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