<PAGE> 1
Filed Pursuant to Rule 424(B)(1)
Registration No. 333-30113
PROSPECTUS
VALLEY RESOURCES, INC.
620,000 SHARES OF COMMON STOCK
$7,000,000 7.70% DEBENTURES DUE 2027
------------------------
The Corporation's Common Stock ("Common Stock") is listed on the American
Stock Exchange. On August 21, 1997,
the reported last sale price of the Common Stock on the American Stock Exchange
was $11.00. See "Price Range of Common Stock and Dividends."
Interest on the Debentures is payable semiannually on the first day of March
and September, commencing March 1, 1998.
The 7.70% Debentures due 2027 (the "Debentures") will be issued in the form
of one global security (the "Global Security") registered in the name of the
nominee of The Depository Trust Company (the "Depository"), and such nominee
will be the sole holder of the Debentures. An owner of an interest in the
Debentures ("Beneficial Owner") will not be entitled to the delivery of a
definitive security except in limited circumstances. A Beneficial Owner's
interest in the Global Security will be recorded on and transfers will be
effected only through records maintained by the Depository and its participants.
See "Description of Debentures."
At the option of any deceased Beneficial Owner's representative, the
Debentures are redeemable at 100% of their principal amount, plus accrued
interest, at any time, subject to the maximum principal amounts of $25,000 per
deceased Beneficial Owner and $210,000 in the aggregate for all deceased
Beneficial Owners during the initial period ending September 1, 1998 and during
each twelve month period thereafter, within 60 days after presentment to the
Depository of a satisfactory request for redemption. Otherwise, neither the
Corporation nor a Beneficial Owner can require redemption of the Debentures
until September 1, 2002, although the Corporation may, but is not required to,
redeem interests in the Debentures tendered in excess of the above limitations.
On or after September 1, 2002, interests in the Debentures will be redeemable,
in whole or in part, at the option of the Corporation at declining premiums. The
Debentures will be unsecured obligations of the Corporation payable out of the
Corporation's general operating funds, and no mandatory sinking fund will exist
to provide for the repayment of the indebtedness represented by the Debentures.
See "Description of Debentures."
Prior to this offering, there has been no public market for the Debentures,
and no assurance can be given that one will develop.
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
==================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) CORPORATION(2)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Per Share.......................................... $11.00 $0.495 $10.505
Total Common Stock(3)............................ $6,820,000 $306,900 $6,513,100
- ------------------------------------------------------------------------------------------------------------------
Per Debenture...................................... 100% 4% 96%
Total Debentures................................. $7,000,000 $280,000 $6,720,000
- ------------------------------------------------------------------------------------------------------------------
Total Offering(3)................................ $13,820,000 $586,900 $13,233,100
==================================================================================================================
</TABLE>
(1) The Corporation has agreed to indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deduction of expenses payable by the Corporation estimated at
$115,000.
(3) The Corporation has granted to the Underwriters an option (the
"Over-Allotment Option"), exercisable for a period of 30 days after the date
of this Prospectus, to purchase up to 93,000 additional shares of Common
Stock upon the same terms and conditions set forth above, solely to cover
over-allotments, if any. If the Over-Allotment Option is exercised in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Corporation will be $14,843,000, $632,935 and $14,210,065,
respectively. See "Underwriting."
------------------------
The Common Stock and Debentures are offered, subject to prior sale, when, as
and if issued by the Corporation and accepted by the Underwriters, and subject
to approval of certain legal matters by their counsel. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the Common Stock and Debentures will
be made in St. Louis, Missouri, on or about August 26, 1997. The Debentures will
bear interest from the date of delivery of the Global Security to the
Underwriters, which is expected to be on or about August 26, 1997.
------------------------
EDWARD D. JONES & CO., L.P. FIRST ALBANY CORPORATION
The date of this Prospectus is August 21, 1997.
<PAGE> 2
[MAP OF VALLEY RESOURCES, INC. APPEARS HERE]
The above map depicts the areas serviced by the Utilities and the propane
operations. Morris Merchants' sales area encompasses New England and upstate New
York. Alternate Energy Corporation's primary sales area is New England, but
customers are also serviced throughout the United States and in South America.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the common stock and
debentures. Such transactions may include stabilizing, the purchase of common
stock and debentures to cover syndicate short positions and the imposition of
penalty bids. For a description of these activities, see "Underwriting."
2
<PAGE> 3
AVAILABLE INFORMATION
Valley Resources, Inc. (the "Corporation") has filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement on Form S-2
with respect to the securities offered hereby (herein, together with all
amendments and exhibits, referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"). This Prospectus does not contain
all of the information set forth in such Registration Statement, certain parts
of which are omitted in accordance with the Rules and Regulations of the
Commission. For further information pertaining to these securities and the
Corporation, reference is made to the Registration Statement.
The Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the
Corporation can be inspected and copied at the public reference facilities of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549, as well as at the following Regional Offices: 7 World
Trade Center, New York, NY 10048; and Citicorp Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661. Copies can be obtained by mail at
prescribed rates. Requests should be directed to the Commission's Public
Reference Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549. Such material also can be inspected at the offices of the American Stock
Exchange, 86 Trinity Place, New York, NY 10006. In addition, certain of such
materials are also available electronically by means of the Commission's home
page on the Internet at http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which have heretofore been filed by the
Corporation with the Commission pursuant to the Exchange Act, are incorporated
by reference into this Prospectus and shall be deemed to be a part hereof as of
their respective dates:
1. The annual report of the Corporation on Form 10-K for the fiscal
year ended August 31, 1996.
2. The quarterly reports of the Corporation on Form 10-Q for the
fiscal quarters ended November 30, 1996, February 28, 1997 and May 31,
1997.
Any statement contained in any document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Registration
Statement to the extent that a statement contained herein or in any subsequently
filed document which also is incorporated by reference herein modifies or
supersedes such statement. Except as so modified or superseded, such statement
shall not be deemed to constitute a part of this Registration Statement.
ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, RECEIVING A COPY OF THIS
PROSPECTUS MAY OBTAIN, WITHOUT CHARGE, UPON WRITTEN OR ORAL REQUEST, A COPY OF
ANY OF THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, EXCEPT FOR THE EXHIBITS
TO SUCH DOCUMENTS. WRITTEN REQUESTS SHOULD BE MAILED TO KENNETH W. HOGAN, SENIOR
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY, VALLEY RESOURCES, INC.,
1595 MENDON ROAD, CUMBERLAND, RHODE ISLAND 02864. TELEPHONE REQUESTS MAY BE
DIRECTED TO (401) 334-1188.
3
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus or incorporated herein by
reference and, except as otherwise noted, assumes that the Underwriters'
Over-Allotment Option will not be exercised.
THE CORPORATION
Valley Resources, Inc. is a Rhode Island holding company organized in 1979,
whose principal office is located at 1595 Mendon Road, Cumberland, Rhode Island
02864. (Telephone number 401-334-1188). The Corporation has five active
wholly-owned subsidiaries: Valley Gas Company, Bristol & Warren Gas Company,
Valley Appliance and Merchandising Company, Valley Propane, Inc. and Morris
Merchants, Inc. The Corporation also has an 80% interest in Alternate Energy
Corporation. See "Valley Resources, Inc."
THE OFFERING
COMMON STOCK:
Shares of Common Stock offered..... 620,000
Shares of Common Stock outstanding
after the offering................. 4,875,080*
Latest 52-week Range of Sales
Prices (through July 31, 1997)..... $13-$10 1/2
Indicated annual dividend rate per
share of Common Stock.............. $0.74
American Stock Exchange Symbol..... VR
Dividend Reinvestment Plan (the
"Plan")............................ Available by separate prospectus
DEBENTURES:
Debentures offered................. $7,000,000 in aggregate principal amount.
Maturity........................... September 1, 2027.
Interest........................... 7.70% payable semi-annually on each
September 1 and March 1, commencing March
1, 1998.
Beneficial Owner's Redemption
Privilege.......................... At the option of any deceased Beneficial
Owner's representative, the interests in
the Debentures are redeemable at 100% of
the principal amount, plus accrued
interest, at any time, subject to the
maximum principal amount of $25,000 per
deceased Beneficial Owner and $210,000 in
the aggregate for all deceased Beneficial
Owners, during the initial period ending
September 1, 1998 and for each twelve
month period thereafter. See "Description
of Debentures."
Corporation's Redemption
Privilege.......................... In whole or in part, beginning September
1, 2002, at a premium of 104% declining
by 1% per year for the next four years,
plus accrued interest. See "Description
of Debentures."
USE OF PROCEEDS.................... To reduce short-term debt of utility
operations, to make loans to nonutility
subsidiaries to repay short-term debt,
and for working capital requirements. See
"Use of Proceeds."
- ---------------
* Based on the number of shares of Common Stock outstanding as of June 30, 1997.
4
<PAGE> 5
SUMMARY FINANCIAL INFORMATION
The following table sets forth certain summary financial information of the
Corporation and the ratio of earnings to fixed charges as of May 31, 1997 and
1996 and for the nine months then ended and as of and for each of the five
fiscal years ended August 31, 1996. The summary financial information is
qualified by reference to the consolidated financial statements and other
information and data set forth elsewhere in the Prospectus.
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS
ENDED MAY 31, FOR THE FISCAL YEAR ENDED AUGUST 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING INCOME:
Operating revenues............ $ 73,553 $ 68,011 $ 80,360 $ 74,870 $ 83,553 $ 77,286 $ 67,144
Operating income.............. $ 6,659 $ 7,172 $ 6,850 $ 5,744 $ 6,501 $ 6,084 $ 4,899
Net income.................... $ 4,444 $ 5,075 $ 3,998 $ 2,555 $ 3,826 $ 3,727 $ 3,115
Net income applicable to
common stock............... $ 4,444 $ 5,075 $ 3,998 $ 2,555 $ 3,826 $ 3,727 $ 3,115
Earnings per average common
share outstanding.......... $ 1.04 $ 1.19 $ 0.94 $ 0.61 $ 0.91 $ 0.89 $ 0.74
Dividends per common share.... $ 0.55 $ 0.543 $ 0.725 $ 0.71 $ 0.69 $ 0.66 $ 0.63
Average Number of Common
Shares Outstanding......... 4,263 4,255 4,259 4,223 4,206 4,203 4,201
RATIO OF EARNINGS TO FIXED
CHARGES(1):
Actual........................ 3.3 3.8 2.5 1.9 2.6 2.8 2.8
Pro Forma(2).................. 3.5 2.7
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1997
------------------------------------
ACTUAL PRO FORMA(2)
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CAPITALIZATION:
Long-term debt (including current maturities)............ $23,674 44.7% $30,674 46.1%
Common equity............................................ 29,339 55.3% 35,795 53.9%
------- ----- ------- -----
Total capitalization..................................... $53,013 100.0% $66,469 100.0%
======= ===== ======= =====
Short-term debt.......................................... $12,000 $ -0-
======= =======
</TABLE>
- ---------------
(1) The ratio of earnings to fixed charges represents the number of times that
fixed charges are covered by earnings. Earnings for the calculation consist
of net income before income taxes and fixed charges. Fixed charges consist
of interest expense and amortization of debt expense.
(2) Adjusted to reflect the sale of the Common Stock and the issuance of the
Debentures offered hereby and the application of the estimated net proceeds
of $13,118,100 therefrom.
5
<PAGE> 6
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Act and Section 21E of the Exchange Act. Actual results could
differ materially from those projected in the forward-looking statements as a
result of the risk factors set forth below and elsewhere in this Prospectus. In
addition to the other information contained and incorporated by reference in
this Prospectus, the following factors should be carefully considered in
evaluating the Corporation and its business before purchasing the securities
offered hereby.
FACTORS AFFECTING THE GAS UTILITY INDUSTRY
The natural gas industry is subject to numerous regulations and
uncertainties, many of which affect the utility operations of the Corporation in
varying degrees. Industry issues which have affected or may affect the
Corporation from time to time include the following: fluctuations in demand
attributable to weather; new business and operational requirements for gas
supply resulting from changes in federal regulation of interstate pipelines;
competition with other gas sources for commercial and industrial customers;
competition with alternative sources of energy; uncertainty in achieving an
adequate return on invested capital due to inflation; difficulty in obtaining
rate increases from regulatory authorities in adequate amounts and on a timely
basis; attrition in earnings produced by the combination of increasing expenses
and the costs of new capital which may exceed allowed rates of return; the
availability of pipeline transportation capacity necessary to secure supplies of
gas; volatility in the price of natural gas; increases in construction and
operating costs; environmental regulations; and uncertainty in the projected
rate of growth of customers' energy requirements.
Sales of natural gas for heating are sensitive to fluctuations in
temperatures. Rates in the industry are set at levels assuming normal
temperatures. In an abnormally warm year, revenues from sales of gas to heating
customers will be adversely affected. The service areas of the Corporation's
utilities have experienced warmer than normal weather in two of the last five
years.
FACTORS AFFECTING THE CORPORATION'S NON-UTILITY OPERATIONS
The Corporation's nonutility operations are subject to market competition
and the ability to meet and maintain competitive pricing. Morris Merchants has
exclusive rights to represent certain manufacturers in New England and upstate
New York; however, there is no assurance that these rights will continue.
ABSENCE OF PUBLIC MARKET FOR DEBENTURES
There is no public trading market for the Debentures and the Corporation
does not intend to apply for listing of the Debentures on any national
securities exchange or for quotation of the Debentures on any automated dealer
quotation system. The Corporation has been advised by the Underwriters that they
presently intend to make a market in the Debentures after the consummation of
the offering contemplated hereby, although they are under no obligation to do so
and may discontinue any market-making activities at any time without any notice.
No assurance can be given as to the liquidity of the trading market for the
Debentures or that an active public market for the Debentures will develop. If
an active public trading market for the Debentures does not develop, the market
price and liquidity of the Debentures may be adversely affected. If the
Debentures are traded, they may trade at a discount from their initial offering
price, depending on prevailing interest rates, the market for similar
securities, the performance of the Corporation and certain other factors.
RELIANCE OF CORPORATION ON DIVIDENDS AND OTHER PAYMENTS FROM SUBSIDIARIES;
DIVIDEND RESTRICTIONS IMPOSED ON SUBSIDIARIES
The Corporation is a holding company, the principal assets of which are
shares of the capital stock of its subsidiaries. As a holding company without
independent means of generating revenues, the Corporation depends on dividends
and other permitted payments from its subsidiaries to fund its obligations and
meet its cash needs, including its payment obligations under the Debentures and
the payment of dividends. Valley Gas Company ("Valley Gas") has outstanding
indebtedness which may increase and any of the subsidiaries could
6
<PAGE> 7
issue preferred stock in the future which would have a preference over its
common stock as to dividends. Valley Gas is not in default in payment of
interest or principal on its outstanding indebtedness. Under the terms of its
outstanding indebtedness, Valley Gas is subject to restrictions on the payment
of dividends on its common stock. Under the most restrictive of these
provisions, approximately $2,501,400 of Valley Gas' retained earnings at May 31,
1997 was available for common stock dividends. There are no restrictions as to
the payment of dividends by the other subsidiary companies.
