alleviates the negative impact that swings in sales can have on earnings in the highly competitive industrial interruptible market. Seasonality The Utilities business is seasonal. The bulk of firm distribution and sales are made during the months of November through March. As a result, the highest levels of earnings and cash flow are generated from the quarters ending in February and May. The bulk of the capital expenditure programs are undertaken during the months of May through October, causing cash flow to be at its lowest during the quarters ending in November and August. Short-term borrowing requirements vary according to the seasonal nature of sales and expense activities of the Utilities, creating greater need for short-term borrowings during periods when internally generated funds are not sufficient to cover all capital and operating requirements, particularly in the summer and fall. Short-term borrowings utilized for construction expenditures generally are replaced by permanent financing when it becomes economical and practical to do so and where appropriate to maintain an acceptable relationship between borrowed and equity resources. Rates and Regulation The Utilities are subject to regulation by the RIPUC with respect to rates, adequacy of service, issuance of securities, accounting and other matters. 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. 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 sales customers of the Utilities during the last five fiscal years were 73 MMcf in 1997, 71 MMcf in 1996, 66 MMcf in 1995, 77 MMcf in 1994, and 69 MMcf in 1993. Gas Marketing - ------------- The Corporation is positioning itself to participate in the deregulated energy markets by entering into a marketing alliance with Total/Louis Dreyfus Energy Services, L.L.C. to market natural gas and petroleum-based products. The marketing alliance will provide the Corporation the opportunity to supply energy needs to customers without franchise territory barriers. The Utilities also filed to unbundle their firm commercial and industrial tariffs with the RIPUC in September 1996. Effective June 1, 1997, the Utilities were authorized to offer transportation rates to large commercial and industrial customers and redesign the rates for other customers. Appliance Contract Sales and Rentals - ------------------------------------ The Corporation conducts appliance sales, service contract sales and appliance rentals through its subsidiaries VAMCO and Morris Merchants. VAMCO's revenues are generated through retail appliance sales, service contract sales and through the rental of gas-fired appliances. The merchandising subsidiaries are in competitive businesses with competition based on many factors, including price, quality of product and service. Morris Merchants has contracts for the distribution of certain lines that it wholesales. At this time the Corporation has no reason to believe it will lose any of its existing lines. Propane Operations - ------------------ The propane operations are conducted through Valley Propane, which sells, at retail, liquid propane gas to residential and commercial customers in Rhode Island and nearby Massachusetts. At August 31, 1997, Valley Propane had 2,721 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 acquired its 80% interest in AEC in May 1996 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", pages 35 and 36, and Note H, page 29, in the 1997 Annual Report to Stockholders which is incorporated by reference herein. Item 2 Properties ---------- 1595 Mendon Road, Cumberland, Rhode Island Office, Sales, and Service Center This location comprises the headquarters, sales and service operation of the Corporation, Valley Gas, VAMCO and Valley Propane; and includes accounting, billing, credit, engineering, garage, maintenance, service, storeroom and construction. The headquarters and sales office for AEC are also located at this facility. The facilities are considered suitable and adequate for the Corporation. 425 Turnpike Street Canton, Massachusetts Office and Warehouse Facilities Morris Merchants conducts its business at this leased warehouse and office building in Canton, MA. Its business does not require any special facilities and, therefore, its leased facilities are not significant to its operation. The total lease payments are less than 1 percent of all corporate assets of the Corporation. 106-B Federal Way Johnston, Rhode Island Service Center AEC conducts its servicing business at this leased garage in Johnston, RI. The leased facility is not significant to its operations and the total lease payments are less than 1 percent of all corporate assets of the Corporation. Scott Road, Cumberland, Rhode Island LNG Storage Plant Propane Storage Plant This facility is used for the storage of LNG and propane used in the peak-shaving operations of Valley Gas. Its daily delivery capacity of LNG and LPG is 25,000 Mcf's and 12,000 Mcf's, respectively. Facility improvements which were completed during the fall of fiscal 1996 doubled the delivery capacity for LNG. 100 Broad Common Road Bristol, Rhode Island Office, Sales and Service Center This location comprises the office, sales and service operation of Bristol & Warren and includes construction, credit, engineering, garage, maintenance, service, and storeroom. This facility is considered suitable and adequate for Bristol & Warren. Brown Street Warren, Rhode Island Propane Storage This facility is used for the storage of propane used in peak-shaving operations of Bristol & Warren. Its daily delivery capacity of LPG is 1,600 Mcf's. The Corporation believes its storage facilities are adequate to meet the needs of the Utilities for the foreseeable future. All of the storage facilities are owned. All Valley Gas properties, except leased property, are held in fee. See item 1 for discussion of gas supply. Item 3 Legal Proceedings ----------------- There were no material legal proceedings pending to which the Corporation or any of its subsidiaries is a party, or of which any of their property is the subject, except two claims that were asserted against Valley Gas as referred to in Note H, page 29, in the 1997 Annual Report to Stockholders which is incorporated by reference herein. Item 4 Submission of Matters to a Vote of Security Holders -------------------------- None Executive Officers of the Registrant - ------------------------------------ The names, ages, and position of all the executive officers of the Corporation on October 15, 1997 are listed below together with their business experience during the past five years. All officers of the Corporation are elected or appointed annually by the board of directors at the directors' first meeting following the Annual Meeting of Stockholders. Business Experience Name Age Position During Last Five Years ---- --- -------- ---------------------- Alfred P. Degen 50 President and Chief Chief Executive Officer of Valley Executive Officer Resources, Inc. since March 1995; President, Valley Resources, Inc. from July 1994; Executive Vice President, Philadelphia Gas Works for more than 5 years prior to July 1994. Kenneth W. Hogan 52 Senior Vice President, Senior Vice President since July Chief Financial 1994; Vice President prior Officer and Secretary to July 1994; Chief Financial Officer since December 1994 and Secretary since April 1977. Charles K. Meunier 55 Vice President, Vice President Operations since Operations December 1994; Assistant Vice President Operations and Human Resources prior to December 1994. Richard G. Drolet 49 Vice President, Vice President Information Systems Information Systems and Corporate Planning since and Corporate Planning December 1994; Assistant Vice President Information Systems and Corporate Planning prior to December 1994. PART II Item 5 Market for the Registrant's Securities and Related Stockholder Matters -------------------------------------- The number of common stock shareholders, common stock market prices, dividends declared and dividend restrictions appearing on pages 1 and 24 of the Annual Report to Stockholders for the fiscal year ended August 31, 1997 are incorporated herein by reference. The common stock of Valley Resources, Inc. is listed on the American Stock Exchange under the symbol VR. Item 6 Selected Financial Data ----------------------- The selected financial data (Summary of Consolidated Operations) appearing on page 37 of the Annual Report to Stockholders for the fiscal year ended August 31, 1997 is incorporated herein by reference. Item 7 Management's Discussion and Analysis ------------------------------------ Management's discussion and analysis of the results of operations, liquidity and capital resources appearing on pages 32 through 36 of the Annual Report to Stockholders for the fiscal year ended August 31, 1997 are incorporated herein by reference. Item 8 Financial Statements and Supplementary Data ------------------------------------------- The following consolidated financial statements of the registrant and its subsidiaries appearing on pages 18 through 31 in the Annual Report to Stockholders for the fiscal year ended August 31, 1997 are incorporated herein by reference: Consolidated Statements of Earnings for each of the three years in the period ended August 31, 1997 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1997 Consolidated Balance Sheets - August 31, 1997 and 1996 Consolidated Statements of Changes in Common Stock Equity for each of the three years in the period ended August 31, 1997 Consolidated Statements of Capitalization - August 31, 1997 and 1996 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure --------------------------------------------- None. PART III Item 10 Directors and Executive Officers of the Registrant -------------------------------------------------- For information with respect to the executive officers of the registrant, see "Executive Officers of the Registrant" at the end of Part I of this report. Information regarding the directors of the registrant appearing on pages 2 through 5 of the Proxy Statement filed with the Securities and Exchange Commission on November 4, 1997 is incorporated herein by reference. Section 16 (a) Beneficial Ownership Reporting Compliance - --------------------------------------------------------- Based solely upon a review of copies of Forms 3, 4 and 5 furnished to the Corporation pursuant to Rule 16a-3(e), the Corporation believes that each of the Corporation's directors, officers and beneficial owners of more than 10% of any class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (the "Exchange Act") have timely filed all reports required by Section 16(a) of the Exchange Act during the most recent two fiscal years. Item 11 Executive Compensation ---------------------- Information regarding management compensation appearing on pages 6 through 9 of the Proxy Statement filed with the Securities and Exchange Commission on November 4, 1997 is incorporated herein by reference. Item 12 Security Ownership of Certain Beneficial Owners and Management -------------------------------- Information regarding the beneficial owners of more than 5 percent of the outstanding Common Stock of the Corporation, being the only class of equity security issued and outstanding, and the security ownership of management appearing on pages 1 and 2 of the Proxy Statement filed with the Securities and Exchange Commission on November 4, 1997 is incorporated herein by reference. Item 13 Certain Relationships and Related Transactions ---------------------------------------------- None. PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------- (a) 1. The following consolidated financial statements of Valley Resources, Inc. and subsidiaries appearing on pages 18 through 31 in the Annual Report to Stockholders for the year ended August 31, 1997 are incorporated by reference in Item 8: Consolidated Statements of Earnings for each of the three years in the period ended August 31, 1997 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1997 Consolidated Balance Sheets - August 31, 1997 and 1996 Consolidated Statements of Changes in Common Stock Equity for each of the three years in the period ended August 31, 1997 Consolidated Statements of Capitalization - August 31, 1997 and 1996 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants (a) 2. Consolidated Financial Schedule Schedule VIII - Valuation and Qualifying Accounts Report of Independent Certified Public Accountants on Consolidated Financial Schedule Schedules I, II, III, IV, V, VI, VII, IX, X, XI, XII, XIII and XIV are either inapplicable or not required or the required information is shown in the financial statements or notes thereto under the instructions and have been omitted. (a) 3. Exhibits 3. (a) Articles of Incorporation, as amended (Exhibit 3 to the 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.) 4. (a) Indenture between Valley Resources, Inc. and Mellon Bank, N.A., Trustee dated as of September 1, 1997. (Exhibit 4 to the Corporation's Registration Statement on Form S-2 (File No. 333-30113) is hereby incorporated by reference.) 4. (b) Indenture of First Mortgage dated as of December 15, 1992 between Valley Gas Company, Valley Resources, Inc. as guarantor and State Street Bank and Trust Company, Trustee (Exhibit 4 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1993 is hereby incorporated by reference.) 10. Compensation Contracts or Arrangements 10. (a) Valley Gas Company Supplemental Retirement Plan (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1989 is hereby incorporated by reference.) 10. (b) Valley Resources, Inc. 1988 Executive Incentive Plan (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1989 is hereby incorporated by reference.) 10. (c) Termination agreement between Valley Resources, Inc. and Kenneth W. Hogan (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10. (d) Valley Resources, Inc. Directors Retirement Plan (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is hereby incorporated by reference.) 10. (e) Termination agreement dated June 21, 1995 between Valley Resources, Inc. and Alfred P. Degen (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 (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 333-30113) is hereby incorporated by reference.) 10. (g) Termination agreement dated December 31, 1996 between Valley Resources, Inc. and Richard G. Drolet. Other Material Contracts or Agreements 10. (h) 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. (i) Storage Service Agreement dated July 3, 1985 between Valley Gas and Consolidated Gas Transmission Corporation (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10. (j) Underground Storage Service Agreement dated October 3, 1984 between Valley Gas and Penn-York Energy Corporation (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10. (k) Underground Storage Service Agreement dated August 19, 1983 between Valley Gas and Penn-York Energy Corporation (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1983 is hereby incorporated by reference.) 