REDUCED PROBABILITY OF CHANGE OF CONTROL OR ACQUISITION OF CORPORATION DUE TO
EXISTENCE OF ANTI-TAKEOVER PROVISIONS
The Corporation's Articles of Incorporation and By-Laws contain certain
provisions that reduce the probability of any change of control or acquisition
of the Corporation. These provisions include, but are not limited to, the
division of the Board of Directors into three classes with one class being
elected each year for a term of three years, the ability of the Board of
Directors to issue preferred stock in one or more series with such rights,
obligations and preferences as the Board of Directors may determine without any
further vote or action by the stockholders, and certain super-majority voting
requirements for certain business combinations or for certain amendments of the
Articles of Incorporation and By-laws. In addition, each share of Common Stock
includes one preferred stock purchase Right which entitles the holder to
purchase one one-hundredth of a share of Cumulative Participating Junior
Preferred Stock, par value $100, upon the occurrence of certain events in excess
of a stipulated percentage of ownership. See "Description of Common Stock."
VALLEY RESOURCES, INC.
Valley Resources, Inc. (the "Corporation"), a Rhode Island corporation
organized in 1979, is a holding company whose principal subsidiary operations
are natural gas distribution. The Corporation's principal executive offices are
located at 1595 Mendon Road, Cumberland, Rhode Island 02864, and its telephone
number is 401-334-1188. As a holding company, the Corporation's principal asset
is the common stock of its subsidiaries.
The Corporation has five active wholly-owned subsidiaries: Valley Gas and
Bristol & Warren Gas Company ("Bristol & Warren") (Valley Gas and Bristol &
Warren collectively, the "Utilities") -- regulated natural gas distribution
companies which accounted for 76% and 80% of the Corporation's revenues and net
income, respectively, in fiscal 1996; Valley Appliance and Merchandising Company
("VAMCO") -- a merchandising appliance rental, sales and service company; Valley
Propane, Inc. ("Valley Propane") -- a wholesale and retail propane company;
Morris Merchants, Inc., d/b/a the Walter F. Morris Company ("Morris
Merchants") -- a manufacturer's representative of franchised lines in the
plumbing and heating contractor supply and other energy related businesses. The
Corporation also has an 80% interest in, and the obligation to acquire the
remaining 20% interest of, Alternate Energy Corporation ("AEC"), which sells,
installs and designs natural gas conversion systems and facilities.
7
<PAGE> 8
USE OF PROCEEDS
The net proceeds to the Corporation from the sale of the securities offered
hereby are expected to be approximately $13,118,100, after deducting the
underwriting commissions and other expenses of the offering. The Corporation
intends to contribute $6,422,000 of the net proceeds of the offering described
herein to the Utilities as a capital contribution, subject to the approval of
the Rhode Island Division of Public Utilities, and the remainder will be used to
make loans to its subsidiaries to repay short-term debt and for working capital
requirements. The Utilities intend to use all of the capital contribution to
retire a portion of their outstanding short-term debt, which was incurred
principally for construction purposes. Utility construction expenditures for
fiscal 1996 aggregated approximately $4,396,000 and are estimated at $4,233,400
for the year ending August 31, 1997. Additions to utility plant consist
primarily of the construction of new mains and services and the installation of
new meters in the service area. As of June 30, 1997, short-term bank notes
aggregated $13,100,000. The interest rate on these borrowings ranged from 5.60%
to 5.71% with maturities not exceeding 31 days.
Pending such applications, the net proceeds may be held in temporary cash
investments.
CAPITALIZATION
The following table sets forth the capitalization of the Corporation as of
May 31, 1997 and the pro forma capitalization which reflects the issuance of the
Common Stock and Debentures offered hereby and the application of the estimated
net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Long-Term Debt:
8% First Mortgage Bonds, due 2022................................. $ 20,130 $ 20,130
Note Payable...................................................... 1,405 1,405
9% Note Payable, due 1999......................................... 2,139 2,139
Debentures Offered Hereby......................................... -- 7,000
-------- --------
Total..................................................... 23,674 30,674
Common Equity:
Common Stock...................................................... 4,280 4,900
Paid in Capital................................................... 18,159 23,995
Retained Earnings................................................. 9,851 9,851
Less Accounts Receivable -- Employee Stock Ownership Plan......... (2,951) (2,951)
-------- --------
Total..................................................... 29,339 35,795
-------- --------
Total Capitalization................................................ $ 53,013 $ 66,469
======== ========
Short-Term Debt..................................................... $ 12,000 $ -0-
======== ========
</TABLE>
- ---------------
(1) As adjusted for the estimated net proceeds from the sale of 620,000 shares
of Common Stock being offered hereby and the issuance of the Debentures
offered hereby and the application of the estimated net proceeds of
$13,118,100 therefrom.
8
<PAGE> 9
SELECTED FINANCIAL DATA
The following tables set forth selected financial data of the Corporation.
The following data should be read in conjunction with the consolidated financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
----------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Utility plant -- net............... $ 49,987 $ 48,889 $ 49,442 $ 47,411 $ 44,207 $ 42,313 $ 38,838
Leased property -- net............. 2,505 3,138 2,945 2,014 2,436 2,395 3,343
Nonutility plant -- net............ 3,677 3,565 3,568 3,547 3,519 3,334 2,180
Current assets..................... 20,876 18,736 19,307 18,409 18,358 20,727 20,908
Other assets....................... 22,215 21,215 21,427 20,957 22,549 12,026 10,594
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total........................ $ 99,260 $ 95,543 $ 96,689 $ 92,338 $ 91,069 $ 80,795 $ 75,863
========== ========== ========== ========== ========== ========== ==========
Capitalization and liabilities
Capitalization
Common equity.................... $ 29,339 $ 28,892 $ 27,092 $ 25,993 $ 26,036 $ 24,943 $ 24,018
Long-term debt (less current 23,174 23,291 23,256 24,616 27,035 27,580 15,795
maturities)....................
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total........................ 52,513 52,183 50,348 50,609 53,071 52,523 39,813
---------- ---------- ---------- ---------- ---------- ---------- ----------
Revolving credit arrangement....... 2,300 2,200 2,200 -0- -0- -0- -0-
Obligations under capital leases... 1,636 2,298 2,134 1,255 1,747 1,847 1,790
Current liabilities................ 24,643 21,788 24,005 23,932 18,530 18,982 26,922
Other liabilities.................. 18,168 17,074 18,002 16,542 17,721 7,443 7,338
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total........................ $ 99,260 $ 95,543 $ 96,689 $ 92,338 $ 91,069 $ 80,795 $ 75,863
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED MAY 31, FOR THE YEAR ENDED AUGUST 31,
----------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues................... $ 73,553 $ 68,011 $ 80,360 $ 74,870 $ 83,553 $ 77,286 $ 67,144
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Cost of gas sold................... 33,146 27,950 31,951 30,229 38,234 33,410 28,963
Cost of sales -- nonutility........ 11,134 10,372 13,689 13,190 12,784 12,715 11,893
Other operation and maintenance.... 14,912 14,702 19,379 18,288 17,784 17,300 15,107
Depreciation....................... 2,333 2,212 2,956 2,685 2,474 2,304 1,770
Taxes -- other than Federal 3,400 3,273 4,091 4,002 4,463 4,073 3,557
income...........................
-Federal income.............. 1,969 2,330 1,444 732 1,313 1,400 955
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total........................ 66,894 60,839 73,510 69,126 77,052 71,202 62,245
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income..................... 6,659 7,172 6,850 5,744 6,501 6,084 4,899
Other income -- net of tax........... 268 332 460 115 227 253 267
Total interest charges............... 2,483 2,429 3,312 3,304 2,902 2,610 2,051
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................... $ 4,444 $ 5,075 $ 3,998 $ 2,555 $ 3,826 $ 3,727 $ 3,115
========== ========== ========== ========== ========== ========== ==========
Shares outstanding -- average........ 4,262,679 4,255,017 4,258,877 4,222,662 4,205,760 4,203,398 4,201,105
Shares outstanding -- period-end..... 4,280,028 4,260,797 4,280,028 4,260,797 4,213,043 4,213,043 4,213,043
Earnings per share................... $ 1.04 $ 1.19 $ 0.94 $ 0.61 $ 0.91 $ 0.89 $ 0.74
Dividends declared per share......... $ 0.55 $ .543 $ 0.725 $ 0.71 $ 0.69 $ 0.66 $ 0.63
</TABLE>
9
<PAGE> 10
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 revenues 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 sources of firm
utility revenues. Firm customers can be residential, commercial or industrial.
The revenues from firm sales customers are determined by regulated tariff
schedules and through Rhode Island Public Utilities Commission ("RIPUC")
approved commodity charge factors. These factors include the Purchased Gas Price
Adjustment ("PGPA"), which requires the Utilities to collect from or return to
customers changes in gas costs from those included in the regulated tariffs, and
provides for an adjustment to collect post-retirement benefits.
Seasonal and dual-fuel sales (see "Business") are made when excess gas
supplies are available and gas prices are competitive with alternative fuel
markets. These sales are generally made in non-winter months and can be
interrupted by the Utilities at any time. Margins from seasonal sales and
margins above $1 per thousand cubic feet ("Mcf") of gas sold to dual fuel
customers are returned to firm sales customers through a reduction in the PGPA.
Prior to November 1995, Bristol & Warren retained all margins on seasonal sales.
The Utilities also provide transportation through their distribution systems for
customer-purchased natural gas received by the Utilities on an off-peak basis.
Morris Merchants and VAMCO generate nonutility revenues through the
wholesale and retail sales of plumbing and heating supplies and appliances.
Additionally, VAMCO generates revenues from appliance rentals and a service
contract repair program.
All of the Corporation's propane operations are conducted through Valley
Propane, which sells propane at retail and provides service to propane customers
in Rhode Island and southeastern Massachusetts.
AEC, acquired in May 1996, generates revenues through the conversion of
vehicles and stationary engines to natural gas and through the design and
installation of natural gas fueling facilities. The Corporation owns an 80%
interest in AEC and has the obligation to acquire the remaining 20% of the
company currently held by the management of AEC. The operations of AEC did not
materially impact the operations of the Corporation in fiscal 1996 or for the
first nine months of fiscal 1997.
SEASONALITY
The bulk of firm distribution and sales are made during the months of
November through March. As a result, the highest levels of earnings and cash
flow are generated in the quarters ending in February and May. The bulk of the
capital expenditure programs are undertaken during the months of May through
October, causing cash flow to be at its lowest during the quarters ending in
November and August.
Short-term borrowing requirements vary according to the seasonal nature of
sales and expense activities of the Utilities, creating greater need for
short-term borrowings during periods when internally generated funds are not
sufficient to cover all capital and operating requirements, particularly in the
summer and fall. Short-term borrowings utilized for construction expenditures
generally are replaced by permanent financing when it
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<PAGE> 11
becomes economical and practical to do so and where appropriate to maintain an
acceptable relationship between borrowed and equity resources.
RESULTS OF OPERATIONS
For the nine months ended May 31, 1997 versus 1996
For the nine months ended May 31, 1997, utility gas revenues were
$57,412,200, an increase of 8.1% over the same period in fiscal 1996. A decrease
in base revenues generated from firm customers was offset by increased
collections through the PGPA and seasonal and transportation revenues.
Base revenues generated from the regulated tariffs declined 3.5% due to
decreased natural gas sales resulting from warmer than normal weather. Revenues
generated through the PGPA increased $5,543,700 over the prior year's nine month
period due to an increase in the PGPA rate charged to firm customers.
Seasonal revenues during the nine month period were 18.8% higher than the
same period in fiscal 1996. The volume of seasonal gas sales increased 13.4% and
the remainder of the increase was attributable to higher gas prices. Sales to
seasonal customers are dependent upon the availability of natural gas and the
price of alternate fuels. Margins earned from seasonal sales are returned to
firm customers through the PGPA and do not impact operating income.
Valley Gas transports natural gas owned by customers if delivered to Valley
Gas's gate station. Transportation revenues for the nine month period increased
$180,100 over the same period in fiscal 1996 due to increased volumes
transported.
Gas sold to firm customers decreased 4.3% to 7,110,200 Mcf for the nine
months ended May 31, 1997. The decrease in gas sales is the result of warmer
weather which was partially offset by an increase in the number of customers.
Weather, as measured by degree days, was 4.6% warmer than the prior year nine
month period. At May 31, 1997 there were 62,181 utility customers versus 61,979
at May 31, 1996.
Nonutility revenues for the nine months ended May 31, 1997 totaled
$16,141,400, an increase of 8.2% over fiscal 1996. The increase in nonutility
revenues was the result of increases in retail and wholesale merchandise sales,
revenues generated from propane operations and sales made by AEC. Conversions
from electric heating, sales in the commercial markets and increases in the
wholesale operation contributed to the increased revenues. Propane revenues for
the nine month period increased over the prior year period, despite
weather-related decreases in gallons sold, due to price increases in the cost of
propane being passed along to customers.
Operating expenses for the 1997 nine month period were impacted by
increases in the cost of gas sold and nonutility cost of sales. The cost of gas
sold increased when compared to the same period of 1996 as a result of both the
increased purchase price of natural gas and the increased gas cost related to
the PGPA revenue reconciliation. The average cost of gas distributed to firm
customers was $3.98 per Mcf for the nine months ended May 31, 1997 compared to
$3.61 per Mcf in the prior year period. Nonutility cost of sales increased 7.3%
over the prior year nine month period which is directly attributable to the
increase in nonutility revenues.
The decrease in other income of $63,600 for the nine month period was the
result of a decline in off-system sales. The decrease in other income was offset
by increased interest income and the recognition of income on other investments.
Interest expense increased 2.3% for the nine month period over the
comparable period in fiscal 1996. Interest on increased short-term borrowings
was slightly offset by a reduction in interest accrued on deferred fuel costs
and lower borrowing rates.