10. (l) Service agreement for storage of LNG dated June 30, 1982 between Valley Gas and Algonquin LNG, Inc. (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1982 is hereby incorporated by reference.) 10. (m) Contract for the purchase of natural gas dated March 1, 1981, between Valley Gas and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (n) Storage Service Transportation contract dated May 15, 1981, between Valley Gas and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (o) Storage Service Transportation contract dated May 26, 1981, between Valley Gas and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (p) Storage Service Agreement dated February 18, 1980, between Valley Gas and Consolidated Gas Supply Corporation (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (q) Precedent Agreement for Firm Services on Maritimes and North- east Pipeline Project Phase II dated September 21, 1996, between Valley Gas and Maritimes and Northeast Pipeline L.L.C.(Exhibit 10 to the Corporation's Registration State- ment on Form S-2 (File No. 333-30113) is hereby incorporated by reference.) 10. (r) Gas Sales Agreement dated June 15, 1992 between Aquila Energy Marketing Corporation and Valley Gas (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is incorporated herein by reference.) 10. (s) 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). 10. (t) Loan Agreement between Valley Resources, Inc. and Fleet National bank dated June 30, 1997 (Exhibit 10 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended May 31, 1997 is incorporated herein by reference.) 13. Annual Report to Stockholders. 21. Subsidiaries of the Registrant (Exhibit 21 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1996 is incorporated herein by reference.). 23. Consent of Grant Thornton LLP. 27. Financial Data Schedule. (b) No Form 8-K was required to be filed for the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALLEY RESOURCES, INC. AND SUBSIDIARIES Date: November 26, 1997 By S/K. W. Hogan ------------------------------------------ Kenneth W. Hogan Senior Vice President, Chief Financial Officer & Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: November 26, 1997 S/A. P. Degen ---------------------------------------------- Alfred P. Degen, President and Chief Executive Officer Date: November 26, 1997 S/K. W. Hogan ---------------------------------------------- Kenneth W. Hogan, Senior Vice President, Chief Financial Officer & Secretary Date: November 26, 1997 S/E. N. Agresti ---------------------------------------------- Ernest N. Agresti, Director Date: November 26, 1997 S/M. G. Alperin ---------------------------------------------- Melvin G. Alperin, Director Date: November 26, 1997 S/C. H. Davison ---------------------------------------------- C. Hamilton Davison, Director Date: November 26, 1997 S/D. A. DeAngelis ---------------------------------------------- Don A. DeAngelis, Director Date: November 26, 1997 S/J. M. Dillon ---------------------------------------------- James M. Dillon, Director Date: November 26, 1997 S/J. K. Farnum ---------------------------------------------- Jonathan K. Farnum, Director Date: November 26, 1997 S/J. F. Guthrie, Jr. ---------------------------------------------- John F. Guthrie, Jr., Director Date: November 26, 1997 S/E. M. McMahon ---------------------------------------------- Eleanor M. McMahon, Director Item 14(a) 2 VALLEY RESOURCES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS SCHEDULE VIII Fiscal Years Ended August 31, 1997, 1996 and 1995
Column A Column B Column C Column D Column E -------- -------- ----------------- -------- -------- Additions ----------------- Balance at (1) (2) Deductions Balance at Beginning of Charged to Costs Charged to from End of Description Period and Expenses Other Accounts Reserves Period ----------- ------ ------------ -------------- -------- ------ 1997 - ---- Allowance for doubtful accounts $719,721 $1,603,597 $183,220 (a) $1,666,105 (b) $840,433 1996 - ---- Allowance for doubtful accounts $655,951 $1,459,761 $156,755 (a) $1,552,746 (b) $719,721 1995 - ---- Allowance for doubtful accounts $653,927 $1,274,238 $104,176 (a) $1,376,390 (b) $655,951 Notes: (a) Collections on accounts previously charged off. (b) Accounts charged off.
Report of Independent Certified Public Accountants on Consolidated Financial Schedule To the Shareholders of Valley Resources, Inc. In connection with our audit of the consolidated financial statements of Valley Resources, Inc. and subsidiaries referred to in our report dated September 26, 1997, which is included in the Annual Report to Stockholders and incorporated by reference in Part II of this form, we have also examined the schedule listed in the index at Part IV, Item 14(a)2. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Boston, Massachusetts September 26, 1997 EX-10 2 Exhibit 10(g) January 2, 1997 Mr. Richard G. Drolet Vice President, Information Systems and Corporate Planning Valley Resources, Inc. 1595 Mendon Road Cumberland, RI 02864 Dear Mr. Drolet: Valley Resources, Inc. (which, together with its subsidiaries, is hereinafter called "the Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company and in consideration of your agreeing to remain in the employ of the Company subject to the terms and conditions set forth below, this letter agreement sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on January 1, 1997 and shall continue in effect through December 31, 1997; provided, however, that commencing on January 1, 1998 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless, not later than August 31 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; provided, further, that notwithstanding any such notice by the Company not to extend, if a change in control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months from the occurrence of such change in control. Notwithstanding the foregoing, the Company may terminate your employment at any time, whether before or after a change in control, subject to providing such benefits as shall be hereinafter specified. 2. Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a 2 trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (B) any person publicly announces (including an announcement by the Company) an intention to take actions which if consummated would constitute a change in control of the Company; (C) any person publicly announces (including an announcement by the Company) that it has become the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in 3 the event of a potential change in control of the Company, you will remain in the employ of the Company for a period of six (6) months from the occurrence of such potential change in control of the Company. 3. Termination Following Change in Control. If any of the events described in Subsection 2(i) hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4 (iii) hereof upon the subsequent termination of your employment during the term of this Agreement unless such termination is (A) because of your death, Retirement or Disability, (B) by the Company for Cause or (C) by you other than for Good Reason. (i) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, your employment may be terminated for "Disability." Termination of your employment based on "Retirement" shall mean termination in accordance with the Company's retirement policy generally applicable to its salaried employees or in accordance with any retirement arrangement established with your consent with respect to you. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the occurrence of circumstances giving rise to a Notice of Termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that 4 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 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 5 across-the-board salary reductions similarly affecting all executives of the Company and all executives of any person in control of the Company; or the failure of the Company to grant increases in salary in accordance with the Company's regular practices; (C) the relocation of the Company's principal executive offices to a location more than twenty-five (25) miles from your present office location or the Company's requiring you to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (D) the failure by the Company to continue in effect any compensation plan in which you participate, or any plan adopted prior to the change in control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the change in control of the Company, or the failure by the Company to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; (E) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which you were participating at the time of a change in control of 6 the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the change in control of the Company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the change in control; (F) the failure by the Company without your consent to pay to you any portion of your current compensation or to pay to you any installment of deferred compensation at the time such installment is due under any deferred compensation program of the Company; (G) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (H) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, the requirements of Subsection (ii) above); for purposes of this Agreement, no such purported termination shall be effective. In addition to your right to terminate for Good Reason as stated above, and not in substitution therefor, you shall have the option at your discretion to terminate your employment at any time within fifteen (15) months after the later of (a) a change in control of the Company or (b) the expiration of the six (6) months period during which you agree to remain in the employ of the 7 Company under paragraph 2(ii) of this Agreement. Such termination shall be conclusively deemed to be a termination for good Reason, but shall not affect your right to terminate for Good Reason under any of the provisions of subsection (iii) above. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. (iv) Notice of Termination. Any purported termination by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you have not returned to the full-time performance of your duties during such period) (B) if your employment is terminated pursuant to Subsection (ii) or (iii) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute 8 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). 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. 9 (ii) If your employment shall be terminated by the Company or by you for Retirement, or by reason of your death or for Disability, your benefits shall be determined in accordance with the Company's retirement and insurance program then in effect. (iii) If your employment by the Company shall be terminated (a) by the Company other than for Cause, Retirement or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus any other amounts to which you are entitled under any compensation plan of the Company, at the times such payments are due; (B) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as a severance payment to you, not later than the fifth day following the Date of Termination, a lump sum severance payment (the "Severance Payment") equal to 1.00 times the base salary paid to you during the twelve (12) months immediately prior to the issuance of the Notice of Termination (provided, however, that in the case of a termination at your option under that portion of Section 3 (iii) giving you an option to terminate at your discretion, the severance payment under this paragraph shall be in an amount equal to your base salary for the 10 twelve (12) months immediately prior to the issuance of the Notice of Termination); (C) For a period after such termination equal to the period actually used in calculating severance pay due to you under Section 4(iii)(B), the Company shall provide you with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(iii) (C) shall be reduced to the extent comparable benefits are actually received by you during such period following your termination, and any such benefits actually received by you shall be reported to the Company; (D) In addition to the retirement benefits to which you are entitled under the Retirement Plan or any successor plan thereto, the Company shall pay you in one lump sum in cash on the fifth day following the Date of Termination, a sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age 65) which you would have accrued under the terms of the Retirement Plan (without regard to any amendment to the Retirement Plan made subsequent to a change in control of the Company and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if you 11 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 "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") 12 would not be deductible (in whole or in part) as a result of Section 280G of the Internal Revenue Code of 1954 as amended (the "Code"), the benefits provided under this Section 4(iii) shall be reduced or eliminated in the following order, viz., first, Subsection D; then, Subsection C; then, Subsection B; and finally, Subsection A, but only to the extent necessary so that no portion of the Total Payments is not deductible as a result of Section 280G of the Code. For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which you shall have effectively waived in writing prior to the date of payment shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you, does not constitute a "parachute payment" within the meaning of Section 280G of the Code, (iii) the Total Payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clause (i) or clause (ii) of this paragraph) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G of the Code, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred 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; 13 (F) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such right of benefit provided by this Agreement) except to the extent that the payment of such fees and expenses would not be, or would cause any other portion of the Total Payments not to be, deductible by reason of Section 280G of the Code. (iv) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer except as expressly provided herein. (v) In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under the Retirement Plan and any other plan or agreement relating to retirement benefits. 5. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for 14 Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisees, legatees, or other designee or if there is no such designee, to your estate. 6. Notice. For the purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you 15 and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Rhode Island. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. 8. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Providence, Rhode Island, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 16 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/Richard G. Drolet - ---------------------- Richard G. Drolet 17 EX-13 3 Challenges & Opportunities (Photo appears here) Valley Resources, Inc.-Annual Report 1997 focus innovation people options The only constant in today's public utility environment is change. The companies that plan for the challenges brought about by that change and the opportunities that those challenges present will thrive in the new environment. Valley Resources, Inc. has structured itself to meet the challenges by capitalizing on new opportunities in the ever-changing energy services marketplace. This report will discuss the corporate focus to anticipate change, the innovation used to address the marketplace, how its people provide the energy to fuel its programs and the options it has to evaluate as we move towards the 21st century. Cover Photo: Valley Propane and Vamco worked cooperatively to answer the need for an economically viable alternative to expensive electric heating at The Bay View Condominiums in Jamestown, Rhode Island. Valley Propane provided a competitively priced propane contract and Vamco designed and installed a high efficiency energy system. Corporate Overview Valley Resources, Inc. (Valley or the Corporation) is a public utility holding company. The Corporation has five active wholly-owned subsidiaries: Valley Gas Company (Valley Gas or the Company) and Bristol & Warren Gas Company (Bristol & Warren) (collectively the "Utilities"), both regulated natural gas distribution companies; Valley Appliance and Merchandising Company (VAMCO), a merchandising, appliance rental, sales and service company; Valley Propane, Inc., a wholesale and retail propane sales company and Morris Merchants, Inc. (Morris), d/b/a the Walter F. Morris Company, a representative distributor of franchised lines. The Corporation also has an 80 percent interest in Alternate Energy Corporation (AEC) which sells, installs and designs natural gas refueling facilities, natural gas conversion systems and energy use control devices. Financial Highlights