Fiscal 1996 versus Fiscal 1995
Utility gas revenues in fiscal 1996 totaled $60,773,500, an increase of
8.5% over fiscal 1995. Revenues from sales to firm customers increased 9.8% over
the prior fiscal year as a result of increased gas sales and rate
11
<PAGE> 12
relief. Offsetting the increase in revenues was a decrease of $2,654,800 in gas
costs recovered through the PGPA. The PGPA does not impact operating income as
it effectuates a dollar for dollar recovery of gas costs.
In fiscal 1996, gas sold to firm customers increased 12.0% over fiscal 1995
and totaled 8,255,500 Mcf. The primary contributor to the increase in gas sales
was the weather which was 17.0% colder than the prior year during the critical
heating period, December through February.
In October 1995, Valley Gas and Bristol & Warren were authorized by the
RIPUC to consolidate their rate structures and to increase their tariffs to
collect an additional $1,100,000 in revenues. The new tariffs collect an
increased share of revenues through the customer charge, thus reducing
sensitivity of utility revenues to weather. Approximately $825,000 of this
revenue increase is reflected in fiscal 1996 revenues.
Sales to seasonal customers in fiscal 1996 decreased 21.2% as compared to
fiscal 1995. Seasonal sales are dependent on the availability of gas and the
price of competing fuels. The colder winter period resulted in less gas
available for sales to this market. Since profits on seasonal sales are returned
to firm sales customers through the PGPA, seasonal sales have no impact on
operating income.
Transportation revenues declined by $124,800, or 24.6%, in fiscal 1996 as
compared to fiscal 1995. The reduction in transportation revenues was the result
of a decrease in gas delivered to Valley Gas on behalf of customers.
Nonutility revenues totaled $19,586,600, an increase of 3.9% over fiscal
1995. Revenues from retail merchandising operations, inclusive of rental and
service program revenues, increased 12.6% over the prior fiscal year. The focus
on the commercial and industrial markets led to an increase in retail
merchandising revenues and related gross profit, even though a lower profit
margin percentage is earned on these sales. The service contract and rental
program revenues increased due to new customers and price increases. The
wholesale operations have faced gross profit margin declines because of pricing
competition among manufacturers and consolidation of wholesale outlets within
their market. Wholesale merchandise revenues declined slightly in fiscal 1996.
The revenues generated from the propane company are included in nonutility
revenues. Propane revenues increased 17.5% in fiscal 1996 over the prior fiscal
year. The increase was due to a 12.3% increase in gallons of propane sold and an
increase in the retail price of propane. Colder weather and sales to the
construction heating market accounted for the increase in sales.
Cost of gas sold includes the cost of natural gas, underground storage gas,
liquefied natural gas and liquid propane gas to serve utility sales customers.
The average cost per Mcf of natural gas distributed for utility operations in
fiscal 1996 and fiscal 1995 was $3.84 and $3.21, respectively. Cold weather in
November and December required the use of storage gas before the peak winter
period which caused increased demands for natural gas supply during the winter
period and resulted in increased natural gas prices. Changes in gas costs of the
utility operations are passed through to firm sales customers in the
calculations of the PGPA. Therefore, increases and decreases in gas costs do not
impact the profit margins of the utility operations.
The cost of sales for nonutility operations in fiscal 1996 increased 3.8%
over the prior fiscal year. The increase was the result of increased retail
sales and increased gallons sold of propane. The average cost of propane
distributed was $0.48 per gallon in fiscal 1996 versus $0.44 per gallon in
fiscal 1995.
Other operation expenses increased 5.7% in fiscal 1996 over fiscal 1995 due
to wages and increased costs associated with the operation of the peak shaving
facilities. An increase in uncollectible expenses also contributed to the
increase.
Maintenance expense in fiscal 1996 was $1,672,000, an increase of 8.9% over
the prior year. Maintenance expense increased due to costs related to the record
snowfall experienced during the winter period and computer maintenance.
Operation and maintenance expenses are impacted by general inflation and wages.
Taxes -- other than Federal income increased 2.2% to $4,090,800 in fiscal
1996. Gross receipts taxes on increased utility revenues were responsible for
the increase. The effective Federal income tax rates for the years ended August
31, 1996 and 1995 were 28% and 24%, respectively.
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<PAGE> 13
Other income -- net of tax totaled $459,900 in fiscal 1996 and $115,000 in
fiscal 1995. The increase in fiscal 1996 was a result of off-system natural gas
sales and investment income. Off-system natural gas sales are natural gas sales
to customers outside the franchise area at market clearing prices. The
opportunities for off-system sales are dependent upon market demand and the
ability of other gas suppliers to meet their delivery requirements. Management
believes it is unlikely that conditions will exist for this level of off-system
sales in subsequent years.
Fiscal 1996 interest expense was $3,311,700, an increase of 0.2% over the
prior fiscal year. Interest expense was impacted by an increase in short-term
debt only partially offset by a reduction in the deferred fuel cost liability
and the related interest accrual.
Fiscal 1995 versus Fiscal 1994
Fiscal 1995 utility gas revenues totaled $56,012,900, a 14.3% decrease from
fiscal 1994. Firm revenues in fiscal 1995 decreased 16.1% from fiscal 1994 due
to a $6,457,700 reduction in gas costs recovered through the PGPA and decreased
gas sales.
Gas sales to firm customers were 7,368,700 Mcf in fiscal 1995, a decrease
of 6.7% from the prior year. The primary contributor to the sales decrease was
warmer weather. Weather, as measured by degree days, in fiscal 1995 was 8.2%
warmer than normal and 9.9% warmer than fiscal 1994. Weather during the critical
heating period of December through February was 15.5% warmer than the prior
year. In fiscal 1995, sales to seasonal customers increased 23.3% over the prior
fiscal year. The warm weather made gas supplies available at competitive prices
which was the primary reason for the sales increase. The profits from these
sales for Valley Gas are returned to firm customers through the PGPA. Bristol &
Warren's margin accrued to the benefit of stockholders in fiscal 1995 and 1994.
Sales to dual fuel customers in fiscal 1995 increased by 24,600 Mcf over the
prior fiscal year. Revenues from the transportation of customer-owned natural
gas increased $134,800 in fiscal 1995.
Nonutility revenues in fiscal 1995 were $18,857,200, an increase of 3.4%
over fiscal 1994. VAMCO focused its retail merchandising attention on the
commercial and industrial equipment market in response to the effects of the
sluggish economy on the residential market. This led to increased retail sales
of equipment to this market and an improvement in the gross margin of the retail
operations. The rental and service contract programs continued to impact
earnings positively. Wholesale operations experienced slight improvements in
sales levels and gross margins as they continued their focus on higher margin
lines. However, profitability decreased in the wholesale business due to
expenses incurred from changes in management and the implementation of a
computerized reporting system to improve communications between the customers
and the sales force.
As stated earlier, propane operations also are included in nonutility
revenues. Propane revenues in fiscal 1995 decreased by 4.8% as a result of a
10.0% decrease in gallons sold, offset by increases in the wholesale price of
propane. The warm weather was the major contributor to the decreased propane
volume sold. Price competition continued to be a critical factor in the ability
to expand these operations.
The Utilities distribute natural gas, underground storage gas, liquefied
natural gas and a limited amount of liquid propane gas to meet customer demands;
the cost of these fuels is included in the cost of gas sold. The average cost
per Mcf of gas distributed in fiscal 1995 was $3.21 versus $4.01 in fiscal 1994.
The decrease in the cost per Mcf was the result of lower demand for natural gas
as a result of the warmer weather. All changes in gas costs are passed through
to firm customers through the workings of the PGPA.
Cost of sales -- nonutility includes the cost of sales for the retail
merchandising operation, the wholesale merchandising operation and the propane
operation. Cost of merchandising goods sold increased 3.4% in fiscal 1995 over
fiscal 1994 which was directly attributable to the increase in merchandise
sales. The average cost of propane for the retail propane operations, included
in cost of sales, was $0.44 per gallon in fiscal 1995 versus $0.40 per gallon in
fiscal 1994.
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<PAGE> 14
Operations expenses in fiscal 1995 increased 2.7% over fiscal 1994. Planned
wage and benefit increases and an increase in uncollectible expenses accounted
for a majority of this 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% over
fiscal 1994. Expenses related to the distribution system were responsible for
the increase. Operation and maintenance expenses were impacted by wages and
general inflation.
Taxes -- other than Federal income were $4,002,100 in fiscal 1995, a
decrease of $461,300 from the prior year. A reduction in gross receipts taxes as
a result of decreased revenues and the lowering of the gross receipts tax rate
for manufacturing customers were responsible for the decrease. The effective
Federal income tax rates for the years ended August 31, 1995 and 1994 were 24%
and 27%, respectively.
Fiscal 1995 other income -- net of tax decreased $112,400 from the prior
year. A decrease in funds available for overnight investments and interest
earned on those investments were responsible for the decrease in other income.
Interest expense in fiscal 1995 totaled $3,304,600, an increase of 13.8%
over fiscal 1994. Increased short-term borrowing rates were responsible for the
increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The sale of natural gas, propane and merchandise and revenues collected
through rental and service contract programs generate cash flows to meet the
cash requirements of the Corporation. Operations, external financings and
investments are also used to meet corporate cash needs. Short-term financings
under existing lines of credit are available to meet daily cash needs. Long-term
and intermediate financings, and when appropriate, equity issues are used to
refinance short-term debt when deemed appropriate by management.
The cash position of the Corporation is impacted by the requirement to
inventory supplemental gas supplies and the timing of inventory acquisitions to
meet the peak winter demand of the Utilities. Supplemental gas inventories are
filled in the summer period for use during the winter period which has a
negative impact on cash flows.
Effective November 1995, the Utilities, as authorized by the RIPUC,
consolidated their rate structures and increased their rate tariffs to collect
an additional $1,100,000 in revenues. Approximately $825,000 of this rate
increase positively impacted liquidity in fiscal 1996. Colder weather and its
positive influence on revenues similarly impacted cash flow.
During fiscal 1996, actual gas costs were greater than expected, which
resulted in the Utilities' under-recovery of gas costs through the PGPA; this
caused the liability to customers at the end of fiscal 1995 to become a
receivable from customers in fiscal 1996, negatively impacting liquidity. This
under-recovery is being collected from customers through an increase in the PGPA
in fiscal 1997, which has had a positive impact on fiscal 1997 cash flows.
Interest costs and the timing of Federal and state tax payments also impact
liquidity.
Cash flows were positively impacted during the third quarter of fiscal 1997
by the receipt of a natural gas supplier refund in the amount of $1,700,000
which was credited to the PGPA. However, sales during the quarter were less than
anticipated due to warmer than normal weather which negatively impacted
liquidity.
Valley Gas entered into a revolving credit arrangement to fund the
redemption of the Valley Gas 8% First Mortgage Bonds as they are redeemed by the
current holders. During fiscal 1996, $2,200,000 of funds were borrowed under
this arrangement, at a financing rate of less than 8%, which favorably impacted
liquidity.
Funding requirements are met through short-term borrowings under existing
lines of credit. At May 31, 1997, the Corporation had $17,000,000 of available
borrowings under its lines of credit. These lines are reviewed annually by the
lending banks, and management believes they will be renewed or replaced.
Management believes the available financings are sufficient to meet cash
requirements for the foreseeable future.
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<PAGE> 15
A lawsuit has been filed against Valley Gas and other parties by Blackstone
Valley Electric Company ("Blackstone") seeking contribution towards a judgment
against Blackstone's share of total clean-up costs of approximately $6,000,000
at the Mendon Road site in Attleboro, Massachusetts. The expenses relate to a
site to which oxide waste was transported in the 1930's prior to the
incorporation of Valley Gas. Management is of the opinion the Corporation will
prevail as a result of the indemnification provisions included in the agreement
entered into when Valley Gas acquired the utility assets from Blackstone.
Management cannot determine the future cash flow impact, if any, of this claim
and related legal fees. In a recent decision of the U.S. Court of Appeals for
the First Circuit, Blackstone's appeal of the judgment against it was sustained
and the case was remanded for further proceedings, including a referral of the
case to the EPA to determine if the substance in question (FFC) is hazardous.
Valley Gas received a letter of responsibility from the Rhode Island
Department of Environmental Management ("DEM") with respect to releases from
manufactured coal waste on its property that is the site of the former Tidewater
plant in Pawtucket, Rhode Island. Valley Gas and Blackstone have submitted a
site investigation report to DEM relating to certain releases on the site.
Management cannot determine the future cash flow impact, if any, of this claim
and related expenses. Management takes the position that it is indemnified by
Blackstone for any such expenses. Valley Gas intends to seek recovery from
Blackstone and any insurance carriers deemed to be at risk during the relevant
period. Remediation of sites such as the former Tidewater plant is governed by a
regulatory framework which now permits more flexibility in methods of
remediation and in property reuse.
Valley Gas received a letter of responsibility from DEM with respect to
releases from manufactured coal waste on its property that is the site of the
former Hamlet Avenue plant in Woonsocket, Rhode Island. Valley Gas and
Blackstone have submitted a site investigation work plan to address certain
releases at the site. Management cannot determine the future cash flow impact,
if any, of this claim and related expenses. Management takes the position that
it is indemnified by Blackstone for any such expenses. Valley Gas intends to
seek recovery from Blackstone and any insurance carriers deemed to be at risk
during the relevant period. Remediation of this site is also governed by a
regulatory framework that permits more flexibility in methods of remediation and
in property reuse.
The Corporation's net cash from operating activities in fiscal 1996 was
$3,669,000 versus $6,728,000 in fiscal 1995 and $8,342,900 in fiscal 1994. Cash
from operations was impacted by the deferred fuel cost account which used funds
of $3,977,800 in fiscal 1996 and provided funds in fiscal 1995 and 1994. Cash
from investing activities in the amount of $5,058,100 in fiscal 1996, $5,929,300
in fiscal 1995 and $4,604,700 in fiscal 1994 was used primarily for capital
expenditures. Financing activities in fiscal 1996 provided cash of $1,441,200
primarily from the issuance of the revolving credit arrangement and the issuance
of short-term debt offset by the use of funds for the payment of dividends and
the redemption of a portion of the 8% First Mortgage Bonds. Financing activities
used cash of $931,400 in fiscal 1995 and $4,090,800 in fiscal 1994.
Cash flows from operating activities were positively impacted for the nine
months ended May 31, 1997 as a result of increased collections through the PGPA
and the receipt of a natural gas supplier refund. Cash flows for the nine months
ended May 31, 1996 were positively impacted by increased sales and decreased
cost of natural gas. Cash from investing activities was $3,054,500 for the nine
months ended May 31, 1997 compared to $3,763,260 in the prior year nine-month
period. Financing activities used cash of $5,270,400 for the nine months ended
May 31, 1997 primarily as a result of short-term borrowings and the payment of
dividends. This compares to cash used of $3,400,600 in the prior nine month
period as a result of decreased short-term borrowings and dividend payments
offset slightly by borrowings under a revolving credit arrangement to fund
redemptions of the 8% First Mortgage Bonds.
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, of which $2,987,500 was incurred in the
Corporation's first three quarters; such expenditures have been 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.
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<PAGE> 16
BUSINESS
The Corporation is a holding company organized in 1979 and incorporated in
the State of Rhode Island. The Corporation has five wholly-owned active
subsidiaries: Valley Gas and Bristol & Warren -- regulated natural gas
distribution companies; VAMCO -- a merchandising and appliance rental company;
Valley Propane -- a wholesale and retail propane company; and Morris
Merchants -- a wholesale distributor of franchised lines in plumbing and heating
contractor supply and other energy-related business. The Corporation also has an
80% interest in AEC which sells, installs and designs natural gas conversion
systems and facilities.
Bristol & Warren, acquired by the Corporation on April 1, 1992, was
incorporated in the State of Rhode Island in 1953 to distribute natural gas to
customers in Bristol and Warren, Rhode Island.
In May 1996, the Corporation acquired its 80% interest in AEC. AEC was
incorporated in the State of Rhode Island in April 1992 to design and install
equipment for the conversion of vehicular and stationary engines to natural gas.
The Corporation has the obligation to acquire the remaining 20% interest in AEC
over the next five fiscal years. Such 20% interest is currently held by AEC
management.
Effective September 1995, all propane sales and service, some of which had
formerly been conducted by the Corporation's now inactive subsidiary, The New
England Gas Company, were combined into a single operation under the name Valley
Propane.
STRATEGY
The Corporation considers itself an integrated diversified energy company.
It plans to continue its diversification efforts, primarily through internal
growth of existing subsidiaries. Existing businesses continue to focus on the
expansion of their activities to acquire additional market share. If attractive
opportunities become available, diversification efforts will include the
acquisition of new businesses.
UTILITY OPERATIONS
Gas Sales and Transportation
The Corporation's utility operations are conducted through the Utilities,
which had an average of 61,653 customers during the twelve months ended May 31,
1997, of which approximately 91% were residential and 9% were commercial and
industrial. For the nine months ended May 31, 1997, 50% of gas sales were to
residential customers and 50% were to commercial and industrial customers.
The Utilities provide natural gas service to residential, commercial and
industrial customers and transportation services to industrial customers. Valley
Gas' service territory is approximately 92 square miles located in the
Blackstone Valley region in northeastern Rhode Island with a population of
approximately 250,000. Bristol & Warren's service territory is approximately 15
square miles in eastern Rhode Island with a population of approximately 35,000.
Effective November 1995, the Utilities operate under a single rate structure.
The following table shows the distribution of gas sold during the years
since fiscal 1992 in millions of cubic feet ("MMcf"):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED AUGUST 31,(1)
----------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
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
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) The operations of Bristol & Warren are included since April 1992.
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<PAGE> 17
Firm customers of the Utilities use gas for cooking, heating, water
heating, drying and commercial/ industrial processing. Certain industrial
customers use additional gas in the summer months, when it is available at lower
prices. These customers are subject to having their service interrupted at the
discretion of the Utilities with very little notice. This use is classified as
seasonal use. As discussed further below, the margin on seasonal use is passed
through the PGPA to lower the cost of gas to all categories of firm customers.
Bristol & Warren retained the margin on seasonal sales prior to November 1995.
The primary source of utility revenues is firm use customers under tariffs
which are designed to recover a base cost of gas, administrative and operating
expenses and provide sufficient return to cover interest and profit. The
Utilities also service dual fuel, interruptible and transportation customers
under rates approved by the RIPUC. Additionally, Valley Gas services
cogeneration customers under separate contract rates that were individually
approved by the RIPUC.
The Utilities' tariffs include a PGPA which allows an adjustment of rates
charged to customers in order to recover all changes in gas costs from
stipulated base gas costs. The PGPA provides for an annual reconciliation of
total gas costs billed with the actual cost of gas incurred. Any excess or
deficiency in amounts collected as compared to costs incurred is deferred and
either reduces the PGPA or is billed to customers over subsequent periods. The
PGPA does not impact operating income as it effectuates a dollar for dollar
recovery of gas costs. All margins from interruptible customers are returned to
firm customers through the workings of the PGPA.
Utility revenues include a surcharge on firm gas consumption to collect a
portion of the costs to fund postretirement medical and life insurance benefits
above the pay-as-you-go costs included in base tariffs. The surcharge was
authorized by the RIPUC in a generic rate proceeding and is being phased in over
a ten-year period which commenced September 1, 1993. Effective November 1995,
the current year funding of postretirement medical and life insurance benefits
is included in base tariffs. In September 1996, the RIPUC authorized the funding
shortages from the first two years of the phase-in to be recovered through a
surcharge over the next three fiscal years.
The prices of alternative sources of energy impact the interruptible and
dual fuel markets. The Utilities serve these customers in the nonpeak periods of
the year or when competitively priced gas supplies are available. These
customers are subject to service discontinuance on short notice as system firm
requirements may demand. Prices for these customers are based on the price of
the customers' alternative fuel. In order to mitigate the volatility of earnings
from interruptible and dual fuel sales, the Utilities roll into the PGPA the
margin earned on these interruptible sales and all margins in excess of $1 Mcf
of gas sold to dual fuel customers. This margin credit reduces rates to firm
customers. This means of margin treatment alleviates the negative impact that
swings in sales can have on earnings in the highly competitive industrial
interruptible market.
The Utilities business is seasonal. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality."
Rates and Regulation
The Utilities are subject to regulation by the RIPUC with respect to rates,
adequacy of service, issuance of securities, accounting and other matters.
On January 19, 1995, Valley Gas and Bristol & Warren filed revised tariffs
with the RIPUC to consolidate their rate structures and to increase their
combined annual revenues. On October 18, 1995, the RIPUC authorized the
consolidated rate structure and allowed the Utilities to adjust their tariffs to
annually collect $1,100,000 or 2.0%. These rates became effective November 21,
1995.
On April 29, 1997, the Utilities were authorized to offer transportation
rates to large commercial and industrial customers and to redesign the rates for
other firm customer classes. The revenue-neutral rate redesign became effective
June 1, 1997.
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Gas Supply and Storage
Tennessee Gas Pipeline Company is the major natural gas transporter for
Valley Gas under long-term contracts. Bristol & Warren's principal gas
transporters are Algonquin Gas Transmission Company and Texas Eastern
Transmission Corporation. The Utilities purchase natural gas from several
suppliers on a long-term firm basis, as well as on the spot market whenever
available.
Year-Round Wellhead Firm Supply -- Valley Gas is a charter member of the
Mansfield Consortium, which consists of five local distribution companies joined
together to use their combined market power to secure favorable terms for
longterm gas supply. In addition, Valley Gas is an investor in Boundary Gas,
Inc. and a customer of Alberta Northeast, LTD, both of which were founded by
groups of gas distribution companies in the Northeast to import natural gas from
Canada.
Valley Gas and Bristol & Warren together have 24,402 dekatherms per day
("Dth/day") of year-round firm supply under long-term contracts with four
domestic and two Canadian suppliers. Of these contracts, 22,335 of the
contracted Dth/day will expire in the next five years; 7,035 Dth/day are due to
expire November 1, 1999 and 15,300 Dth/day are due to expire on June 30, 2002.
All of the Utilities' gas supply contracts are spot-indexed based. The Utilities
have flexible take requirements, with only 1,973 dekatherms categorized as
"baseload" supply which must be taken every day, and that contract expires in
1999.
Winter-Only Firm Supply -- The Utilities are well-positioned with respect
to winter-only firm supply in that their actual and prospective long-term
contracts are with major participants in this market, and contract prices are at
competitively favorable terms.
Liquefied Natural Gas ("LNG") -- Valley Gas is entitled to 5,300 Dth/day of
firm supply from Distrigas, which revaporizes LNG at its Everett, Massachusetts
facility for delivery during the winter months to Valley Gas by Tennessee Gas
Pipeline or to Bristol & Warren via Algonquin Gas Transmission. As an option,
Valley Gas may take this gas in its liquefied state for transportation by truck
to and storage at Valley Gas' on-site LNG tank. A further option allows Valley
Gas to increase its maximum daily quantity from 5,300 to 7,950 dekatherms. There
are no minimum takes, and the contract runs through October 31, 2005.
Maritimes & Northeast Pipeline -- Subject to approval by the Federal Energy
Regulatory Commission and subsequent construction of the proposed Maritimes &
Northeast Pipeline from Sable Island, Canada into a Massachusetts interconnect
with Tennessee Gas Pipeline, Valley Gas will be entitled to firm winter delivery
of 5,000 Dth/day to its city gate, with an option to increase its maximum daily
quantity to 7,500 dekatherms. There are no minimum takes. This 10-year contract
is scheduled to go into effect November 1, 1999.
Pawtucket Power Co-Generation Plant -- Valley Gas is entitled under
long-term contract to utilize up to 540 dekatherms per hour, with a maximum
annual quantity of 333,000 dekatherms, of natural gas used by Pawtucket Power in
its generation of electricity and steam. This firm gas supply originates in
Alberta, Canada.
Underground Storage -- The Utilities have 1,543,958 dekatherms of
underground storage capacity with CNG Transmission and National Fuel Gas Supply
Corporation, with a total maximum daily withdrawal quantity of 20,589
dekatherms. Underground storage gas is injected during the non-winter months by
the Utilities into fields located in Pennsylvania and New York, for subsequent
withdrawal during the winter when customer demand is greatest.
Interstate Pipeline Capacity -- The Utilities utilize firm pipeline
capacity for two basic purposes: 1) daily transportation of firm and spot market
gas supply throughout the year from the Gulf Coast to their city gates, and 2)
winter-only transportation of underground storage gas to their city gates.
Gas Supply Pipeline Capacity -- Total year-round firm capacity is 24,902
Dth/day. Of this total, 86% expires by December 1, 2002.
Storage Pipeline Capacity -- The Utilities' storage-related pipeline
capacity totals 11,349 Dth/day. About 37% of this capacity expires November 1,
2000, and the remainder extends from 2003 through 2012.
On-Site LNG and Propane Storage -- In addition to the gas delivered by the
interstate pipeline, the Utilities have on-site storage facilities for liquid
propane gas ("LPG"), with Valley Gas having about 857,000
18
<PAGE> 19
gallons and Bristol & Warren having about 117,000 gallons of LPG storage. Valley
Gas also has on-site storage facilities for 968,320 gallons (about 85,000
dekatherms) of LNG. Both LPG and LNG are vaporized into the Utilities
distribution systems during periods of peak demand, and utilized as backup in
the event of failure of an upstream pipeline to deliver needed gas supplies.
Competition and Marketing
The primary competition faced by the Utilities is from other energy
sources, primarily heating oil. The principal considerations affecting a
customer's selection among competing energy sources include price, equipment
cost, reliability, ease of delivery and service. In addition, the type of
equipment already installed in businesses and residences significantly affects
the customer's choice of energy. However, where previously installed equipment
is not an issue, households in recent years have consistently preferred the
installation of gas heat. For example, Valley Gas' statistics indicate that
approximately 90% of the new homes built on or near Valley Gas' service mains in
recent years have selected gas as their energy source.
The Utilities are pursuing new markets believed to have the potential to
provide both growth and/or lessen sales sensitivity to weather: industrial
processing, cogeneration, natural gas vehicles and conversions from oil or
electricity to gas.
In recent utility rate decisions, the RIPUC approved rates which will
retain and attract industrial customers. Additionally, the Utilities have two
rates which promote economic development in its service territory. These rates
provide incentives for companies that add industrial processing load, make a
substantial investment in new natural gas equipment and hire additional
employees.
The cogeneration market is addressed through sales contacts with customers
who have applications suitable to use waste heat through the cogeneration
process. There are established rate tariffs to specifically address the
requirements of the cogeneration market. In addition, Valley Gas has a 50
kilowatt demonstration facility at its Cumberland location which provides
electricity for computer facilities and hot water requirements.
Valley Gas has a compressed natural gas ("CNG") fueling station at its
Cumberland, Rhode Island headquarters. The use of natural gas in vehicles is
promoted through conversions of its own fleet and the CNG rate approved by the
RIPUC.
The Utilities' residential marketing department seeks to increase
conversions from oil to natural gas through installations of conversion burners
and conversions to natural gas of housing developments that initially chose
alternate energy sources. Additional efforts are made to convert homes with
inactive natural gas service and to replace electric heating systems with
natural gas systems.
The distribution company unbundling process will add competition from a new
source -- natural gas suppliers. The Utilities have received approval from the
RIPUC for transportation rates which allow large commercial and industrial
customers the choice to purchase gas from the Utilities or from natural gas
marketers; gas purchased by users within the Utilities' territories is
transported to the users by the Utilities. Since the Utilities' profits are
derived from distribution of natural gas and not natural gas sales, this process
should not significantly impact the profitability of the Utilities.
Gas Distribution System
Valley Gas' distribution system consists of approximately 900 miles of gas
mains and service lines. Bristol & Warren's gas distribution system consists of
approximately 100 miles of gas mains and service lines. The aggregate maximum
daily quantity of gas that may be distributed through the Utilities from their
own facilities and under existing supply and transportation contracts is
approximately 100 MMcf, and the maximum daily gas sendouts for all sales
customers of the Utilities during the last five fiscal years were 71 MMcf in
1996, 66 MMcf in 1995, 77 MMcf in 1994, 69 MMcf in 1993, and 67 MMcf in 1992.
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<PAGE> 20
GAS MARKETING
The Corporation is positioning itself to participate in the deregulated
energy markets by entering into a marketing alliance with Total/Louis Dreyfus
Energy Services, L.L.C. to market natural gas and petroleum-based products. The
marketing alliance will provide the Corporation the opportunity to supply energy
needs to customers without franchise territory barriers. The Utilities also
filed to unbundle their firm commercial and industrial tariffs with the RIPUC in
September 1996. Effective June 1, 1997, the Utilities were authorized to offer
transportation rates to large commercial and industrial customers and redesign
the rates for other customers.
APPLIANCE CONTRACT SALES AND RENTALS
The Corporation conducts appliance sales, service contract sales and
appliance rentals through its subsidiaries VAMCO and Morris Merchants. VAMCO's
revenues are generated through retail appliance sales, service contract sales
and through the rental of gas-fired appliances. The merchandising subsidiaries
are in competitive businesses with competition based on many factors, including
price, quality of product and service.