For the year ended August 31 (in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Operating revenues............................... $87,484 $80,360 $74,870 Operation expenses, maintenance and depreciation. 75,302 67,975 64,392 ------- ------- ------- Operating income before taxes.................... 12,182 12,385 10,478 Taxes - other than Federal income................ 4,243 4,091 4,002 Taxes - Federal income........................... 1,335 1,444 732 Other income - net of taxes...................... 423 460 115 Interest charges................................. 3,368 3,312 3,304 ------- ------- ------- Net income....................................... $ 3,659 $ 3,998 $ 2,555 ------- ------- ------- Earnings per average common share outstanding.... $ 0.86 $ 0.94 $ 0.61 Dividends declared per common share.............. $ 0.735 $ 0.725 $ 0.71 Net utility plant (thousands).................... $50,447 $49,442 $47,411 Capital expenditures (thousands)................. $ 4,293 $ 5,009 $ 5,916 Average number of common shares outstanding...... 4,267,038 4,258,877 4,222,662 Number of stockholders........................... 2,774 2,824 2,887
1 Message to Stockholders Nineteen ninety-seven was a year of accomplishment and growth for Valley Resources. Our nonutility revenues and earnings reached record levels. Earnings from our nonutility subsidiaries exceeded $1.0 million, an increase of more than 32 percent over the prior year. While utility revenues and earnings were adversely affected by warmer than normal weather during the prime heating season, continued growth in the number of customers served and the strong local economy point toward improved future results. The communities served by our regulated utilities continue to experience significant economic development in both the residential and commercial sectors. Our nonutility businesses achieved outstanding results in the year just completed and are poised to continue to make major contributions to the success of the Corporation. This year's report reviews the challenges facing Valley, and the opportunities these challenges present, organized around the themes of focus, innovation, people and options. The Corporate focus at Valley continues to be on the long-term success of the organization and its many stakeholders. As the energy business evolves and deals with issues such as customer choice, unbundled services and products, and increased competition, Valley is well prepared to succeed in this dynamic new marketplace. Our diversified portfolio of energy products, services and equipment provides us with a unique opportunity to maximize shareholder value and achieve consistent growth. During 1997, Valley accelerated its efforts to develop and market innovative products and services. Our VAMCO subsidiary intensified its efforts in the commercial and institutional segments while maintaining a very competitive position in the more traditional residential appliance sales, rental and service business. VAMCO also introduced water filtration systems, under the trade name of Val Pure, as a new and exciting product line during the latter part of 1997. Initial sales of this product have been encouraging. Our propane subsidiary achieved record earnings in 1997 by engaging in innovative marketing and operating strategies. Morris Merchants which celebrated its 75th anniversary this year, a significant milestone for any business entity, also had a very successful 1997. In its first full year as a member of the Valley family, Alternate Energy Corporation (AEC) 2 (Photo appears here) Photo Tag: Valley Resources Common Stock is traded on the American Stock Exchange. In August of 1997, the Corporation sold an additional 620,000 shares through Edward D. Jones and First Albany Corporation. continued to build on its strengths in the area of compressed natural gas refueling facilities and vehicle conversions. Major projects were completed in Rocky Hill, and Berlin, Connecticut and Manchester, New Hampshire. In addition, AEC developed and has a patent pending for a fuel control system which provides facility and equipment operators with an automated method to control fuel use and improve efficiency. Valley has long recognized that the strength of the organization lies with the dedicated people whose individual commitment makes it possible to provide the level of service necessary to compete successfully in the energy products and services business. Whether it be a service technician who goes the extra mile to ensure that a customer's heating system is operating properly on a cold winter night or someone in our customer relations area who takes the time to explain clearly to a customer the sometimes complex reasons for changes in their monthly bill, Valley's employees have always responded with a dedication and commitment second to none. This year our company embarked on an 3 extensive employee training and development program designed to enhance employee involvement in improving their competitiveness through an increased customer service focus. Initial funding for this project was provided through a grant from the State of Rhode Island. Valley Gas and Utility Workers Union of America Local 472 also achieved a milestone this year as they successfully negotiated a new labor agreement more than three months before the expiration of the former agreement. A new early agreement was also reached with bargaining unit employees at Bristol & Warren Gas, represented by Service Employees International Union Local 134. In considering corporate focus, innovation and people, we are well aware that our customers, particularly in the utility subsidiaries, are facing options which were not conceivable several years ago. During 1997 our utility companies negotiated a firm transportation tariff, approved by the Rhode Island Public Utilities Commission, which for the first time allows our largest customers to purchase gas directly from third-party suppliers and marketers. The Utilities will continue to deliver this gas through its distribution system and bill customers for this service. The future will no doubt offer more options to customers for the goods and services provided by Valley. We believe that these options will result in increased gas utilization and promote growth for our utility business. Your Corporation successfully completed a major recapitalization during 1997. In August we issued 620,000 shares of common stock and sold $7.0 million in debentures. The proceeds of this transaction were used to reduce short-term debt and to position the Corporation to take advantage of investment and growth opportunities as they become available. In March 1997, the Board of Directors increased the Corporation's dividend, marking the 19th consecutive year of dividend increases. The indicated annual dividend rate is now 74 cents per share. As we look back on 1997, we see a year of progress and opportunity. I believe that Valley is well positioned to capitalize on the changing marketplace for energy products and services. On behalf of the Board of Directors, I would like to welcome the many new investors from our recent public offering. Please be assured that the management and Board will work diligently to produce results which will enhance the 4 value of your investment. To our long-term shareholders, we thank you for your continued support and confidence. To our employees, your ongoing commitment and dedication is recognized and appreciated. Finally, to our many customers, we appreciate your business and will do whatever is necessary to earn your ongoing support in the years ahead. Sincerely, S/Alfred P. Degen Alfred P. Degen President & Chief Executive Officer (Photo appears here) Photo Tag: Alfred P. Degen, President & Chief Executive Officer 5 Summary of Annual Earnings and Dividends Consolidated net income is derived from the operations of the Corporation's six active subsidiaries: Valley Gas Company, Bristol & Warren Gas Company, Valley Appliance and Merchandising Company, Valley Propane, Inc., Morris Merchants, Inc. and Alternate Energy Corporation. Consolidated net income for fiscal 1997 was $3,659,300 or $0.86 per average common share outstanding, as compared to $3,998,400 or $0.94 per share in fiscal 1996. Valley Gas and Bristol & Warren, the utility subsidiaries, contributed $2,607,500 to consolidated net income, down from $3,206,400 in fiscal 1996. Utility operations experienced earnings declines as a result of the weather and its impact on gas sales. Weather during the winter period, as measured on a degree day basis, was 10.4 percent warmer than in the previous year and 5.4 percent warmer than normal. This resulted in a decline in annual gas sales of 3.2 percent from the prior year. Utility earnings were also affected by a decline in the off-system sales market. In the prior year the Utilities were able to make off-system sales as a result of the demand for natural gas caused by the extremely cold weather in certain parts of the country. This market did not materialize in fiscal 1997. The contribution of the nonutility operating companies to consolidated earnings was $1,051,800 compared to $792,000 for fiscal 1996. Retail, wholesale and propane operations all contributed to the increased earnings of the nonutility subsidiaries. Retail operations have continued to be positively impacted by sales in the commercial market and conversions in the residential heating market from electric to natural gas and propane. Improved sales and margins for the wholesale operation also contributed to increased earnings. The addition of new product lines enhanced the company's profitability. Valley Propane, through new inventory management techniques, was able to improve earnings despite decreased volumes sold. The installation of natural gas refueling stations generated increased revenues for AEC; however, start-up expenses resulted in losses in fiscal 1997. In March 1997 the Board of Directors increased the dividend 1.4 percent to an indicated annual rate of $0.74 per share. This is the nineteenth consecutive year the dividend has been increased. The Board's continuing policy is to pay a reasonable percentage of sustainable corporate earnings in the form of dividends. Dividends and Market Data
Cash Market Price 1997 Dividend High Low First Quarter..... $.1825 $13.00 $11.75 Second Quarter.... .1825 12.00 11.00 Third Quarter..... .1850 12.50 10.75 Fourth Quarter.... .1850 11.94 10.50 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 - -----------------------------------------------------
6 (Charts appear here) net income
Utility Nonutility 1993 2,879,500 847,700 1994 2,914,300 911,700 1995 1,665,400 889,500 1996 3,206,400 792,000 1997 2,607,500 1,051,800
dividends paid 1993 $0.66 1994 $0.69 1995 $0.71 1996 $0.73 1997 $0.74
market price
High Low Close 1996 1st Quarter 11.50 10.25 10.63 1996 2nd Quarter 11.38 10.50 10.88 1996 3rd Quarter 11.88 10.88 11.88 1996 4th Quarter 12.63 11.88 11.88 1997 1st Quarter 13.00 11.75 11.88 1997 2nd Quarter 12.00 11.00 11.00 1997 3rd Quarter 12.50 10.75 11.81 1997 4th Quarter 11.94 10.50 11.00