Morris Merchants has contracts for the distribution of certain lines that
it wholesales. At this time the Corporation has no reason to believe it will
lose any of its existing lines.
PROPANE OPERATIONS
The propane operations are conducted through Valley Propane, which sells,
at retail, liquid propane gas to residential and commercial customers in Rhode
Island and nearby Massachusetts. At May 31, 1997, Valley Propane had 2,729
customers. Valley Propane also supplies propane to holding customers of the
Utilities; these customers are serviced by Valley Propane until the Utilities
can connect mains and service lines. Valley Propane is also impacted by weather,
as a large percentage of its customers use propane as a primary source of heat.
Valley Propane increases and decreases the selling price of its gas depending
upon supply and competition.
NATURAL GAS CONVERSIONS
The Corporation conducts natural gas conversions through AEC. AEC generates
its revenues through the engineering and installation of compressed natural gas
refueling stations, the conversion of gasoline and diesel-powered vehicles to
natural gas and through the implementation of its patented process to co-fire
natural gas and diesel fuel in engines, primarily generators.
The Corporation owns an 80% interest in AEC and has the obligation over the
next five fiscal years to acquire the remaining 20%, which is currently held by
the management of AEC.
ENVIRONMENTAL PROCEEDINGS
For information regarding the Corporation's potential environmental
liabilities, see "Management's Discussion and Analysis of the Results of
Operations and Financial Condition -- Liquidity and Capital Resources."
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<PAGE> 21
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is traded on the American Stock Exchange ("AMEX") under
the symbol "VR." The following table sets forth for the periods indicated the
high and low sale prices of the Common Stock as reported by AMEX and the cash
dividends paid per share in such periods.
The Corporation has paid cash dividends on its Common Stock each year since
1964. While it is the intention of the Board of Directors to continue to declare
dividends on a quarterly basis, the frequency and amount of future dividends
will depend upon the Corporation's earnings, financial requirements and other
relevant factors, including limitations imposed by the indenture for the
Debentures. See "Description of Common Stock." There were 2,416 record holders
of the Corporation's Common Stock as of July 15, 1997.
<TABLE>
<CAPTION>
MARKET PRICE
CASH -----------------
DIVIDEND HIGH LOW
-------- ------ ------
<S> <C> <C> <C>
Fiscal 1995
First Quarter.................................. $ .175 $13.25 $12.00
Second Quarter................................. .175 12.63 10.75
Third Quarter.................................. .18 11.38 10.50
Fourth Quarter................................. .18 11.50 10.38
Fiscal 1996
First Quarter.................................. $ .18 $11.50 $10.25
Second Quarter................................. .18 11.38 10.50
Third Quarter.................................. .1825 11.88 10.88
Fourth Quarter................................. .1825 12.63 11.88
Fiscal 1997
First Quarter.................................. $.1825 $13.00 $11.75
Second Quarter................................. .1825 12.00 11.00
Third Quarter.................................. .185 12.50 11.25
Fourth Quarter (through July 31, 1997)......... .185 11.81 10.63
</TABLE>
DESCRIPTION OF COMMON STOCK
The following description relating to the Common Stock is summarized from,
and subject to the provisions of, the Articles of Incorporation and the Bylaws
of the Corporation, as amended.
GENERAL
The Corporation is authorized to issue 20,000,000 shares of Common Stock,
$1 par value, of which 4,280,028 were issued and outstanding at June 30, 1997.
The Corporation is also authorized to issue 500,000 shares of Preferred Stock,
$100 par value, none of which is issued and outstanding. As of June 30, 1997,
41,125 shares of Common Stock were reserved for issuance under the Corporation's
dividend reinvestment plan.
DIVIDEND RIGHTS
Dividends are payable on the Common Stock when and as declared by the Board
of Directors out of funds legally available therefor. Under Rhode Island law,
dividends may be paid out of unreserved and unrestricted retained earnings.
Inasmuch as the Corporation is structured as a holding company, the funds
required to enable the Corporation to pay dividends on its Common Stock are
derived from the dividends paid by its subsidiaries on their common stock, all
of which is held by the Corporation, except for 20% of AEC. See "Risk Factors --
Reliance of Corporation on Dividends and Other Payments from Subsidiaries;
Dividend Restrictions Imposed on Subsidiaries."
21
<PAGE> 22
VOTING RIGHTS
Each share of Common Stock is entitled to one vote on all matters submitted
to stockholders.
Directors. The Articles of Incorporation and Bylaws of the Corporation
provide that the Board of Directors (presently numbering nine) shall be divided
into three classes with each class to be as nearly equal in number as shall be
possible, and that one class shall be elected each year for a term of three
years. The Corporation's Bylaws provide that the affirmative vote of a majority
of the outstanding shares of Common Stock is required to elect directors.
Directors may be removed by stockholders from office at any time, but only for
cause, by the affirmative vote of the holders of not less than 80% of the
outstanding shares of Common Stock; however the 80% vote is not required when
such action is recommended by a two-thirds vote of directors then in office.
Certain Business Combinations. The Corporation's Articles of Incorporation
provide that any "Business Combinations" involving a "Related Person" must be
approved by the holders of 80% of the outstanding shares of its capital stock,
provided that majority approval shall apply if (a) the proposed transaction has
been approved by two-thirds of the Corporation's "Continuing Directors" or
(b)(1) the consideration to be received by the holders of the Corporation's
capital stock is at least equal to the highest of (i) the highest per share
price paid by the Related Person for any shares acquired within two years of the
first public announcement of the proposed transaction (the "Announcement Date")
or in the transaction in which it became a Related Person, (ii) the fair market
value (as defined in the Articles of Incorporation) per share of the capital
stock on the Announcement Date or the date on which the Related Person become a
Related Person, or (iii) in the case of the Corporation's Preferred Stock, an
amount equal to the highest preferential amount per share in the event of any
liquidation, dissolution or winding up of the Corporation, (2) the consideration
to be received by the Corporation's shareholders is in the same form as that
previously paid by the Related Person for its shares, and (3) a proxy statement
containing a fairness opinion of an investment banking firm and the position of
the Continuing Directors on the proposed transaction shall have been mailed to
all of the Corporation's shareholders to solicit their approval of the proposed
transaction. A "Business Combination" is defined to include mergers,
consolidations, leases, sales and exchanges of assets and similar transactions
involving the Corporation and its subsidiaries which amount to 20% or more of
the fair market value of the consolidated assets of the Corporation, including
any securities issued by a subsidiary, between the Corporation (or a subsidiary)
and a Related Person. The definition also includes certain other transactions
(including reclassifications and recapitalizations) which would have the effect
of, directly or indirectly, increasing the Related Persons' proportionate share
of capital stock in the Corporation and complete or partial liquidations or
dissolutions proposed by a Related Person. A "Related Person" is defined to
include a person, entity or affiliated group of persons or entities that
beneficially owns 15% or more of the capital stock of the Corporation. A
"Continuing Director" is defined as a director (a) unaffiliated with any Related
Person who was a member of the Board immediately prior to the time the Related
Person became a Related Person or (b) who was designated as a Continuing
Director by a majority of the then Continuing Directors.
Amendments to Articles and Bylaws. The Articles of Incorporation and
Bylaws of the Corporation provide for amendment of the foregoing provisions of
the Articles or the Bylaws by 80% and two-thirds, respectively, of the
outstanding shares entitled to vote unless the proposed amendment has been
approved by two-thirds of the Board of Directors, in which case majority
approval by stockholders as required by applicable law is necessary. The Board
of Directors may amend the Bylaws subject, however, to the rights, preferences
and privileges to which the holder of any class of stock shall be entitled.
The general purpose of the foregoing provisions is to make more difficult
and deter efforts by another party to gain control of the Corporation on a
non-negotiated basis. It is possible that such provisions might also deter
non-negotiated tender offers at a premium over market price which might be, or
might be viewed by stockholders as being, beneficial. In addition, to the extent
such non-negotiated takeover attempts are deterred, the positions held by
management are made more secure.
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<PAGE> 23
LIQUIDATION RIGHTS
Shares of Preferred Stock, if any are issued in the future and then
outstanding, will be preferred over Common Stock in the event of liquidation of
the Corporation at the redemption price for such preferred shares in effect at
the time of such liquidation, and in involuntary liquidation at prices not to
exceed $100 par value per share, plus accrued dividends. In addition, in the
event of liquidation of any of the Corporation's subsidiaries, all securities of
the subsidiaries, other than common stock, including shares of preferred stock
then issued and outstanding, would receive payment in full before any amounts
would be available for distribution to the Corporation as the holder of the
common stock of the subsidiaries. Subject to the foregoing, holders of the
Common Stock will share ratably in assets available for distribution after
payment in full of all obligations of the Corporation in the event of its
liquidation.
RIGHTS
Each share of Common Stock of the Corporation includes one preferred stock
purchase Right which entitles the holder to purchase one one-hundredth of a
share of Cumulative Participating Junior Preferred Stock, par value $100, at a
price of $35 per one one-hundredth of a share subject to adjustment. The Rights
are not currently exercisable and trade automatically with the Common Stock. The
Rights will generally become exercisable, and separate certificates representing
the Rights will be distributed, upon occurrence of the acquisition or the
commencement of a tender or an exchange offer by any person or group to acquire
10% or more of the issued and outstanding shares of Common Stock.
The Rights should not interfere with any merger or business combination
approved by the Board of Directors because, prior to the Rights becoming
exercisable, the Rights may be redeemed by the Corporation at $0.01 per Right.
The Rights have no dilutive effect and do not affect reported earnings per
share.
DIVIDEND REINVESTMENT PLAN
The Corporation offers holders of the Common Stock an opportunity through
the Plan to reinvest their dividends automatically in shares of the Common Stock
at a price equal to 95% of the average of the reported closing price of the
Common Stock on the three trading days preceding the dividend payment date. The
Plan also permits holders of Common Stock to make cash investments for the
purchase of shares of Common Stock on the open market, without any discount.
Such shares are offered only by means of a separate Prospectus available from
the Corporation upon request.
TRANSFER AGENT & REGISTRAR
The transfer agent and registrar of the Common Stock is The Bank of New
York, New York, New York.
DESCRIPTION OF DEBENTURES
GENERAL
The Debentures are to be issued under an Indenture dated as of August 15,
1997 (the "Indenture"), by and between the Corporation and Mellon Bank, N.A., as
Trustee. A copy of the Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The terms of the
Debentures include those stated in the Indenture and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939 (the "Trust Indenture
Act") as in effect on the date of the Indenture. Potential investors are
referred to the Indenture and the Trust Indenture Act for a statement of such
terms. The following statements relating to the Debentures and certain
provisions of the Indenture are summaries, do not purport to be complete, and
are subject to and are qualified in their entirety by reference to the
provisions of the Indenture. Unless otherwise stated, capitalized terms defined
in the Indenture have the same meanings when used herein.
The Corporation does not intend to list the Debentures on a national
securities exchange. There is presently no trading market for the Debentures,
and there can be no assurance that such a market will develop or, if developed,
that it will be maintained. See "Risk Factors -- Absence of Public Market for
Debentures."
23
<PAGE> 24
BOOK-ENTRY ONLY SYSTEM
The Debentures will be issued in the aggregate initial principal amount of
$7,000,000 and will be represented by one certificate (the "Global Security") to
be registered in the name of the nominee of The Depository Trust Company ("DTC")
or any successor depository (the "Depository"). The Depository will maintain the
Debentures in denominations of $1,000 and integral multiples thereof through its
book-entry facilities. In accordance with its normal procedures, the Depository
will record the interests of each Depository participating firm (e.g., brokerage
firm) ("Participant") in the Debentures, whether held for its own account or as
a nominee for another person.
So long as the nominee of the Depository is the registered owner of the
Debentures, such nominee will be considered the sole owner or holder of the
Debentures for all purposes under the Indenture and any applicable laws, except
as noted below. A Beneficial Owner, as hereinafter defined, of interests in the
Debentures will not be entitled to receive a physical certificate representing
such ownership interest and will not be considered an owner or holder of the
Debentures under the Indenture, except as otherwise provided below. A Beneficial
Owner is the person who has the right to sell, transfer or otherwise dispose of
an interest in the Debentures and the right to receive the proceeds therefrom,
as well as interest, principal and premium (if any) payable in respect thereof.
A Beneficial Owner's interest in the Debentures will be recorded, in integral
multiples of $1,000, on the records of the Participant that maintains such
Beneficial Owner's account for such purpose. In turn, the Participant's interest
in such Debentures will be recorded, in integral multiples of $1,000, on the
records of the Depository. Therefore, the Beneficial Owner must rely on the
foregoing arrangements to evidence its interest in the Debentures. Beneficial
ownership of the Debentures may be transferred only by compliance with the
procedures of a Beneficial Owner's Participant (e.g., brokerage firm) and the
Depository.
All rights of ownership must be exercised through the Depository and the
book-entry system, except that a Beneficial Owner is entitled to exercise
directly its rights under Section 316(b) of the Trust Indenture Act with respect
to the payment of interest and principal on the Debentures. Notices that are to
be given to registered owners by the Corporation or the Trustee will be given
only to the Depository. It is expected that the Depository will forward the
notices to the Participants by its usual procedures, so that such Participants
may forward such notices to the Beneficial Owners. Neither the Corporation nor
the Trustee will have any responsibility or obligation to assure that any
notices are forwarded by the Depository to the Participants or by any
Participants to the Beneficial Owners.
DTC has advised the Corporation and the Underwriters as follows: DTC is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a member of the Federal Reserve System, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities of Participants and facilitates the clearance and settlement of
securities transactions among Participants in such securities transactions
through electronic book-entry changes in accounts of Participants, thereby
eliminating the need for physical movement of securities certificates.
Participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own DTC. Access to
DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by DTC only through
Participants.
INTEREST AND PAYMENT
The Debentures will mature on September 1, 2027. The Debentures will bear
interest from the date of issuance at the rate per annum stated on the cover
page hereof, calculated on the basis of a 360-day year of twelve 30-day months,
payable semi-annually on March 1 and September 1 of each year, commencing March
1, 1998 to the Persons in whose names the Debentures are registered at the close
of business on the 15th day of the month prior to such Interest Payment Date. If
any payment date would otherwise be a day that is a Legal Holiday, the payment
will be postponed to the next day that is not a Legal Holiday, and no interest
on such payment shall accrue for the period from and after such otherwise
scheduled payment date for the purposes of the payment to be made on such next
succeeding day.
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<PAGE> 25
So long as the nominee of the Depository is the registered owner of the
Debentures, payments of interest, principal and premium (if any) in respect of
the Debentures will be made to the Depository. The Depository will be
responsible for crediting the amount of such payments to the accounts of the
Participants entitled thereto, in accordance with the Depository's normal
procedures. Each Participant will be responsible for disbursing such payments to
the Beneficial Owners of the interests in Debentures that it represents. Neither
the Corporation nor the Trustee will have any responsibility or liability for
any aspect of the records relating to, notices to, or payments made on account
of, beneficial ownership interests in the Debentures; maintaining, supervising
or reviewing any records relating to such beneficial ownership interests; the
selection of any Beneficial Owner to receive payment in the event of a partial
redemption of the Global Security; or consents given or other action taken on
behalf of any Beneficial Owner.
REDEMPTION AT THE OPTION OF THE CORPORATION
The Debentures will be redeemable at any time on or after September 1,
2002, as a whole or in part, at the election of the Corporation, at a Redemption
Price equal to the percentage of the principal amount set forth below if
redeemed during the twelve-month period beginning September 1 of the year
indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE %
---- ------------------
<S> <C>
2002........................................... 104%
2003........................................... 103%
2004........................................... 102%
2005........................................... 101%
2006 to maturity............................... 100%
</TABLE>
In each case, interest accrued to the Redemption Date shall also be paid.
If less than all the Debentures are redeemed, the particular Debentures to be
redeemed will be selected by the Trustee by lot.
Notice of redemption will be mailed at least 30 days before the Redemption
Date to each holder of Debentures to be redeemed at the holder's registered
address.
On and after the Redemption Date, interest will cease to accrue on
Debentures or portions thereof called for redemption, unless the Corporation
shall default in the payment of the Redemption Price.
LIMITED RIGHT OF REDEMPTION UPON DEATH OF BENEFICIAL OWNER
Unless the Debentures have been declared due and payable prior to their
maturity by reason of an Event of Default, the Representative (as hereinafter
defined) of a deceased Beneficial Owner has the right to request redemption of
all or part of his interest at par, expressed in integral multiples of $1,000
principal amount, in the Debentures for payment prior to maturity, and the
Corporation will redeem the same subject to the limitations that the Corporation
will not be obligated to redeem during the period from the original issuance of
the Debentures through and including September 1, 1998 (the "Initial Period"),
and during any twelve-month period which ends on and includes each September 1
thereafter (each such twelve-month period being hereinafter referred to as a
"Subsequent Period"), (i) any interest in the Debentures which exceeds an
aggregate principal amount of $25,000 or (ii) interests in the Debentures in an
aggregate principal amount exceeding $210,000. A request for redemption may be
presented to the Trustee by the Representative of a deceased Beneficial Owner at
any time and in any principal amount. Representatives of deceased Beneficial
Owners must make arrangements with the Participant through whom such interest is
owned in order that timely presentation of redemption requests can be made by
the Participant and, in turn, by the Depository to the Trustee. If the
Corporation, although not obligated to do so, chooses to redeem interests of a
deceased Beneficial Owner in the Debentures in the Initial Period or in any
Subsequent Period in excess of the $25,000 limitation, such redemption, to the
extent that it exceeds the $25,000 limitation for any deceased Beneficial Owner,
shall not be included in the computation of the $210,000 aggregate limitation
for such Initial Period or such Subsequent Period, as the case may be, or for
any succeeding Subsequent Period.
Subject to the $25,000 and the $210,000 limitations, the Corporation will,
upon the death of any Beneficial Owner, redeem the interest of the Beneficial
Owner in the Debentures within 60 days following
25
<PAGE> 26
receipt by the Trustee of a Redemption Request (as hereinafter defined) from
such Beneficial Owner's personal representative, or surviving joint tenant(s),
tenant(s) by the entirety or tenant(s) in common, or other persons entitled to
effect such a Redemption Request (each, a "Representative"). If Redemption
Requests exceed the aggregate principal amount of interests in Debentures
required to be redeemed during the Initial Period or any Subsequent Period, then
such excess Redemption Requests will be applied to successive Subsequent
Periods, regardless of the number of Subsequent Periods required to redeem such
interests.
A request for redemption of an interest in the Debentures may be made by
delivering a request to the Depository, in the case of a Participant which is
the Beneficial Owner of such interest, or to the Participant through whom the
Beneficial Owner owns such interest, in form satisfactory to the Participant,
together with evidence of the death of the Beneficial Owner and evidence of the
authority of the Representative satisfactory to the Participant and Trustee. A
Representative of a deceased Beneficial Owner may make the request for
redemption and shall submit such other evidence of the right to such redemption
as the Participant or Trustee shall require. The request shall specify the
principal amount of interest in the Debentures to be redeemed. A request for
redemption in form satisfactory to the Participant and accompanied by the
documents relevant to the request as above provided, together with a
certification by the Participant that it holds the interest on behalf of the
deceased Beneficial Owner with respect to whom the request for redemption is
being made (a "Redemption Request"), shall be provided to the Depository by a
Participant, and the Depository will forward the request to the Trustee.
Redemption Requests shall be in form satisfactory to the Trustee.
The price to be paid by the Corporation for an interest in the Debentures
to be redeemed pursuant to a request on behalf of a deceased Beneficial Owner is
one hundred percent (100%) of the principal amount thereof plus accrued but
unpaid interest to the date of payment. Subject to arrangements with the
Depository, payment for interests in the Debentures which are to be redeemed
shall be made to the Depository upon presentation of Debentures to the Trustee
for redemption in the aggregate principal amount specified in the Redemption
Requests submitted to the Trustee by the Depository which are to be fulfilled in
connection with such payment. Any acquisition of Debentures by the Corporation
or its Subsidiaries other than by redemption at the option of any Representative
of a deceased Beneficial Owner shall not be included in the computation of
either the $25,000 or the $210,000 limitation for the Initial Period or for any
Subsequent Period.
Interests in the Debentures held in tenancy by the entirety, joint tenancy
or by tenants in common will be deemed to be held by a single Beneficial Owner
and the death of a tenant in common, tenant by the entirety or joint tenant will
be deemed the death of a Beneficial Owner. The death of a person who, during
such person's lifetime, was entitled to substantially all of the rights of a
Beneficial Owner of an interest in the Debentures will be deemed the death of
the Beneficial Owner, regardless of the recordation of such interest on the
records of the Participant, if such rights can be established to the
satisfaction of the Participant and the Trustee. Such interest shall be deemed
to exist in typical cases of nominee ownership, ownership under the Uniform
Gifts to Minors Act or the Uniform Transfers to Minors Act, community property
or other joint ownership arrangements between a husband and wife (including
individual retirement accounts or Keogh plans maintained solely by or for the
decedent or by or for the decedent and his or her spouse), and trust and certain
other arrangements where one person has substantially all of the rights of a
Beneficial Owner during such person's lifetime.
In the case of a Redemption Request which is presented on behalf of a
deceased Beneficial Owner and which has not been fulfilled at the time the
Corporation gives notice of its election to redeem the Debentures, the interests
in the Debentures which are subject of such Redemption Request shall not be
eligible for redemption pursuant to the Corporation's option to redeem but shall
remain subject to fulfillment pursuant to such Redemption Request.
Subject to the provisions of the immediately preceding paragraph, any
Redemption Request may be withdrawn upon delivery of a written request for such
withdrawal given to the Trustee by the Depository prior to payment for
redemption of the interest in the Debentures by reason of the death of a
Beneficial Owner.
The Corporation is legally obligated to redeem Debentures and interests of
Beneficial Owners therein properly presented for redemption pursuant to a
Redemption Request in accordance with and subject to the terms, conditions and
limitations of the Indenture, as summarized above. The Corporation's redemption
26
<PAGE> 27
obligation is not cumulative. Nothing in the Indenture prohibits the Corporation
from redeeming, in fulfillment of Redemption Requests made pursuant to the
Indenture, Debentures or interests therein of Beneficial Owners in excess of the
principal amount the Corporation is obligated to redeem, nor does anything in
the Indenture prohibit the Corporation from purchasing any Debentures or
interests therein in the open market. However, the Corporation may not use any
Debentures redeemed or purchased as described in the immediately preceding
sentence as a credit against its redemption obligation.
Because of the limitations of the Corporation's requirement to redeem, no
Beneficial Owner can have any assurance that its interest in the Debentures will
be paid prior to maturity.
SINKING FUND; NON-CONVERTIBILITY
The Debentures are not subject to a sinking fund and are not convertible.
DEBENTURES UNSECURED
The Debentures will be unsecured and will rank on a parity with all of the
other unsecured and unsubordinated Indebtedness of the Corporation outstanding
from time to time. Subject only to the restrictive covenants described below
(see "Restrictive Covenants"), the Indenture does not limit the amount of
Indebtedness which the Corporation or its subsidiaries may incur.
RESTRICTIVE COVENANTS
The Corporation covenants in the Indenture that it will not declare or pay
any dividends or make any other distribution upon its Common Stock (other than
dividends and distributions payable only in shares of Common Stock) and will not
directly or indirectly apply any of the assets of the Corporation to the
redemption, retirement, purchase or other acquisition of any stock of the
Corporation of any class, except purchases or redemptions in compliance with any
mandatory sinking fund or purchase fund or redemption requirement in respect of
any preferred stock of the Corporation, whether now or hereafter authorized or
issued, unless after giving effect to such declaration, payment, distribution or
application of assets the Consolidated Tangible Net Worth of the Corporation
shall be at least equal to $20,000,000 as reflected on the Corporation's latest
available balance sheet. Consolidated Tangible Net Worth is defined in the
Indenture as the shareholders' equity of the Corporation, less intangible assets
other than amounts recoverable from future ratepayers in accordance with RIPUC
rate treatment. At May 31, 1997, after giving effect to the issuance of the
Common Stock and the Debentures, Consolidated Tangible Net Worth of the
Corporation would have been approximately $33,276,700.
Subject to certain exceptions described in the Indenture, the Corporation
also covenants that neither it nor any of its subsidiaries will issue, assume or
guarantee any Indebtedness secured by a Lien (as defined in the Indenture) on
any property or asset at any time owned by it, without effectively securing,
prior to or concurrently with the issuance, assumption or guarantee of any such
Indebtedness, the Debentures equally and ratably (or, at the Corporation's
option, prior to) such Indebtedness.
The Corporation also covenants that neither it nor any of its subsidiaries
will issue, assume or guarantee any Funded Indebtedness (as defined in the
Indenture) on any property or asset at any time owned by it, unless immediately
thereafter, and after giving effect thereto and to the application of the
proceeds thereof, Consolidated Net Utility Fixed Assets shall be at least equal
to Consolidated Funded Indebtedness.
Except as described in the preceding paragraphs, the Indenture does not
afford any protection to holders of Debentures solely on account of the
Corporation's involvement in highly leveraged transactions.
SUCCESSOR CORPORATION
The Corporation covenants in the Indenture that it will not consolidate
with, merge into or transfer or lease all or substantially all of its assets to
another corporation, unless immediately after such transaction no default will
exist, such corporation assumes all the obligations of the Corporation under the
Debentures and the Indenture, and certain other requirements are met.
27
<PAGE> 28
EVENTS OF DEFAULT; NOTICE AND WAIVER
The following constitute events of default under the Indenture: (a) default
in the payment of principal (or premium, if any) of the Debentures when due; (b)
default in the payment of any interest on the Debentures when due, continued for
30 days; (c) default in the performance of any other agreement of the
Corporation in the Debentures or the Indenture, continued for 60 days after
written notice; (d) acceleration of certain indebtedness of the Corporation or
its Subsidiaries for borrowed money under the terms of any instrument under
which indebtedness of $500,000 or more is issued or secured; and (e) certain
events in bankruptcy, insolvency or reorganization.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of a default, give the holders of Debentures notice of all continuing
defaults (as defined) known to it; but, except in the case of a default in the
payment of the principal or premium, if any, or interest in respect of any of
the Debentures, the Trustee shall be protected in withholding such notice if it
in good faith determines that the withholding of such notice is in the interest
of such holders.
If any event of default shall occur and be continuing, the Trustee or the
holders of at least 25% in principal amount of outstanding Debentures may
declare the Debentures immediately due and payable. Any such acceleration may be
rescinded by the holders of a majority in principal amount of the Debentures
then outstanding, upon the conditions provided in the Indenture.
An existing default and its consequences may be waived by the holders of a
majority in principal amount of the Debentures, upon the conditions provided in
the Indenture, other than an uncured default in payment of principal, premium,
if any, or interest in respect of the Debentures, an uncured failure to make any
redemption payment or an uncured default with respect to a provision which
cannot be modified under the terms of the Indenture without the consent of each
holder affected.
The Indenture includes a covenant that the Corporation will file annually
with the Trustee, within 120 days after the end of each fiscal year, a statement
regarding compliance by the Corporation with the terms thereof and specifying
any defaults by the Corporation of which the signers may have knowledge.
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture which materially affect the
rights of the holders of the Debentures may be made by the Corporation and the
Trustee only with the consent of the holders of not less than a majority in
principal amount of the Debentures then outstanding; provided that no such
modification or amendment may change the stated maturity of any Debenture, or
reduce the principal amount of or redemption premium, if any, or interest rate
on any Debenture or change the interest payment date or otherwise modify the
terms of payment of the principal of or redemption premium, if any, or interest
on the Debentures, or reduce the percentage required for any consent, waiver or
modification, or modify certain other provisions of the Indenture, without the
consent of each holder of any Debenture affected thereby.
DISCHARGE OF THE INDENTURE
The Indenture will be discharged and canceled upon payment of all the
Debentures or upon deposit with the Trustee, within no more than one year prior
to the maturity or the redemption of all the Debentures, of funds or U.S.
Government Obligations sufficient to pay the principal of and premium, if any,
and interest on the Debentures.
28
<PAGE> 29
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, the form of
which is filed as an exhibit to the Registration Statement, to purchase from the
Corporation the number of shares of Common Stock and the principal amounts of
Debentures set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF SHARES PRINCIPAL AMOUNT
UNDERWRITERS OF COMMON STOCK OF DEBENTURES
---------------- ----------------
<S> <C> <C>
Edward D. Jones & Co., L.P. ......................... 310,000 $3,500,000
First Albany Corporation............................. 310,000 3,500,000
------- ----------
Total...................................... 620,000 $7,000,000
======= ==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Stock and Debentures
are subject to the approval of certain legal matters by counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock and Debentures offered hereby if any are taken (other
than shares of Common Stock covered by the over-allotment option described
below).