7 a clear view of efficiency and progress (Photo appears here) Photo Tag: A view of the Naval War College and the Newport Bridge, Newport, Rhode Island from The Bay View Condominiums. Valley Resources has remained focused on our core business philosophy of anticipating change in order to meet our customers' needs for innovative approaches to delivering energy and energy-related services. The basis of this philosophy is our strategic plan which has five key objectives: - Improving corporate profitability and maximizing shareholder value, - Creating a challenging corporate environment that will result in superior customer service, - Expanding marketing opportunities in the traditional marketplace, - Improving the market share of the subsidiaries, and - Preparing for marketing opportunities and the inherent risk in the new deregulated environment. The utility subsidiaries, Valley Gas and Bristol & Warren, maintained a twofold objective in fiscal 1997. Traditional utility service responsibilities, integrated with the demands of deregulation, continued to pose the challenges of increasing natural gas volumes, maintaining gas supply flexibility and providing competitive pricing. Conversions to natural gas from electric and oil provided a valuable source of opportunities to increase volumes in an economic environment that is benefiting from commercial growth and improved regional employment. Identifying new marketing segments resulted in new loads in the residential market, most notably at North Farm Condominiums in Bristol and several multi-home subdivisions in Valley Gas' service area. The utility subsidiaries maintained constant vigilance in the management of supply contracts, a demanding task as deregulation allows customers to choose their natural gas supplier. These contracts provide for least cost pricing while at the same time preserving supply security. Deregulation of natural gas has increased the complexity of supply contracting as well as the need for flexible and creative methods of fuel cost management. The nonregulated subsidiaries also adjusted their focus according to the particular challenges each faced. Morris Merchants, Inc., located in Canton, Massachusetts, a representative distributor of franchised plumbing and heating lines from manufacturers across the United States, increased its sales volumes with new marketing techniques for existing products and through additional, established product lines. The successful internal analysis undertaken by Morris in fiscal 1997 led to a restructure of its vendor contracts to better manage inventory which resulted in increases in margins earned. Valley Propane improved profitability by structuring its winter supply strategy to mitigate weather-related price fluctuations. The result -- increased earnings, despite the reduction in sales caused by the warmer than normal winter. VAMCO, the Corporation's merchandising subsidiary, effectively broadened its scope in fiscal 1997. An expansion of products and services was accompanied by a change in market approach. VAMCO 's traditional role was one of supporting utility operations by supplying equipment and services that encouraged natural gas growth in the Utilities' service area. In fiscal 1997, VAMCO's primary marketing objective was to continue a more aggressive and comprehensive approach in the commercial sector by providing packaged solutions which include design, installation and financing services. This new approach facilitated the identification and achievement of energy goals for small and mid-sized businesses and expanded into projects that generated multiple sales opportunities. In fiscal 1997 AEC identified those markets where its technological expertise added value. AEC focused its efforts on the construction of natural gas fueling stations, while still responding to continuing demand for its patented technology for the conversion of specialty vehicles. 8 focus (3 Photos appear here) Photo tag: Robert White, Valley Propane Sales and Operation Manager, a competitive sailor, keeps a watchful eye on the competition and harnesses the wind in a regatta between Jamestown and Newport. The focus required to compete effectively in order to meet our customers' changing needs is driven by our strategic plan. Dynamic products and services, delivered with a relentless passion for staying the course outlined by this plan, allow us to be responsive to these changing customer needs. 9 inspiration plus opportunity (Photo appears here) Photo tag: Chief Anthony Silva of Cumberland's Police Department thanks AEC for the innovative package of outside financing and utility funding which allowed his fleet to be powered by natural gas. Innovation is bringing about change by providing a complete new product or service in the marketplace or by providing an existing product or service in a more unique way. During 1997, the subsidiaries of Valley Resources were able to do both. Collaboration between VAMCO and Morris Merchants allowed VAMCO to bring a new product line to market while Morris established a new outlet for a long-time supplier. In the summer of 1997, VAMCO introduced a new product; ValPure Water Filtration Systems. This attractive package of home water filtration products and services arose from a collaborative use of VAMCO's marketing and service expertise and the technical know-how of its affiliate and product vendor, Morris Merchants. Profits that will be earned are not only from the sales of the products but, as important, from the continuous revenue stream afforded by customers who sign up for the convenient option of automatic replacement of the water filter cartridges. At the same time Morris Merchants benefited as the distributor for the manufacturer of the filtration products and from the expanding sales opportunities for these products. Discussions with various industrial customers about their energy needs and the cost savings afforded them by taking advantage of service offerings brought about by deregulation provided an opportunity for AEC to bring a new product to market. The result - a second patented technology. The new device permits automated regulation of gas flow by volume and/or time of day. This technology will enable commercial and industrial multiple-fuel users to achieve savings through better fuel management. As a result of meetings and discussions with large commercial and industrial customers the Utilities recognized the desire of several of these customers to purchase their own supplies. The Utilities decided that a complete redesign of their rate structure would be necessary to be able to render firm transportation service while maintaining a competitively priced residential service. In June 1997, the Rhode Island Public Utilities Commission approved a settlement agreement forged by the joint efforts of the Utilities, customers, the Division of Public Utilities and Carriers and the office of the Rhode Island Attorney General. The Utilities now offer a firm transportation service as well as significantly lower firm service rates to large-volume customers. These rates were designed to improve the competitive position of natural gas and increase gas volumes. (Photo appears here) 10 innovation (3 Photos appear here) Photo tag: Tom Aubee, President of Alternate Energy Corporation, uses innovative approaches to inspire the members of the soccer team he coaches in North Kingstown, Rhode Island. The collaboration of Valley's subsidiaries to anticipate the needs of customers resulted in new innovative products and new unique approaches to traditional markets. As our investment in innovation continues, it also brings new opportunities for growth in earnings. 11 Valley's greatest resource (Photo appears here) Photo tag: Through funding by the State of Rhode Island, all employees are participating in workforce development activities including leadership development, work process evaluation and instruction in competitiveness and problem solving. The Corporation realizes that it is through the employees of Valley Resources that opportunity in challenge is recognized. The programs and products outlined in this report illustrate that the employees of Valley Resources are motivated to seize opportunities to successfully implement Valley's strategic plan. To that end, fiscal 1997 was the beginning of an internal analysis involving all employees. This ongoing initiative has resulted in an eagerness on the part of employees to view themselves, their business and markets from a fresh perspective. One concrete result of this process is a continuous improvement effort undertaken by multi-disciplined teams of employees. These teams are researching issues with the goal of making recommendations to enhance customer satisfaction and operational efficiency. While this continuous improvement process involves the review of cross-functional processes, each department of the organization is evaluating exactly what it is doing and why. This self-analysis has resulted in changes in procedures and systems to improve customer service and efficiency. Additionally, training is being offered in both problem-solving techniques for all employees and leadership skills for management employees. Both of these training programs are designed to equip employees with the skills needed to maintain our competitive edge. (Photo appears here) Photo tag: In a cross-training exercise resulting from the desire to understand work process and job responsibilities, Jim Chadwick, Steve McManus, Mike Paquin and Bob Hallberg, representatives of the construction and sales departments, share information. 12 People (Photo appears here) Photo tag: Members of a "work process" team, Sue Driscoll, Judy Tomlinson, Alan Ladieu and Noelle Morin, provide a fresh perspective to the customer bill design. (Photo appears here) Photo tag: Customer Service employee Noelle Morin and husband Brian meet the challenges of the twists and turns on the Blackstone River. (Photo appears here) Photo tag: Valley Resources work process training creates interaction among employees. Valley Resources realizes that it must provide a challenging corporate environment that fosters individuals to view themselves, our businesses and our markets from a fresh perspective. These initiatives become the basis on which teams are developed to enchance customer satisfaction and operational efficiency, the cornerstone of superior customer service. 13 Choices and opportunities (Photo appears here) Photo tag: VAMCO Residential Sales Supervisor, Tim Draper, explains the features of ValPure Water Filtration System to a prospective customer. Change is ongoing, and success depends on the Corporation's maintaining flexibility in both its outlook and in its commitments. The subsidiaries are poised for rapid and competitively-priced responses to emerging market trends while improving service performance in traditional markets. With the new transportation service the Utilities have taken the first step toward unbundling of services in this era of deregulation. Investigation of innovative cost-management programs is an ongoing process in a competitive utility environment. The Utilities are developing a flexible integrated resource plan and reviewing approaches to rendering earnings less sensitive to the vagaries of weather. The greatest potential for growth is in unregulated markets. In addition to its newly expanded offerings of its patented systems, AEC also plans to take advantage of the market opportunities provided by the commercialization of fuel-cell technology and will educate the markets about the value of emerging natural gas technologies. Additionally, markets are being expanded beyond the traditional Northeast sales region. For VAMCO, expansion beyond the geographic area serviced by the Utilities will provide growth in new markets for its known products. Morris Merchants' growth potential can be pursued along three routes: increasing sales in existing products lines, developing opportunities in new lines and expanding geographically. The Corporation will continue its diversification efforts through acquisitions and alliances to strengthen its competitive position in the changing world of energy products and services. The Corporation recently took an important step to make sure that its options for the future remain open. In August 1997, 620,000 shares of common stock and $7 million of 30-year debentures were sold. This recapitalization provides a solid financial foundation for flexibility, choice and growth. (Photo appears here) Photo tag: Commercial and Industrial Marketing Consultant, C. Mark Cataudella, meets with Father Louis Natalizia. Father Natalizia turned to the energy management expertise of Vamco to ensure a comfortable environment for the parishioners and students of his parish. 14 options (Photo appears here) Corporate profitability depends on our ability to evaluate the options presented in prepareing for new markets while mitigating the risk inherent in the new deregulated environment. This is achieved by maintaining flexibility in both our outlook and our commitments. (Photo appears here) Photo tag: Mike Marks and Steve Healey review supply contracts which will enable the Utilities to maintain gas supply flexibility. (Photo appears here) Photo tag: Corrosion Control Technician, Joe Goudreau, an expert rock climber, reinforces the need to evaluate one's options carefully as he feels for the "right" grip ascending a natural peak in Lincoln Woods State Park 15 (Charts appear here) Weather Variance from Normal
Actual Normal %Change 1993 6,341 6,405 -1.0% 1994 6,459 6,339 1.9% 1995 5,820 6,339 -8.2% 1996 6,369 6,339 0.5% 1997 6,191 6,339 -2.3%
Natural Gas Volumes
MMcf Sales MMcf Transported 1993 8,420 4,031 1994 8,890 3,624 1995 8,667 4,419 1996 9,302 3,273 1997 9,104 5,043
Book Value/Market Price Year End 1993 5.92 15.375 1994 6.18 12.375 1995 6.10 10.750 1996 6.33 11.875 1997 7.00 11.000
Yield on Year End Market Price 1993 4.3% 1994 5.6% 1995 6.6% 1996 6.1% 1997 6.7%
16 Financial Information Consolidated Statements of Earnings ..................................... 18 Consolidated Statements of Cash Flows ................................... 19 Consolidated Balance Sheets ............................................. 20-21 Consolidated Statements of Changes in Common Stock Equity ............... 22 Consolidated Statements of Capitalization ............................... 22 Notes to Consolidated Financial Statements .............................. 23-31 Report of Independent Certified Public Accountants ...................... 31 Management's Discussion and Analysis .................................... 32-36 Summary of Consolidated Operations ...................................... 37 Gas Operating Statistics ................................................ 38 Directors ............................................................... 39 Officers ................................................................ 40 Corporate Information ................................................... 40 17 Consolidated Statements of Earnings
For the year ended August 31 1997 1996 1995 - --------------------------------------------------------------------------------------- Operating revenues: Utility gas revenues ..................... $66,230,787 $60,773,519 $56,012,913 Nonutility revenues ...................... 21,253,190 19,586,615 18,857,277 ----------- ----------- ----------- Total ................................ 87,483,977 80,360,134 74,870,190 ----------- ----------- ----------- Operating expenses: Cost of gas sold ......................... 37,843,842 31,951,154 30,229,359 Cost of sales - nonutility ............... 14,790,835 13,688,935 13,189,797 Operations ............................... 17,890,281 17,706,904 16,752,501 Maintenance .............................. 1,633,671 1,671,971 1,535,206 Depreciation (Note A) .................... 3,143,719 2,956,727 2,684,755 Taxes - other than Federal income ....... 4,242,841 4,090,751 4,002,076 - Federal income (Notes A and F) .. 1,334,677 1,443,547 731,947 ----------- ----------- ----------- Total ................................ 80,879,866 73,509,989 69,125,641 ----------- ----------- ----------- Operating income ............................ 6,604,111 6,850,145 5,744,549 Other income - net of tax (Notes A and F) ... 423,476 459,938 115,032 ----------- ----------- ----------- Total income before interest ......... 7,027,587 7,310,083 5,859,581 ----------- ----------- ----------- Interest charges: Long-term debt ........................... 1,957,052 1,927,154 1,947,205 Other .................................... 1,411,222 1,384,569 1,357,451 ----------- ----------- ----------- Total ................................ 3,368,274 3,311,723 3,304,656 ----------- ----------- ----------- Net income available for common stock ....... $ 3,659,313 $ 3,998,360 $ 2,554,925 =========== =========== =========== Average number of common shares outstanding . 4,267,038 4,258,877 4,222,662 Earnings per average common share outstanding $ 0.86 $ 0.94 $ 0.61 The accompanying Notes are an integral part of these statements.
18 Consolidated Statements of Cash Flows
For the year ended August 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------- Increase (decrease) in cash: Cash flows from operating activities: Net income ....................................... $ 3,659,313 $ 3,998,360 $ 2,554,925 Adjustments to reconcile net income to net cash: Depreciation ................................... 3,143,719 2,956,727 2,684,755 Provision for uncollectibles ................... 1,603,597 1,459,761 1,274,238 Deferred Federal income taxes .................. . 441,638 922,007 619,918 Amortization of investment tax credits ......... (49,090) (49,452) (50,144) Change in assets and liabilities: Accounts receivable ............................ (2,841,404) (718,826) (1,612,297) Deferred fuel costs ............................ 1,620,252 (3,977,779) 2,629,056 Unbilled gas costs ............................. (1,140) (4,603) (4,617) Fuel and other inventories ..................... (71,908) (663,964) 502,202 Prepayments .................................... 119,631 (249,971) (72,088) Common stock held for dividend reinvestment plan (220,829) 158,876 (271,315) Prepaid pensions ............................... (924,745) (625,374) (572,320) Accounts payable ............................... (944,778) 921,892 (275,189) Security deposits .............................. (61,952) (65,258) 30,945 Taxes accrued .................................. 171,730 (317,791) (131,917) Other .......................................... 520,799 (75,564) (578,144) ------------ ------------ ------------ Total adjustments ............................ 2,505,520 (329,319) 4,173,083 ------------ ------------ ------------ Net cash provided by operating activities ........ 6,164,833 3,669,041 6,728,008 ------------ ------------ ------------ Cash flows from investing activities: Utility capital expenditures ..................... (3,599,752) (4,396,081) (5,335,159) Nonutility capital expenditures .................. (693,229) (612,628) (580,772) Other investments ................................ (81,222) (49,360) (13,400) ------------ ------------ ------------ Net cash used by investing activities ............ (4,374,203) (5,058,069) (5,929,331) ------------ ------------ ------------ Cash flows from financing activities: Dividends paid ................................... (3,130,413) (3,083,369) (2,989,702) Common stock transactions ........................ 6,450,861 184,615 391,278 Issuance of long-term debt, net of issuance cost.. 9,655,515 -0- -0- Issuance of revolving credit arrangement ......... 100,000 2,200,000 -0- Retirement of long-term debt ..................... (1,553,395) (860,000) (1,333,000) Increase (decrease) in notes payable ............. (13,000,000) 3,000,000 3,000,000 ------------ ------------ ------------ Net cash (used) provided by financing activities . (1,477,432) 1,441,246 (931,424) ------------ ------------ ------------ Net increase (decrease) in cash ..................... 313,198 52,218 (132,747) Cash, beginning ..................................... 506,813 454,595 587,342 ------------ ------------ ------------ Cash, ending ........................................ $ 820,011 $ 506,813 $ 454,595 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ....................................... $ 3,378,894 $ 3,311,577 $ 3,265,612 ============ ============ ============ Federal income taxes ........................... $ 861,140 $ 885,000 $ 380,000 ============ ============ ============ Supplemental disclosures of noncash activity: Capital lease obligations incurred ............... $ 388,139 $ 1,844,817 $ 300,972 ============ ============ ============ The accompanying Notes are an integral part of these statements.
19 Consolidated Balance Sheets
August 31 1997 1996 - --------------------------------------------------------------------------------------------------------- Assets: Utility plant, at cost (Notes A and D) ...................................... $79,728,717 $76,534,841 Less: Accumulated provision for depreciation (Note A) ...................... 29,281,602 27,092,766 ----------- ----------- Net utility plant ........................................................... 50,447,115 49,442,075 ----------- ----------- Leased property-less accumulated amortization of $3,379,848 and $2,789,155 .. 2,377,376 2,944,581 ----------- ----------- Nonutility property-less accumulated provision for depreciation of $4,076,160 and $3,850,692 (Note A) ................................................... 3,711,869 3,567,797 ----------- ----------- Other investments ........................................................... 1,591,682 1,510,460 ----------- ----------- Current assets: Cash .................................................................... 820,011 506,813 Accounts receivable-less allowance for uncollectibles of $840,433 and $719,721 ........................................................... 11,183,288 9,945,481 Deferred fuel costs (Note A) ............................................. -0- 827,012 Deferred unbilled gas costs (Note A) ..................................... 440,034 438,894 Fuel and other inventories (Note A) ...................................... 6,120,355 6,048,447 Prepayments .............................................................. 1,289,671 1,409,302 Common stock held for dividend reinvestment plan (Note B) ................ 351,648 130,819 ----------- ----------- Total current assets .................................................. 20,205,007 19,306,768 ----------- ----------- Deferred debits: Recoverable postretirement benefit (Note H) .............................. 461,948 692,922 Recoverable vacations accrued ............................................ 595,781 633,194 Recoverable deferred Federal income taxes (Note F) ....................... 6,043,670 5,969,839 Recoverable transition obligation (Note H) ............................... 373,200 1,700,000 Unamortized debt discount and expense .................................... 1,745,161 1,523,092 Prepaid pensions (Note H) ................................................ 7,095,582 6,170,837 Other .................................................................... 3,048,746 3,227,420 ----------- ----------- Total deferred debits ................................................ 19,364,088 19,917,304 ----------- ----------- Total assets ......................................................... $97,697,137 $96,688,985 =========== =========== The accompanying Notes are an integral part of these statements.
20 Consolidated Balance Sheets
August 31 1997 1996 - ------------------------------------------------------------------------------------------ Capitalization and liabilities: Capitalization (see Consolidated Statements of Capitalization) $66,293,195 $50,348,234 ----------- ----------- Revolving credit arrangement (Note D) ........................ 2,300,000 2,200,000 ----------- ----------- Obligations under capital leases (Note D) .................... 1,541,418 2,133,543 ----------- ----------- Current liabilities: Current maturities of long-term debt (Note D) ............. 150,000 500,000 Obligations under capital leases (Note D) ................. 835,957 811,036 Notes payable (Note C) .................................... 1,900,000 14,900,000 Accounts payable .......................................... 4,298,429 5,243,207 Security deposits ......................................... 1,034,795 1,096,747 Taxes accrued ............................................. 361,755 190,025 Deferred fuel costs (Note A) .............................. 793,240 -0- Accrued interest .......................................... 541,359 551,979 Other ..................................................... 696,889 712,413 ----------- ----------- Total current liabilities .............................. 10,612,424 24,005,407 ----------- ----------- Commitments and contingencies (Note H) Deferred credits: Unamortized investment tax credit (Note A) ................ 674,598 723,688 Transition obligation (Note H) ............................ 373,200 1,700,000 Unfunded deferred Federal income taxes (Note F) ........... 1,886,708 1,922,773 Postretirement benefit obligation (Note H) ................ 461,948 692,922 Other ..................................................... 1,734,012 1,700,469 ----------- ----------- Total deferred credits .................................. 5,130,466 6,739,852 ----------- ----------- Deferred Federal income taxes (Notes A and F) ................ 11,819,634 11,261,949 ----------- ----------- Total liabilities ....................................... 31,403,942 46,340,751 ----------- ----------- Total capitalization and liabilities .................... $97,697,137 $96,688,985 =========== =========== The accompanying Notes are an integral part of these statements.
21 Consolidated Statements of Changes in Common Stock Equity
Common Shares Issued Paid in Retained & Outstanding Capital Earnings - ------------------------------------------------------------------------------------------------------------------ Number Amount - ------------------------------------------------------------------------------------------------------------------ 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................................... 3,659,313 Cash dividends on common stock............... (3,130,413) Issuance of Common Stock..................... 620,000 620,000 5,893,100 Other ....................................... (62,239) --------- ---------- ----------- ---------- Balance, August 31, 1997........................ 4,900,028 $4,900,028 $24,034,924 $8,279,306 ========= ========== =========== ========== The accompanying Notes are an integral part of these statements.
Consolidated Statements of Capitalization
August 31 1997 1996 - -------------------------------------------------------------------------------------- Common stock equity: Common stock, $1 par value (Note B) Authorized 20,000,000 shares Issued and outstanding 4,900,028 and 4,280,028 shares $ 4,900,028 $ 4,280,028 Paid in capital (Note B) ................................. 24,034,924 18,204,063 Retained earnings (Notes B and E) ........................ 8,279,306 7,750,406 ----------- ----------- 37,214,258 30,234,497 Less: Accounts receivable from Valley Gas Employee Stock Ownership Plan (Note D) ................ 2,907,049 3,142,200 ----------- ----------- Total common stock equity ....................... 34,307,209 27,092,297 ----------- ----------- Long-term debt (Note D): 8% First Mortgage Bonds, due 2022 ..................... 20,090,000 20,212,000 7.7% Debentures, due 2027 ............................. 7,000,000 -0- 9% Notes Payable, due 1999 ............................ 2,138,937 2,138,937 Note payable .......................................... 2,907,049 1,405,000 ----------- ----------- Total ........................................... 32,135,986 23,755,937 Less: Current maturities............................... 150,000 500,000 ----------- ----------- Total long-term debt ............................ 31,985,986 23,255,937 ----------- ----------- Total capitalization ............................ $66,293,195 $50,348,234 =========== =========== The accompanying Notes are an integral part of these statements.
22 Notes to Consolidated Financial Statements Note A: Summary of Significant Accounting Policies Consolidation - The consolidated financial statements include the accounts of Valley Resources, Inc. and its active wholly-owned subsidiaries (the "Corporation")--Valley Gas Company ("Valley Gas"), Valley Appliance and Merchandising Company ("VAMCO"), Valley Propane, Inc. ("Valley Propane"), Morris Merchants, Inc. ("Morris Merchants") (d/b/a the Walter F. Morris Company), and Bristol & Warren Gas Company ("Bristol & Warren"). The consolidated financial statements also include the Corporation's 80% interest in Alternate Energy Corporation ("AEC"). All significant intercompany transactions have been eliminated where required. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Regulation - The utility operations of Valley Gas and Bristol & Warren (collectively the "Utilities") are subject to regulation by the Rhode Island Public Utilities Commission ("RIPUC"). Accounting policies conform with generally accepted accounting principles, as applied in the case of regulated public utilities, and are in accordance with the accounting requirements and rate making practices of the RIPUC. Depreciation - Annual provisions for depreciation for the Utilities are determined on a composite straight-line basis. The composite rate for fiscal 1997 and 1996 was 2.91% and for fiscal 1995 it was 2.72%. 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 - The Utilities maintain two non-contributory defined benefit pension plans covering substantially all of their employees, Bristol & Warren employees became eligible May 1, 1997. The plans provide benefits based on compensation and years of service. The Utilities fund pension costs that are deductible for Federal income tax purposes (see Note H). On January 1, 1997, the Valley Gas Company 401(k) plan and the Valley Gas Employee Stock Ownership Plan ("ESOP") were merged into the Valley Resources 401(k) Employee Stock Ownership Plan ("KSOP"). The 23 Notes to consolidated financial statements (continued) plan covers all Corporate employees, if eligible (see Note D). Plan expense, including contributions to the Valley Gas 401(k) and ESOP, in fiscal 1997, 1996 and 1995 were $160,800, $226,100 and $122,400, 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 1997, 1996, and 1995 profit sharing expense was $64,600, $68,400, and $68,400, respectively. Bristol & Warren maintained a non-contributory defined contribution pension plan covering substantially all of its employees. The plan provided for benefits based on hours worked and rate of pay. In fiscal 1997, 1996 and 1995 plan expense was $14,200, $23,000, and $27,500, respectively. The plan was terminated on April 30, 1997. New Accounting Standard - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" and Statement of Financial Accounting Standards No. 129 "Disclosure of Information about Capital Structure", which are not expected to have a material impact on the Corporation's financial condition or results of operations. Inventories - Fuel and other inventories at August 31, are as follows:
1997 1996 - ------------------------------------------------------------------------------- Fuels (at average cost)................................ $3,809,617 $3,622,698 Merchandise and other (at average cost)................ 1,252,846 1,199,856 Merchandise (at LIFO).................................. 1,057,892 1,225,893 ---------- ---------- $6,120,355 $6,048,447 ========== ==========
Merchandise (at LIFO), if valued at current cost, would have been greater by $270,900 in fiscal 1997 and $327,300 in fiscal 1996. Note B: Common Stock and Rights On August 26, 1997, the Corporation issued 620,000 shares of Common Stock. The net proceeds of this offering were used to reduce the short-term debt of the Utilities, to make loans to nonutility subsidiaries to repay short-term debt and for working capital requirements. Subsequent to fiscal year end, the Underwriters of the stock offering exercised their over-allotment option; 93,000 additional common shares were issued for additional net proceeds of approximately $977,000. 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. All shares issued pursuant to the plan in fiscal 1997 were open-market purchases. 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. At August 31, 1997 and 1996, 31,179 and 10,813 shares, respectively, were held by the Corporation for issuance to the plan. On August 31, 1997, 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. 24 Notes to consolidated financial statements (continued) 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 1997, 1996, and 1995 amounted to $110,000, $114,800, and $94,500, respectively. There are no legal restrictions on withdrawal of compensating balances. A detail of short-term borrowings for fiscal 1997, 1996, and 1995 is as follows:
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- At year end Weighted average interest rate....................... 5.7% 5.7% 5.9% Unused lines of credit............................... $35,100,000 $14,100,000 $15,100,000 For the year ended Weighted average interest rate....................... 5.7% 6.0% 6.2% Average borrowings................................... $16,800,000 $12,908,300 $11,283,300 Maximum month-end borrowings......................... $22,000,000 $16,000,000 $16,000,000 Month of maximum borrowings.......................... January November December