The Underwriters have advised the Corporation that they propose to offer
the Common Stock and Debentures being purchased by them directly to the public
at the initial public offering prices set forth on the cover page of this
Prospectus. After the initial public offering, the public offering prices may be
changed by the Underwriters.
The offering of the Common Stock and Debentures is made for delivery when,
as and if accepted by the Underwriters and subject to prior sale and to
withdrawal, cancellation or modification of the offer without notice. The
Underwriters reserve the right to reject any order for the purchase of Common
Stock or Debentures in whole or in part.
The Corporation has granted to the Underwriters an option for 30 days to
purchase (at the Common Stock Price to Public less the Underwriting Discounts
and Commissions shown on the cover page of this Prospectus) up to 93,000
additional shares of Common Stock. The Underwriters may exercise such option
only to cover over-allotments of shares of Common Stock made in connection with
the sale of the shares offered hereby.
Until the distribution of the Common Stock and Debentures is completed,
rules of the Commission may limit the ability of the Underwriters and certain
selling group members to bid for and purchase the Common Stock and Debentures.
As an exception to these rules, the Underwriters are permitted to engage in
certain transactions that stabilize the price of the Common Stock and
Debentures. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock and Debentures.
If the Underwriters create a short position in the Common Stock or
Debentures in connection with the Offering, i.e., if they sell more Common Stock
or Debentures than are set forth on the cover page of this Prospectus, the
Underwriters may reduce that short position by purchasing Common Stock or
Debentures in the open market.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Corporation nor either of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Common Stock and
Debentures. In addition, neither the Corporation nor either of the Underwriters
makes
29
<PAGE> 30
any representation that the Underwriters will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.
The Corporation has agreed to indemnify the Underwriters and persons who
control the Underwriters against certain liabilities that may be incurred in
connection with the offering contemplated hereby, including liabilities under
the Act or to contribute to payments the Underwriters may be required to make in
respect thereof.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Corporation by Edwards & Angell, 150 John F. Kennedy Parkway, Short Hills, New
Jersey 07078-2701. Certain matters will be passed upon for the Underwriters by
Armstrong, Teasdale, Schlafly & Davis, One Metropolitan Square, St. Louis,
Missouri 63102.
EXPERTS
The consolidated financial statements of Valley Resources, Inc. and
subsidiaries at August 31, 1996 and 1995 and for each of the three years in the
period ended August 31, 1996, are included and incorporated by reference in this
Prospectus, have been audited by Grant Thornton, LLP, independent certified
public accountants, as indicated in their report with respect thereto, and are
included and incorporated herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
30
<PAGE> 31
VALLEY RESOURCES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Consolidated Statements of Earnings for the Nine Months Ended May 31, 1997 and 1996
(unaudited) and the Fiscal Years Ended August 31, 1996, 1995 and 1994 (audited)..... F-3
Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 1997 and 1996
(unaudited) and the Fiscal Years Ended August 31, 1996, 1995 and 1994 (audited)..... F-4
Consolidated Balance Sheets as of May 31, 1997 (unaudited) and August 31, 1996 and
1995 (audited)...................................................................... F-5
Consolidated Statements of Changes in Common Stock Equity for the Nine Months Ended
May 31, 1997 (unaudited) and the Fiscal Years Ended August 31, 1996, 1995 and 1994
(audited)........................................................................... F-7
Consolidated Statements of Capitalization as of May 31, 1997 (unaudited) and August
31, 1996 and 1995 (audited)......................................................... F-8
Notes to Consolidated Financial Statements............................................ F-9
</TABLE>
F-1
<PAGE> 32
VALLEY RESOURCES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
of Valley Resources, Inc.
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Valley Resources, Inc. (a Rhode
Island corporation) and subsidiaries as of August 31, 1996 and 1995 and the
related consolidated statements of earnings, cash flows and changes in common
stock equity for each of the three years in the period ended August 31, 1996.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Valley Resources, Inc. and subsidiaries as of August 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1996, in conformity with generally
accepted accounting principles.
GRANT THORNTON, LLP
Boston, Massachusetts
September 24, 1996
F-2
<PAGE> 33
VALLEY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
MAY 31, AUGUST 31,
------------------------- ---------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Utility gas revenues.......... $57,412,230 $53,087,986 $60,773,519 $56,012,913 $65,323,556
Nonutility revenues........... 16,141,389 14,922,573 19,586,615 18,857,277 18,229,362
----------- ----------- ----------- ----------- -----------
Total................. 73,553,619 68,010,559 80,360,134 74,870,190 83,552,918
----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of gas sold.............. 33,145,587 27,949,784 31,951,154 30,229,359 38,233,511
Cost of sales -- nonutility... 11,133,782 10,371,783 13,688,935 13,189,797 12,783,575
Operations.................... 13,659,370 13,469,871 17,706,904 16,752,501 16,299,527
Maintenance................... 1,253,160 1,232,442 1,671,971 1,535,206 1,485,279
Depreciation (Note A)......... 2,333,214 2,212,317 2,956,727 2,684,755 2,473,467
Taxes -- other than Federal
income............... 3,400,490 3,273,181 4,090,751 4,002,076 4,463,406
-- Federal income
(Notes A and F)..... 1,969,120 2,329,617 1,443,547 731,947 1,313,227
----------- ----------- ----------- ----------- -----------
Total................. 66,894,723 60,838,995 73,509,989 69,125,641 77,051,992
----------- ----------- ----------- ----------- -----------
Operating income................ 6,658,896 7,171,564 6,850,145 5,744,549 6,500,926
Other income -- net of tax
(Notes A and F)............... 268,365 331,952 459,938 115,032 227,450
----------- ----------- ----------- ----------- -----------
Total income before
interest............ 6,927,261 7,503,516 7,310,083 5,859,581 6,728,376
----------- ----------- ----------- ----------- -----------
Interest charges:
Long-term debt................ 1,456,544 1,437,577 1,927,154 1,947,205 2,037,760
Other......................... 1,027,058 991,326 1,384,569 1,357,451 864,590
----------- ----------- ----------- ----------- -----------
Total................. 2,483,602 2,428,903 3,311,723 3,304,656 2,902,350
----------- ----------- ----------- ----------- -----------
Net income available for common
stock......................... $ 4,443,659 $ 5,074,613 $ 3,998,360 $ 2,554,925 $ 3,826,026
=========== =========== =========== =========== ===========
Average number of common shares
outstanding................... 4,262,679 4,255,017 4,258,877 4,222,662 4,205,760
Earnings per average common
share outstanding............. $ 1.04 $ 1.19 $ 0.94 $ 0.61 $ 0.91
</TABLE>
The accompanying Notes are an integral part of these statements.
F-3
<PAGE> 34
VALLEY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
MAY 31, AUGUST 31,
------------------------- ---------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Net income................................... $ 4,443,659 $ 5,074,613 $ 3,998,360 $ 2,554,925 $ 3,826,026
Adjustments to reconcile net income to net
cash:
Depreciation............................... 2,333,214 2,212,317 2,956,727 2,684,755 2,473,467
Provision for uncollectibles............... 1,159,240 1,087,195 1,459,761 1,274,238 959,404
Deferred Federal income taxes.............. 108,070 434,005 922,007 619,918 1,040,691
Amortization of investment tax credits..... -- -- (49,452) (50,144) (44,940)
Change in assets and liabilities:
Accounts receivable........................ (6,011,017) (3,515,550) (718,826) (1,612,297) (492,220)
Deferred fuel costs........................ 2,130,692 (1,857,435) (3,977,779) 2,629,056 1,752,484
Unbilled gas costs......................... (56,790) (48,766) (4,603) (4,617) (5,256)
Fuel and other inventories................. 1,950,415 1,667,099 (663,964) 502,202 331,499
Prepayments................................ 852,780 631,731 (249,971) (72,088) (31,177)
Common stock held for dividend reinvestment
plan..................................... (56,276) 156,661 158,876 (271,315) 23,530
Prepaid pensions........................... (693,559) (469,029) (625,374) (572,320) (784,454)
Accounts payable........................... (444,258) 350,413 921,892 (275,189) (323,061)
Security deposits.......................... (21,777) (55,973) (65,258) 30,945 47,803
Taxes accrued.............................. 2,055,954 1,671,170 (317,791) (131,917) 69,422
Other...................................... 808,844 130,922 (75,564) (578,144) (500,288)
----------- ----------- ----------- ----------- -----------
Total adjustments..................... 4,115,532 2,394,760 (329,319) 4,173,083 4,516,904
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities.... 8,559,191 7,469,373 3,669,041 6,728,008 8,342,930
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Utility capital expenditures............... (2,456,995) (3,248,493) (4,396,081) (5,335,159) (3,953,702)
Nonutility capital expenditures............ (530,530) (459,937) (612,628) (580,772) (599,725)
Other investments.......................... (66,988) (54,754) (49,360) (13,400) (51,262)
----------- ----------- ----------- ----------- -----------
Net cash used by investing activities...... (3,054,513) (3,763,184) (5,058,069) (5,929,331) (4,604,689)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Dividends paid............................... (2,343,667) (2,305,155) (3,083,369) (2,989,702) (2,900,408)
Common stock transactions.................... (44,687) 129,580 184,615 391,278 (95,418)
Issuance of revolving credit arrangement..... 100,000 2,200,000 2,200,000 -- --
Retirement of long-term debt................. (82,000) (825,000) (860,000) (1,333,000) (95,000)
(Decrease) increase in notes payable......... (2,900,000) (2,600,000) 3,000,000 3,000,000 (1,000,000)
----------- ----------- ----------- ----------- -----------
Net cash (used) provided by financing
activities................................. (5,270,354) (3,400,575) 1,441,246 (931,424) (4,090,826)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash................ 234,324 305,614 52,218 (132,747) (352,585)
Cash, beginning................................ 506,813 454,595 454,595 587,342 939,927
----------- ----------- ----------- ----------- -----------
Cash, ending................................... $ 741,137 $ 760,209 $ 506,813 $ 454,595 $ 587,342
=========== =========== =========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest................................... $ 2,091,679 $ 2,136,026 $ 3,311,577 $ 3,265,612 $ 2,895,752
=========== =========== =========== =========== ===========
Federal income taxes....................... $ 386,140 725,000 $ 885,000 $ 380,000 $ 637,000
=========== =========== =========== =========== ===========
Supplemental disclosures of noncash activity:
Capital lease obligations incurred........... $ 313,956 $ 1,803,938 $ 1,844,817 $ 300,972 $ 956,973
=========== =========== =========== =========== ===========
</TABLE>
The accompanying Notes are an integral part of these statements.
F-4
<PAGE> 35
VALLEY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
MAY 31, ---------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Assets:
Utility plant, at cost (Notes A and D).............. $78,710,640 $76,534,841 $72,759,666
Less: Accumulated provision for depreciation
(Note A).......................................... 28,723,467 27,092,766 25,348,673
----------- ----------- -----------
Net utility plant................................... 49,987,173 49,442,075 47,410,993
----------- ----------- -----------
Leased property-less accumulated amortization of
$3,237,074, $2,789,155 and $2,088,737............. 2,505,147 2,944,581 2,013,647
----------- ----------- -----------
Nonutility property-less accumulated provision for
depreciation of $4,123,817, $3,850,692 and
$3,434,784 (Note A)............................... 3,676,885 3,567,797 3,546,543
----------- ----------- -----------
Other investments................................... 1,577,448 1,510,460 1,461,100..
----------- ----------- -----------
Current assets:
Cash.............................................. 741,137 506,813 454,595
Accounts receivable-less allowance for
uncollectibles of $784,058, $719,721 and
$655,951....................................... 14,797,258 9,945,481 10,686,414
Deferred fuel costs (Note A)...................... -0- 827,012 -0-
Deferred unbilled gas costs (Note A).............. 495,684 438,894 434,291
Fuel and other inventories (Note A)............... 4,098,032 6,048,447 5,384,483
Prepayments....................................... 556,522 1,409,302 1,159,331
Common stock held for dividend reinvestment plan
(Note B)....................................... 187,095 130,819 289,695
----------- ----------- -----------
Total current assets...................... 20,875,728 19,306,768 18,408,809
----------- ----------- -----------
Deferred debits:
Recoverable postretirement benefit (Note H)....... 519,692 692,922 692,922
Recoverable vacations accrued..................... 795,077 633,194 846,825
Recoverable deferred Federal income taxes
(Note F)...................................... 6,070,362 5,969,839 5,713,177
Recoverable transition obligation (Note H)........ 1,700,000 1,700,000 1,325,000
Unamortized debt discount and expense............. 1,479,644 1,523,092 1,581,023
Prepaid pensions (Note H)......................... 6,864,396 6,170,837 5,545,463
Other............................................. 3,208,836 3,227,420 3,792,004
----------- ----------- -----------
Total deferred debits..................... 20,638,007 19,917,304 19,496,414
----------- ----------- -----------
Total assets.............................. $99,260,388 $96,688,985 $92,337,506
=========== =========== ===========
</TABLE>
The accompanying Notes are an integral part of these statements.
F-5
<PAGE> 36
VALLEY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
MAY 31, ---------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capitalization and liabilities:
Capitalization (see Consolidated Statements of
Capitalization)................................... $52,512,857 $50,348,234 $50,608,628
----------- ----------- -----------
Revolving credit arrangements (Note F).............. 2,300,000 2,200,000 -0-
----------- ----------- -----------
Obligations under capital leases (Note D)........... 1,636,473 2,133,543 1,254,778
----------- ----------- -----------
Current liabilities:
Current maturities of long-term debt (Note D)..... 500,000 500,000 500,000
Obligations under capital leases (Note D)......... 868,674 811,036 758,870
Notes payable (Note C)............................ 12,000,000 14,900,000 11,900,000
Accounts payable.................................. 4,798,949 5,243,207 4,321,315
Security deposits................................. 1,074,970 1,096,747 1,162,005
Taxes accrued..................................... 2,245,979 190,025 507,816
Deferred fuel costs (Note A)...................... 1,303,680 -0- 3,150,767
Accrued interest.................................. 939,770 551,979 655,045
Other............................................. 911,207 712,413 976,138
----------- ----------- -----------
Total current liabilities................. 24,643,229 24,005,407 23,931,956
----------- ----------- -----------
Commitments and contingencies (Note H)
Deferred credits:
Unamortized investment tax credit (Note A)........ 723,688 723,688 773,141
Transition obligation (Note H).................... 1,700,000 1,700,000 1,325,000
Unfunded deferred Federal income taxes (Note F)... 1,922,773 1,922,773 1,930,375
Postretirement benefit obligation (Note H)........ 500,444 692,922 692,922
Other............................................. 1,834,858 1,700,469 1,729,504
----------- ----------- -----------
Total deferred credits.................... 6,681,763 6,739,852 6,450,942
----------- ----------- -----------
Deferred Federal income taxes (Notes A and F)....... 11,486,066 11,261,949 10,091,202
----------- ----------- -----------
Total liabilities......................... 46,747,531 46,340,751 41,728,878
----------- ----------- -----------
Total capitalization and liabilities...... $99,260,388 $96,688,985 $92,337,506
=========== =========== ===========
</TABLE>
The accompanying Notes are an integral part of these statements.