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 1997 are: 1998, $986,000; 1999, $5,203,800; 2000, $757,100; 2001, $320,200; and 2002, $215,700, 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, $122,000, $860,000 and $1,333,000 of the bonds were redeemed by holders in fiscal 1997, 1996 and 1995, respectively. The fair market value of the Corporation's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Corporation for debt of the same remaining maturities. Management believes the carrying value of the debt approximates the fair value at August 31, 1997. Regulatory treatment allows payments under capital leases to be recorded as rental expenses. Rental expenses for all leases in fiscal 1997, 1996, and 1995 were $1,169,500, $1,437,900, and $1,179,800, 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 1999, 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 the KSOP. The receivable from the KSOP has been shown as a reduction of common stock equity. The financing by the KSOP is secured by the common stock of two unregulated subsidiaries and the unallocated shares held by the KSOP. The Corporation's common stock purchased by the KSOP with the borrowed money is held by the KSOP trustee in a "suspense account." As the Corporation matches employee 401(k) contributions and makes discretionary contributions to the plan, a portion of the common stock is released from the suspense account and allocated to participating employees. Any dividends on unallocated shares are used to pay loan interest. Note E: Restriction on Retained Earnings At August 31, 1997, $1,613,100 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. 25 Notes to consolidated financial statements (continued) Note F: Income Taxes In accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), the Corporation's financial statements are required, among other things, to record the cumulative deferred income taxes on all temporary timing differences. As approved by the RIPUC, the Utilities did not fully record deferred income taxes but, rather, "flowed through" certain tax benefits to utility customers prior to fiscal 1994. At August 31, 1997, the Corporation has a liability of $6,043,700 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:
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Current income tax expense: Operating expense .................................. $ 893,039 $ 521,540 $112,029 Nonoperating expense................................ 103,200 147,065 71,230 ---------- ---------- -------- 996,239 668,605 183,259 ---------- ---------- -------- Deferred income tax expense: Accelerated depreciation............................ 332,771 276,474 194,537 Pensions............................................ 314,413 212,627 194,588 Deferred fuel costs................................. (229,039) 293,801 -0- Uncollectibles...................................... (23,830) (21,840) 2,142 Directors' fees and interest........................ (36,845) (36,453) (8,744) Bond premium ....................................... (6,240) (6,240) (6,242) Rate case expenses.................................. (97,257) (37,626) 174,290 Capitalization of inventory costs................... 28,869 (6,897) (2,079) Consulting contracts................................ 30,570 64,392 64,389 Software amortization............................... 140,856 140,856 140,856 Alternative minimum tax............................. -0- 8,617 (180,000) Excess VEBA contribution............................ (78,532) -0- -0- Other .............................................. 65,902 34,296 46,181 ---------- ---------- -------- 441,638 922,007 619,918 ---------- ---------- -------- Total .............................................. $1,437,877 $1,590,612 $803,177 ========== ========== ========
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:
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Statutory Federal rate....................................... 34% 34% 34% Maintenance costs capitalized for book purposes........... (4) (3) (4) Cost of removal........................................... (1) (1) (1) ESOP dividends............................................ (1) (1) (2) Prior year over accrual................................... -0- -0- (2) Other..................................................... -0- (1) (1) --- --- --- Total..................................................... 28% 28% 24% === === ===
26 Notes to consolidated financial statements (continued) Temporary differences which gave rise to the following deferred tax assets and liabilities at August 31, 1997 and 1996 are:
1997 1996 - ---------------------------------------------------------------------------------------------- Unbilled revenues ............................................ $ 273,872 $ 271,504 Directors' fees and interest ................................. 252,322 215,477 Other ........................................................ 549,248 525,365 ------------ ------------ Total deferred tax assets ................................. 1,075,442 1,012,346 ------------ ------------ Accelerated depreciation ..................................... (8,879,705) (8,446,411) Pensions ..................................................... (2,431,184) (2,116,771) Software amortization ........................................ (676,918) (536,062) Deferred fuel costs .......................................... (64,762) (293,801) Other ........................................................ (842,507) (881,250) ------------ ------------ Total deferred tax liabilities ............................ (12,895,076) (12,274,295) ------------ ------------ Total deferred taxes ......................................... $(11,819,634) $(11,261,949) ============ ============
The Corporation's nonutility operations are subject to state income taxes. For fiscal 1997, 1996, and 1995, state income taxes totaled $170,700, $124,300, and $131,800, respectively. Note G: Regulatory Matters On June 1, 1997, the Utilities received approval to redesign their rates and offer transportation services to large commercial and industrial customers. 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 - The Utilities have two non-contributory defined benefit pension plans covering substantially all of their employees and a supplemental pension plan covering certain officers. Net periodic pension income for fiscal 1997, 1996, and 1995 included the following components:
1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the period........... $ 543,241 $ 534,961 $ 470,907 Interest cost on projected benefit obligation.............. 1,337,602 1,321,504 1,232,168 Actual return on plan assets............................... (8,425,498) (3,266,264) (3,448,848) Net amortization and deferral.............................. 5,619,910 784,425 1,173,453 ---------- ---------- ---------- Net periodic pension income................................ $ (924,745) $ (625,374) $ (572,320) ========== ========== ==========
Plans Funded Status - July 31 1997 1996 - --------------------------------------------------------------------------------------------------------------- Projected benefit obligations: Vested............................................................... $ 16,661,224 $ 15,511,957 Nonvested............................................................ 219,424 225,232 ------------ ------------ Accumulated.......................................................... 16,880,648 15,737,189 Due to recognition of future salary increases........................ 4,308,115 3,757,612 ------------ ------------ Total.............................................................. (21,188,763) (19,494,801) Plan assets at fair value............................................... 36,565,680 29,152,063 ------------ ------------ Plan assets in excess of projected benefit obligation................... 15,376,917 9,657,262 Unrecognized transition amount.......................................... (676,708) (824,232) Unrecognized net gains.................................................. (7,604,627) (2,662,193) ----------- ------------ Prepaid pension costs................................................... $ 7,095,582 $ 6,170,837 =========== ============
27 Notes to consolidated financial statements (continued) Plan assets are invested in common stock, short-term investments and various other fixed income securities. The weighted-average discount rate used in determining the projected benefit obligation was 7 3/4% as of July 31, 1997 and 1996. The assumed rate of future compensation increases was 5 1/2% per year. The expected long-term rate of return on assets was 9% for all years presented. Postretirement Life and Health Benefit Plan - Valley Gas sponsors a postretirement benefit plan that covers substantially all of its employees except for nonunion employees hired on or after September 1, 1993 and union employees hired on or after April 1, 1994. The plan provides medical, dental and life insurance benefits. The plan is non-contributory. In accordance with Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), Valley Gas records the cost for this plan on an accrual basis. As permitted by SFAS 106, Valley Gas will record the transition obligation over a twenty-year period. Valley Gas' cost under this plan for fiscal 1997, 1996 and 1995 was $775,600, $809,500 and $815,100, 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:
1997 1996 - ---------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees ............................................................ $(2,986,423) $(2,787,993) Fully eligible active plan participants ............................. (639,520) (775,563) Other active plan participants ...................................... (2,432,046) (2,007,935) ----------- ----------- (6,057,989) (5,571,491) Plan assets at fair value .............................................. 1,699,662 951,546 ----------- ----------- Accumulated postretirement benefit obligation in excess of plan assets............................................................... (4,358,327) (4,619,945) Unrecognized transition obligation ..................................... 4,444,372 4,722,146 Unrecognized net (gain) from past experience different from that assumed and from changes in assumptions ............................. (547,993) (795,123) ----------- ----------- Accrued postretirement benefit cost .................................... $ (461,948) $ (692,922) =========== ===========
Net periodic postretirement benefit cost consisted of the following: 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Service cost - benefits attributable to service during the period....... $ 136,372 $156,991 $140,882 Interest cost on accumulated postretirement benefit obligation.......... 419,243 417,117 420,725 Actual return (loss) on plan assets..................................... (57,041) 33,712 (10,575) Net amortization and deferral........................................... 277,015 201,640 264,026 ---------- -------- -------- Net periodic postretirement benefit cost................................ 775,589 809,460 815,058 Regulatory asset........................................................ (230,974) -0- 252,365 ---------- -------- -------- Net expense............................................................. $1,006,563 $809,460 $562,693 ========== ======== ========
For measurement purposes, an 11% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1996; 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, 1997 by $450,000 and the aggregate of the service and the interest cost components of 28 Notes to consolidated financial statements (continued) net periodic postretirement benefit cost ("NPPBC") for the year by $54,000. The discount rate was 7 3/4% for the development of the NPPBC. The assumed rate of future compensation increases was 5 1/2% per year. The trend rates were set by the RIPUC. Long-Term Obligations - The Utilities have contracts which expire at various dates through the year 2012 for the purchase, delivery and storage of natural gas and supplemental gas supplies. Certain contracts for the purchase of the supplemental gas supplies contain minimum purchase obligations which approximate 2% of total system requirements. FERC Order No. 636 Transition Costs - As a result of FERC Order 636, the Utilities' interstate pipeline service providers have unbundled their supply, storage and transportation services. This unbundling caused the interstate pipeline companies to incur substantial costs in order to comply with Order 636. These transition costs include four types: (1) unrecovered gas costs (gas costs that have been incurred but not yet recovered by the pipelines when they were providing bundled service to local distribution companies); (2) gas supply realignment costs (the cost of renegotiating existing gas supply contracts with producers); (3) stranded costs (unrecovered costs of assets that cannot be assigned to customers of unbundled services); and (4) new facilities costs (costs of new facilities required to physically implement Order 636). Pipelines are expected to be allowed to recover prudently incurred transition costs from customers primarily through a demand charge, after approval by FERC. The Utilities' pipeline suppliers began direct billing these costs in fiscal 1994 as a component of demand charges. The Utilities estimate their remaining portion of transition costs to be $373,200 and have recognized a liability for these costs as of August 31, 1997. The RIPUC has allowed the recovery of transition costs through the PGPA. Under the provisions of SFAS 71, regulatory assets totaling $373,200 were recorded for the expected future recovery of the transition obligations. Actual transition costs to be incurred depend on various factors, and, therefore, future costs may differ from the amounts discussed above. Contingent Liabilities - A lawsuit has been filed against Valley Gas and other parties by Blackstone Valley Electric Company ("Blackstone") seeking contribution towards a judgment against Blackstone's share of total cleanup costs of approximately $6,000,000 at the Mendon Road site in Attleboro, Massachusetts. The expenses relate to a site to which oxide waste was transported in the 1930's prior to the incorporation of Valley Gas. Management is of the opinion the Corporation will prevail as a result of the indemnification provisions included in the agreement entered into when Valley Gas acquired the utility assets from Blackstone. Management cannot determine the future cash flow impact, if any, of this claim and related legal fees. Legal fees associated with this claim are recovered in rates. In a recent decision of the U.S. Court of Appeals for the First Circuit, Blackstone's appeal of the judgment against it was sustained and the case was remanded for further proceedings, including a referral of the case to the EPA to determine if the substance in question (FFC) is hazardous. Valley Gas received a letter of responsibility from the Rhode Island Department of Environmental Management ("DEM") with respect to releases from coal waste on its property that is the site of the former Tidewater manufacturing 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. As noted above, management takes the position that it is indemnified by Blackstone for any such expenses. Management intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant 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 coal waste on its property that is the site of the former Hamlet Avenue manufacturing 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. As noted above, management takes the position that it is indemnified by Blackstone for any such expenses. Management intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant period. Remediation of this site is also governed by a regulatory framework that permits more flexibility in methods of remediation and in property reuse. 29 Notes to consolidated financial statements (continued) Note I: Segment Information The following information is presented relative to the gas, merchandising and other operations of the Corporation.
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Gas Operations Operating revenues........................................... $66,230,787 $60,773,250 $56,012,913 Operating income before Federal income taxes................. 6,465,007 7,150,140 5,157,534 Identifiable assets at August 31............................. 82,074,205 84,646,797 83,952,630 Depreciation................................................. 2,594,712 2,364,999 2,131,425 Capital expenditures......................................... 3,599,752 4,396,081 5,335,159 Appliance & Contract Sales & Rentals Operating revenues........................................... $18,490,238 $17,617,481 $17,216,397 Operating income before Federal income taxes................. 1,274,805 986,920 1,111,530 Identifiable assets at August 31............................. 9,384,412 8,116,782 8,148,961 Depreciation................................................. 464,564 512,242 475,456 Capital expenditures......................................... 572,069 531,152 521,345 Other Operations, including Corporate & Eliminations Operating revenues........................................... $2,762,952 $1,969,403 $1,640,880 Operating income before Federal income taxes................. 198,976 156,632 207,432 Identifiable assets at August 31............................. 6,238,520 3,925,406 235,915 Depreciation................................................. 84,443 79,486 77,874 Capital expenditures......................................... 121,160 81,476 59,427 Total Corporation Operating revenues........................................... $87,483,977 $80,360,134 $74,870,190 Operating income before Federal income taxes................. 7,938,788 8,293,692 6,476,496 Federal income tax expense................................... (1,334,677) (1,443,547) (731,947) Nonoperating income-net...................................... 423,476 459,938 115,032 Interest expense............................................. (3,368,274) (3,311,723) (3,304,656) Net income................................................... 3,659,313 3,998,360 2,554,925 Identifiable assets at August 31............................. 97,697,137 96,688,985 92,337,506 Depreciation................................................. 3,143,719 2,956,727 2,684,755 Capital expenditures......................................... 4,292,981 5,008,709 5,915,931
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. 30 Notes to consolidated financial statements (continued) Note J: Summarized Quarterly Financial Data (Unaudited)
Three months ended (in thousands, except as to earnings (loss) per average share) November February May August - ----------------------------------------------------------------------------------------------------------------- Fiscal 1997 Total operating revenues............................ $16,340 $30,932 $26,281 $13,931 Income (loss) before Federal income taxes........... $(1,263) $ 4,916 $ 2,830 $(1,386) Net income (loss)................................... $ (772) $ 3,260 $ 1,956 $ (785) Earnings (loss) per average share................... $ (0.18) $ 0.76 $ 0.46 $ (0.18) 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................... $ (0.18) $ 0.90 $ 0.47 $ (0.25)
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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1997, in conformity with generally accepted accounting principles. S/Grant Thornton LLP Boston, Massachusetts September 26, 1997 31 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 refueling facilities, natural gas conversion systems and energy use control devices. Operating results are derived from two major classifications - utility and nonutility. Utility earnings are generated from the operations of the regulated natural gas distribution companies and include the distribution and sale of natural gas to firm and seasonal customers. Nonutility earnings are a consolidation of the earnings 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 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 sales customers changes in gas costs from those included in the regulated tariffs, and an adjustment to collect post-retirement benefits. Seasonal and dual-fuel sales are made when excess gas supplies are available and gas prices are competitive with alternative fuel markets. 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. The Utilities also provide off-peak transportation services through their distribution systems. 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. Valley Propane sells propane at both wholesale and retail and provides service to propane customers in Rhode Island and southeastern Massachusetts. AEC, acquired in May 1996, generates revenues through the design and installation of natural gas refueling facilities and through the conversion of vehicles and stationary engines to natural gas. The Corporation owns an 80% interest in AEC and has the obligation to acquire the remaining 20% of the company currently held by the management of AEC. AEC did not materially impact the operations of the Corporation in fiscal 1997 or fiscal 1996. RESULTS OF OPERATIONS Fiscal 1997 versus Fiscal 1996 Fiscal 1997 utility gas revenues totaled $66,230,800, a 9.0% increase over fiscal 1996. Revenues generated from firm sales increased in fiscal 1997 by 8.6% over fiscal 1996. The increase in firm revenues is the result of a $1,580,600 decrease in base revenues, resulting from warmer weather in fiscal 1997, offset by a $6,461,000 increase in gas costs recovered through the PGPA, which has no direct earnings impact. Utility gas revenues were also positively impacted by increased revenues from seasonal and transportation customers. Gas sales to firm customers were 7,994,400 Mcf in fiscal 1997, a decrease of 3.2% from the prior year. The primary contributor to the sales decrease was warmer weather. Weather, as measured by degree days, in fiscal 1997 was 2.3% warmer than normal and 2.8% warmer than fiscal 1996. Weather during the critical heating period, December through February, was 10.4% warmer than the prior year and 5.4% warmer than normal. In fiscal 1997, gas sales to seasonal customers increased 6.0% over the prior fiscal year. Sales to seasonal customers are dependent upon the availability of natural gas and the price of alternate fuels. Margins earned from seasonal sales are returned to firm customers through the PGPA and do not impact the profitability of the company. The Utilities also transport natural gas owned by customers. Transportation revenues increased 32 Management's Discussion and Analysis of the Results of Operations and Financial Condition (continued) $301,700 in fiscal 1997. Nonutility revenues in fiscal 1997 were $21,253,200, an increase of 8.5% over fiscal 1996. All nonutility operations enjoyed increased revenues in fiscal 1997 and were favorably impacted by an improving regional economy. VAMCO's revenue improvement was the result of increased equipment sales resulting from traditional conversions from electric heating in the residential market and its more aggresive and comprehensive focus on the commercial and industrial market segments. This has also led to an improvement in the gross margin of the retail operations. The rental and service contract programs continued to impact earnings positively. Revenues generated from wholesale operations improved through the addition of new product lines and new marketing directions for existing products. AEC also contributed to increased nonutility revenues although start-up costs have resulted in losses for this subsidiary. Propane revenues in fiscal 1997 increased 6.1% despite an 8.0% decrease in gallons sold. The warm weather impact on sales volumes was offset by increased revenues and margins. Market timing differences in retail pricing and utility cost basis were the primary reasons for this increase. 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 sales 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 1997 was $4.07 versus $3.84 in fiscal 1996. Gas costs increased as a result of both the purchase price of natural gas and increased gas costs related to the PGPA reconciliation. Cost of sales - nonutility includes the cost of sales for VAMCO, Valley Propane, Morris Merchants and AEC. Cost of merchandise sold increased 8.0% in fiscal 1997 over fiscal 1996 which was directly attributable to the increase in sales. The average cost of propane for the retail propane operations, included in cost of sales, was $0.55 per gallon in fiscal 1997 versus $0.48 per gallon in fiscal 1996. Operations expenses in fiscal 1997 increased 1.0% over fiscal 1996. Expenses recovered in the Utilities most recent rate filing, normal wage increases and uncollectible expense were offset by decreased expenses related to operation of the LNG plant due to the warmer winter. Maintenance expense in fiscal 1997 was $1,633,700, a 2.3% decrease from fiscal 1996. A shift of maintenance projects to capital and the lack of snow removal costs were responsible for the decrease. Operation and maintenance expenses were impacted by wages and general inflation. Taxes - other than Federal income were $4,242,800 in fiscal 1997, an increase of $152,100 over the prior year. The impact of gross receipts taxes on increased utility revenues is responsible for the increase. The effective Federal income tax rate for the years ended August 31, 1997 and 1996 was 28%. Fiscal 1997 other income - net of tax decreased $36,500 from the prior year as a direct result of a decline in off-system sales. The decrease was slightly offset by increased interest income and the recognition of income on other investments. Interest expense in fiscal 1997 totaled $3,368,300, an increase of 1.7% over fiscal 1996. Increased short-term borrowings were responsible for the increase in interest expense. This increase was offset by a reduction in interest accrued on deferred fuel costs and lower borrowing rates. 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 and 5.6% colder than normal during the critical heating period, December through February. 33 Management's Discussion and Analysis of the Results of Operations and Financial Condition (continued) In October 1995, the Utilities 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. 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 34 Management's Discussion and Analysis of the Results of Operations and Financial Condition (continued) 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. LIQUIDITY AND CAPITAL RESOURCES The cash requirements of the Corporation are generated through the distribution and sale of natural gas, propane and merchandise. Additional revenues are collected through the rental and service contract programs. Operations, external financings and investments are also used to meet corporate cash needs. Short-term financings under existing lines of credit are available to meet working capital requirements. Long-term and intermediate financings and, when appropriate, equity issues are used to refinance short-term debt when deemed appropriate by management. Utility operations are subject to 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. 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. The requirement to inventory supplemental gas supplies and the timing of inventory acquisitions to meet the peak winter demand of the Utilities negatively impact the cash requirements of the Corporation. Supplemental gas inventories are filled in the summer period for use during the winter period. The full impact of the rate increase granted to the Utilities in October 1995 positively impacted liquidity in fiscal 1997. However, warmer than normal weather, especially during the critical heating season, December through February, resulted in decreased gas sales and a negative impact on cash flow. Cash flows were positively impacted during fiscal 1997 by the receipt of a natural gas supplier refund in the amount of $1,700,000 which was credited to the PGPA. An increase in collections through the PGPA during fiscal 1997 positively impacted cash flows. PGPA revenues increased in fiscal 1997 due to prior year under recoveries and an increase in the PGPA effective in February 1997 to collect winter price increases. However, due to lower than anticipated spring pricing the Utilities have over recovered gas costs which will be returned to customers in fiscal 1998, negatively impacting liquidity. Interest costs and the timing of Federal and state tax payments also impact liquidity. In fiscal 1997, the Corporation refinanced a line of credit that was used exclusively to make loans to its Employee Stock Ownership Plan to purchase Valley Resources common stock. As the Corporation makes contributions to the plan, the funds are used to repay the loan. A portion of the proceeds, $1,431,400, was used to repay short-term funding done through the utility operations, which favorably impacted liquidity. On August 26, 1997, Valley Resources issued 620,000 additional shares of common stock and $7,000,000 of 7.7% Debentures due 2027. The net proceeds of this offering, $13,233,000 before deduction of expenses payable by the Corporation, were used to reduce the short-term debt of utility operations, to make loans to nonutility subsidiaries to repay short-term debt and for working capital requirements. This financing favorably impacted liquidity. In addition, the Underwriters of the stock offering exercised their over-allotment option, 35 Management's Discussion and Analysis of the Results of Operations and Financial Condition (continued) 93,000 additional shares, in September 1997 which will favorably impact liquidity in fiscal 1998. Funding requirements are met through short-term borrowings under existing lines of credit. At August 31, 1997, the Corporation had $35,100,000 of available borrowings under its lines of credit. These lines are reviewed annually by the lending banks, and management believes they will be renewed or replaced. 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 cleanup costs of approximately $6,000,000 at the Mendon Road site in Attleboro, Massachusetts. The expenses relate to a site to which oxide waste was transported in the 1930's prior to the incorporation of Valley Gas. Management is of the opinion the Corporation will prevail as a result of the indemnification provisions included in the agreement entered into when Valley Gas acquired the utility assets from Blackstone. Management cannot determine the future cash flow impact, if any, of this claim and related legal fees. 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 coal waste on its property that is the site of the former Tidewater gas manufacturing 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. As noted above, management takes the position that it is indemnified by Blackstone for any such expenses. Management intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant 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 coal waste on its property that is the site of the former Hamlet Avenue gas manufacturing 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. As noted above, management takes the position that it is indemnified by Blackstone for any such expenses. Management intends to seek recovery from Blackstone and any insurance carriers deemed to be at risk during the relevant 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 1997 was $6,164,800 versus $3,669,000 in fiscal 1996 and $6,728,000 in fiscal 1995. Cash from operations was positively impacted by the deferred fuel cost account which generated funds of $1,620,300 in fiscal 1997 compared to the use of funds in the amount of $3,977,800 in fiscal 1996. Investing activities used cash in the amount of $4,374,200 in fiscal 1997, $5,058,100 in fiscal 1996 and $5,929,300 in fiscal 1995 primarily for capital expenditures. Financing activities in fiscal 1997 used cash of $1,477,400 which is the result of the Corporation's issuance of common equity and long-term debt net of a reduction in short-term debt and the payment of dividends. Financing activities generated cash of $1,441,200 in fiscal 1996 and used cash of $931,400 in fiscal 1995. 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 1997, capital expenditures were $4,293,000 versus $5,008,700 in fiscal 1996 and $5,915,900 in fiscal 1995. Fiscal 1998 capital expenditures are estimated to be $5,515,200 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. 36 Summary of Consolidated Operations
August 31 (in thousands) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Assets Utility plant - net.......................... $50,447 $49,442 $47,411 $44,207 $42,313 Leased property - net........................ 2,377 2,945 2,014 2,436 2,395 Nonutility plant - net....................... 3,712 3,568 3,547 3,519 3,334 Current assets............................... 20,205 19,307 18,409 18,358 20,727 Other assets................................. 20,956 21,427 20,957 22,549 12,026 ------- ------- ------- ------- ------- Total.................................... $97,697 $96,689 $92,338 $91,069 $80,795 ======= ======= ======= ======= ======= Capitalization and liabilities Capitalization Common equity.............................. $34,307 $27,092 $25,993 $26,036 $24,943 Long-term debt (less current maturities).................. 31,986 23,256 24,616 27,035 27,580 ------- ------- ------- ------- ------- Total.................................... 66,293 50,348 50,609 53,071 52,523 Revolving credit arrangement.................... 2,300 2,200 -0- -0- -0- Obligations under capital leases................ 1,541 2,134 1,255 1,747 1,847 Current liabilities............................. 10,612 24,005 23,932 18,530 18,982 Other liabilities............................... 16,951 18,002 16,542 17,721 7,443 ------- ------- ------- ------- ------- Total.................................... $97,697 $96,689 $92,338 $91,069 $80,795 ======= ======= ======= ======= =======
For the year ended August 31, (in thousands, except as to share and per share data) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------ Operating revenues.............................. $87,484 $80,360 $74,870 $83,553 $77,286 ------- ------- ------- ------- ------- Operating expenses: Cost of gas sold............................. 37,844 31,951 30,229 38,234 33,410 Cost of sales - nonutility................... 14,791 13,689 13,190 12,784 12,715 Other operation and maintenance.............. 19,524 19,379 18,288 17,784 17,300 Depreciation................................. 3,143 2,956 2,685 2,474 2,304 Taxes - other than Federal income............ 4,243 4,091 4,002 4,463 4,073 - Federal income....................... 1,335 1,444 732 1,313 1,400 ------- ------- ------- ------- ------- Total.................................. 80,880 73,510 69,126 77,052 71,202 ------- ------- ------- ------- ------- Operating income................................ 6,604 6,850 5,744 6,501 6,084 Other income - net.............................. 423 460 115 227 253 Total interest charges.......................... 3,368 3,312 3,304 2,902 2,610 ------- ------- ------- ------- ------- Net income...................................... $ 3,659 $ 3,998 $ 2,555 $ 3,826 $ 3,727 ======= ======= ======= ======= ======= Shares outstanding - average.................... 4,267,038 4,258,877 4,222,662 4,205,760 4,203,398 Shares outstanding - year-end................... 4,900,028 4,280,028 4,260,797 4,213,043 4,213,043 Earnings per share.............................. $0.86 $0.94 $0.61 $0.91 $0.89 Dividends declared per share.................... $0.735 $0.725 $0.71 $0.69 $0.66 Year-end book value per share................... $7.00 $6.33 $6.10 $6.18 $5.92
37 Gas Operating Statistics
For the year ended August 31 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------- Gas utility revenues (in thousands): Residential .................... $37,340 $34,678 $30,606 $37,065 $34,250 Commercial ..................... 16,267 14,891 13,212 15,633 13,964 Industrial - firm .............. 8,156 7,314 8,011 9,057 7,683 Industrial - seasonal .......... 3,605 3,335 3,507 2,945 2,762 Transportation ................. 684 382 507 372 408 Other .......................... 179 173 170 252 227 ------- ------- ------- ------- ------- Total ....................... $66,231 $60,773 $56,013 $65,324 $59,294 ======= ======= ======= ======= ======= Sales-MMcf: Residential .................... 4,393 4,612 4,078 4,517 4,439 Commercial ..................... 2,161 2,252 1,953 2,078 1,978 Industrial - firm .............. 1,440 1,391 1,338 1,299 1,185 Industrial - seasonal .......... 1,110 1,047 1,298 996 818 ------- ------- ------- ------- ------- Total ....................... 9,104 9,302 8,667 8,890 8,420 Company use and losses............. 179 198 128 176 194 Transportation..................... 5,043 3,273 4,419 3,624 4,031 ------- ------- ------- ------- ------- Total sendout ..................... 14,326 12,773 13,214 12,690 12,645 ======= ======= ======= ======= ======= Gas purchased and transported-MMcf: Liquid propane gas ............. 17 70 -0- -0- 158 Liquefied natural gas .......... 805 992 378 574 206 Natural gas stored underground . 1,373 1,348 1,156 1,075 1,494 Pipeline natural gas ........... 7,088 7,090 7,261 7,417 6,756 Transportation ................. 5,043 3,273 4,419 3,624 4,031 ------- ------- ------- ------- ------- Total ....................... 14,326 12,773 13,214 12,690 12,645 ======= ======= ======= ======= ======= Average number of customers: Residential .................... 56,048 55,676 55,186 54,715 54,541 Commercial ..................... 5,448 5,333 5,212 5,111 5,077 Industrial - firm .............. 230 237 241 249 253 Industrial - seasonal .......... 51 54 59 58 58 Transportation ................. 3 2 2 2 2 ------- ------- ------- ------- ------- Total ....................... 61,780 61,302 60,700 60,135 59,931 ======= ======= ======= ======= ======= Average revenue per residential customer ........... $ 666 $ 623 $ 555 $ 677 $ 628 Average use per residential customer-Mcf ....... 78 84 74 83 81 Maximum daily throughput-Mcf ...... 72,675 70,904 65,619 76,910 69,003 Sales degree days ................. 6,191 6,369 5,820 6,459 6,341
38 Corporate Information Annual Meeting and Proxies The Annual Meeting of Stockholders will be held in Cumberland, Rhode Island, on December 9, 1997. Notice of the meeting and form of proxy along with this report are being mailed by the management to each holder of record of common stock on October 21, 1997. Form 10-K The Corporation is required to file an annual report on Form 10-K with the Securities and Exchange Commission which includes additional information concerning the Corporation and its operations. A copy of this report will be forwarded to you upon written request to Mr. K. W. Hogan, Senior Vice President, Chief Financial Officer & Secretary, Valley Resources, Inc., P. O. Box 7900, 1595 Mendon Road, Cumberland, Rhode Island 02864-0700. Telephone: (401) 334-1188 Certified Public Accountants Grant Thornton LLP 98 North Washington Street Boston, Massachusetts 02114 Registrar & Transfer Agent The Bank of New York Shareholder Relations - Department 11E P. O. Box 11258 Church Street Station New York, NY 10286 Telephone: 1-800-524-4458 Stock Listing The common stock of Valley Resources, Inc. is listed on the American Stock Exchange under the symbol VR. Quotes of Valley Resources, Inc. common stock are listed in The Wall Street Journal and many daily newspapers among the AMEX stocks traded for the day. 39 Directors Ernest N. Agresti Retired Partner, Edwards & Angell, Providence, Rhode Island Melvin G. Alperin President, Brewster Industries, Pawtucket, Rhode Island C. Hamilton Davison President & Chief Executive Officer, Paramount Cards, Inc. Pawtucket, Rhode Island Don A. DeAngelis Vice Chairman & Chief Executive Officer, Murdock Webbing Company, Inc. Central Falls, Rhode Island Alfred P. Degen President & Chief Executive Officer, Valley Resources, Inc., Cumberland, Rhode Island James M. Dillon Retired Director of Development, The Roman Catholic Diocese, Bridgeport, Connecticut Jonathan K. Farnum Chairman & President, Wardwell Braiding Machine Company, Central Falls, Rhode Island John F. Guthrie, Jr. Vice President, The New England, Boston, Massachusetts Eleanor M. McMahon, Ed.D. Distinguished Visiting Professor, A. Alfred Taubman Center for Public Policy, Brown University, Providence, Rhode Island Officers of the Corporation Alfred P. Degen President & Chief Executive Officer Kenneth W. Hogan Senior Vice President, Chief Financial Officer & Secretary Richard G. Drolet Vice President, Information Systems & Corporate Planning Charles K. Meunier Vice President, Operations Jeffrey P. Polucha Vice President, Marketing & Development James P. Carney Assistant Vice President, Human Resources Sharon Partridge Assistant Vice President, Finance & Treasurer Alan H. Roy Assistant Vice President, Gas Supply Robert A. Young Assistant Vice President & Chief Engineer Clement W. Bethel Assistant Treasurer Patricia A. Morrison Assistant Secretary; Clerk, Morris Merchants, Inc. Other Officers David L. Hickerson President, Morris Merchants, Inc. Richard C. Hadfield Executive Vice President, Morris Merchants, Inc. Rosemary Platt Controller, Morris Merchants, Inc. Thomas A. Aubee President, Alternate Energy Corp. 40 Logo and Address Back Cover Valley Resources, Inc. & Subsidiaries 1595 Mendon Road P. O. Box 7900 Cumberland, Rhode Island 02864-0700 (401) 334-1188 http://www.valleyresources.com EX-23 4 Exhibit 23 Consent of Independent Certified Public Accountants We have issued our reports dated September 26, 1997, 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, 1997. We hereby consent to the inclusion and incorporation by reference of said reports in the Registration Statements of Valley Resources, Inc. and subsidiaries on Form S-3 (File No. 33-32827); Form S-8/S-3 (File No. 33-20770); Form S-8/S-3 (File No. 33-33574); Form S-8 (File No. 33-33575) and Form S-2 (File No. 333-30113). GRANT THORNTON LLP Boston, Massachusetts November 26, 1997 EX-27 5
UT YEAR AUG-31-1997 AUG-31-1997 PER-BOOK 50,447,115 7,680,927 20,205,007 19,364,088 0 97,697,137 4,900,028 24,034,924 8,279,306 34,307,209 0 0 27,090,000 1,900,000 4,895,986 0 150,000 0 1,541,418 835,957 26,976,567 97,697,137 87,483,977 1,334,677 79,545,189 80,879,866 6,604,111 423,476 7,027,587 3,368,274 3,659,313 0 3,659,313 3,130,413 1,957,052 6,164,833 0.86 0.86
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