F-6
<PAGE> 37
VALLEY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
<TABLE>
<CAPTION>
COMMON SHARES
ISSUED AND OUTSTANDING
------------------------ PAID IN RETAINED
NUMBER AMOUNT CAPITAL EARNINGS
--------- ---------- ----------- -----------
<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
--------- ---------- ----------- ----------
Add (deduct):
Net income............................. 4,443,659
Cash dividends on common stock......... (2,343,667)
Other.................................. (44,687)
--------- ---------- ----------- ----------
Balance, May 31, 1997 (unaudited)........ 4,280,028 $4,280,028 $18,159,376 $ 9,850,398
========= ========== =========== ==========
</TABLE>
The accompanying Notes are an integral part of these statements.
F-7
<PAGE> 38
VALLEY RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
AUGUST 31,
MAY 31, ---------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Common stock equity:
Common stock, $1 par value (Note B) Authorized
20,000,000 shares
Issued and outstanding 4,280,028, 4,280,028 and
4,260,797 shares............................... $ 4,280,028 $ 4,280,028 $ 4,260,797
Paid in capital (Note B).......................... 18,159,376 18,204,063 18,038,679
Retained earnings (Notes B and E)................. 9,850,398 7,750,406 6,835,415
----------- ----------- -----------
32,289,802 30,234,497 29,134,891
Less: Accounts receivable from Valley Gas Employee
Stock Ownership Plan (Note D).................. 2,950,882 3,142,200 3,142,200
----------- ----------- -----------
Total common stock equity................. 29,338,920 27,092,297 25,992,691
----------- ----------- -----------
Long-term debt (Note D):............................
8% First Mortgage Bonds, due 2022................. 20,130,000 20,212,000 21,072,000
9% Notes Payable, due 1999........................ 2,138,937 2,138,937 2,138,937
Note payable...................................... 1,405,000 1,405,000 1,905,000
----------- ----------- -----------
Total..................................... 23,673,937 23,755,937 25,115,937
Less: Current maturities.......................... 500,000 500,000 500,000
----------- ----------- -----------
Total long-term debt...................... 23,173,937 23,255,937 24,615,937
----------- ----------- -----------
Total capitalization...................... $52,512,857 $50,348,234 $50,608,628
=========== =========== ===========
</TABLE>
The accompanying Notes are an integral part of these statements.
F-8
<PAGE> 39
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts
of Valley Resources, Inc. and its active wholly-owned subsidiaries (the
"Corporation") -- Valley Gas Company ("Valley Gas"), Valley Appliance and
Merchandising Company ("VAMCO"), Valley Propane, Inc. ("Valley Propane"), Morris
Merchants, Inc. ("Morris Merchants") (d/b/a the Walter F. Morris Company), and
Bristol & Warren Gas Company ("Bristol & Warren"). The consolidated financial
statements also include the Corporation's 80% interest in Alternate Energy
Corporation ("AEC"). All significant intercompany transactions have been
eliminated where required.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Regulation -- The utility operations of Valley Gas and Bristol & Warren
(collectively the "Utilities") are subject to regulation by the Rhode Island
Public Utilities Commission ("RIPUC"). Accounting policies conform with
generally accepted accounting principles, as applied in the case of regulated
public utilities, and are in accordance with the accounting requirements and
rate making practices of the RIPUC.
Depreciation -- Annual provisions for depreciation for the Utilities are
determined on a composite straight-line basis. The composite rate for fiscal
1996 was 2.91% and was 2.72% for fiscal 1995 and fiscal 1994. Depreciation
provisions for other subsidiary companies are provided on the straight-line and
accelerated methods at rates ranging from 2.86% to 34%.
Deferred Fuel Costs -- The Utilities' tariffs include a Purchased Gas Price
Adjustment ("PGPA") which allows an adjustment of rates charged to customers in
order to recover all changes in gas costs from stipulated base gas costs. The
PGPA provides for an annual reconciliation of total gas costs billed with the
actual cost of gas incurred. Any excess or deficiency in amounts collected as
compared to costs incurred is deferred and either reduces the PGPA or is billed
to customers over subsequent periods.
Deferred Unbilled Gas Costs -- Revenue is recorded on the basis of bills
rendered on a cycle basis throughout the month. Valley Gas defers to the
following month that portion of the base cost of gas delivered but not yet
billed under the cycle billing system.
Accounting for Income Taxes -- Income tax regulations allow recognition of
certain transactions for tax purposes in time periods other than the period
during which these transactions will be recognized in the determination of net
income for financial reporting purposes. As required by generally accepted
accounting principles, deferred income taxes are provided to reflect the tax
effect of these timing differences in the proper accounting periods.
In accordance with Financial Accounting Standards Board Statement No. 109
"Accounting for Income Taxes," deferred income taxes are recorded for all book
and tax temporary timing differences.
Investment tax credits relating to the Utilities property have been
deferred and will be amortized to income over the productive lives of the
related assets. Investment tax credits earned by the Corporation's other
subsidiary companies were recognized as a reduction of Federal income tax
expense in the year utilized.
Pension Plans -- Valley Gas maintains two non-contributory defined benefit
pension plans covering substantially all of Valley Gas' employees. The plans
provide benefits based on compensation and years of service. Valley Gas' policy
is to fund pension costs that are deductible for Federal income tax purposes
(see
F-9
<PAGE> 40
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
Note H). Additionally, Valley Gas maintains a 401(k) plan covering substantially
all of Valley Gas' employees. In fiscal 1996, 1995 and 1994, plan expense was
$126,100, $122,400 and $112,900, respectively.
Morris Merchants maintains an employee profit sharing plan covering
substantially all of the employees who have completed one year of service.
Contributions to the plan are at the discretion of the Board of Directors. In
fiscal 1996, 1995 and 1994 profit sharing expense was $68,400, $68,400 and
$73,700, respectively.
Bristol & Warren maintains a non-contributory defined contribution pension
plan covering substantially all of its employees. The plan provides benefits
based on hours worked and rate of pay. In fiscal 1996, 1995 and 1994 plan
expense was $23,000, $27,500 and $23,100, respectively.
New Accounting Standard -- In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of", which will be effective for the Corporation's fiscal year ending
August 31, 1997. This statement requires the Corporation to review long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The Corporation intends
to adopt this statement prospectively. The impact of the standard is not
expected to have a material impact on the Corporation's financial condition or
results of operations.
Inventories -- Fuel and other inventories are as follows:
<TABLE>
<CAPTION>
(UNAUDITED) AUGUST 31,
MAY 31, -------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Fuels (at average cost)................ $ 1,582,394 $3,622,698 $3,254,439
Merchandise (at LIFO).................. 1,332,693 1,225,893 1,078,459
----------- ---------- ----------
$ 4,098,032 $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. The Rights
are not currently exercisable, and trade automatically with the common stock.
The Rights will generally become exercisable and separate certificates
representing the Rights will be distributed, upon occurrence of certain events
in excess of a stipulated percentage of ownership.
F-10
<PAGE> 41
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
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.
A detail of short-term borrowings for fiscal 1996, 1995 and 1994 is as
follows:
<TABLE>
<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 fiscal 1995, respectively.
The fair market value of the Corporation's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Corporation for debt of the same remaining
maturities. Management believes the carrying value of the debt approximates the
fair value at August 31, 1996.
Regulatory treatment allows payments under capital leases to be recorded as
rental expenses. Rental expenses for all leases in fiscal 1996, 1995 and 1994
were $1,437,900, $1,179,800, and $1,235,200, respectively.
Valley Gas entered into an intermediate term financing arrangement with a
bank in November 1995. The terms of the arrangement call for a $6,000,000
revolving line of credit which matures in 1998, with the option to extend the
termination date to November 30, 2000.
The Corporation borrowed funds under a line of credit at rates less than
the prevailing prime rate, which are restricted in their use to being loaned to
Valley Gas Employee Stock Ownership Plan ("ESOP"). The receivable from the ESOP
has been shown as a reduction of common stock equity. The financing by the ESOP
is secured by the common stock of two unregulated subsidiaries and the
unallocated shares held by the ESOP.
F-11
<PAGE> 42
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
The Corporation's common stock purchased by the ESOP with the borrowed
money is held by the ESOP trustee in a "suspense account." As Valley Gas makes
contributions to the plan, a portion of the common stock is released from the
suspense account and allocated to participating employees. Any dividends on
unallocated shares are used to pay loan interest. ESOP expense in fiscal 1996
was $100,000. There was no ESOP expense recorded in fiscal 1995 and 1994.
NOTE E: RESTRICTION ON RETAINED EARNINGS
At August 31, 1996, $1,229,400 of the retained earnings of Valley Gas were
available for the payment of cash dividends to the Corporation under the most
restrictive provisions of Valley Gas' first mortgage bonds. There are no
restrictions as to the payment of dividends for the other subsidiaries.
NOTE F: INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109"), the Corporation's financial
statements are required, among other things, to record the cumulative deferred
income taxes on all temporary timing differences. As approved by the RIPUC, the
Utilities did not fully record deferred income taxes but, rather, "flowed
through" certain tax benefits to utility customers prior to fiscal 1994. At
August 31, 1996, the Corporation has a liability of $5,969,800 on the
Consolidated Balance Sheets as recoverable deferred income taxes and a
corresponding recoverable deferred charge. The liability represents the tax
effect of timing differences for which deferred income taxes had not been
provided, increased in accordance with SFAS 109 for the tax effect of future
revenue requirements. The Utilities are recovering unfunded deferred taxes from
utility customers over the remaining book life of utility property.
F-12
<PAGE> 43
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
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>
F-13
<PAGE> 44
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
Temporary differences which gave rise to the following deferred tax assets
and liabilities at August 31, 1996 and 1995 are:
<TABLE>
<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, the Utilities filed revised tariffs with the RIPUC to
consolidate their rate structure and to increase their combined annual revenues.
On October 18, 1995, the RIPUC authorized the Utilities to adjust their tariffs
to collect $1,100,000 and consolidate their rate structure.
NOTE H: COMMITMENTS AND CONTINGENCIES
Pension Plans -- Valley Gas has two non-contributory defined benefit
pension plans covering substantially all of its employees and a supplemental
pension plan covering certain officers.
Net periodic pension income for fiscal 1996, 1995 and 1994 included the
following components:
<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>
F-14
<PAGE> 45
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
<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>
Plan assets are invested in common stock, short-term investments and
various other fixed income securities.
The weighted-average discount rate used in determining the projected
benefit obligation were 7 3/4% and 7 1/2%, respectively, as of July 31, 1996 and
1995. The assumed rate of future compensation increases was 5 1/2% per year. The
expected long-term rate of return on assets was 9% for all years presented.
Postretirement Life and Health Benefit Plan -- Valley Gas sponsors a
postretirement benefit plan that covers substantially all of its employees. The
plan provides medical, dental and life insurance benefits. The plan is
non-contributory.
In accordance with Statement of Financial Accounting Standards No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
106"), Valley Gas records the cost for this plan on an accrual basis. As
permitted by SFAS 106, Valley Gas will record the transition obligation over a
twenty-year period. Valley Gas' cost under this plan for fiscal 1996, 1995 and
1994 was $809,500, $815,100 and $841,500, respectively. The regulatory asset
represents the excess of postretirement benefits on the accrual basis over
amounts authorized to be recovered in rates. The RIPUC authorized Valley Gas a
phase-in recovery of the tax deductible portion of these postretirement
benefits, if funded.
Valley Gas has funded a portion of these costs through trusts established
under Section 501(c)(9) of the Internal Revenue Code for the bargaining and
nonbargaining unit plans. Valley Gas is currently funding the amount recovered
through rates.
F-15
<PAGE> 46
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
The following table sets forth the Plans' funded status reconciled with the
amounts recognized in Valley Gas' 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>
Net periodic postretirement benefit cost consisted of the following:
<TABLE>
<CAPTION>
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>
For measurement purposes, a 12% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1995; the rate was assumed
to decrease gradually to 5% by fiscal 2002 and to remain at that level
thereafter. The rates of increase assumed for post-age 65 medical benefits were
slightly lower. The health care cost trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the assumed health
care cost trend rates by 1% in each year would increase the accumulated
postretirement benefit obligation at August 31, 1996 by $434,000 and the
aggregate of the service and the interest cost components of net periodic
postretirement benefit cost ("NPPBC") for the year by $58,000. The discount rate
was 7 1/2% for the development of the NPPBC. The assumed rate of future
compensation increases was 5 1/2% per year. The trend rates were set by the
RIPUC.
Long-Term Obligations -- The Utilities have contracts which expire at
various dates through the year 2012 for the purchase, delivery and storage of
natural gas and supplemental gas supplies. Certain contracts for the purchase of
the supplemental gas supplies contain minimum purchase obligations which
approximate 2% of total system requirements.
FERC Order No. 636 Transition Costs -- As a result of FERC Order 636, the
Utilities' interstate pipeline service providers have been required to unbundle
their supply, storage and transportation services. This unbundling has caused
the interstate pipeline companies to incur substantial costs in order to comply
F-16
<PAGE> 47
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
with Order 636. These transition costs include four types: (1) unrecovered gas
costs (gas costs that have been incurred but not yet recovered by the pipelines
when they were providing bundled service to local distribution companies); (2)
gas supply realignment costs (the cost of renegotiating existing gas supply
contracts with producers); (3) stranded costs (unrecovered costs of assets that
cannot be assigned to customers of unbundled services); and (4) new facilities
costs (costs of new facilities required to physically implement Order 636).
Pipelines are expected to be allowed to recover prudently incurred
transition costs from customers primarily through a demand charge, after
approval by FERC. The Utilities' pipeline suppliers began direct billing these
costs in fiscal 1994 as a component of demand charges. The Utilities estimate
their remaining portion of transition costs to be $1,700,000 and have recognized
a liability for these costs as of August 31, 1996. The RIPUC has allowed the
recovery of transition costs through the PGPA. Under the provisions of SFAS 71,
regulatory assets totaling $1,700,000 were recorded for the expected future
recovery of the transition obligations. Actual transition costs to be incurred
depend on various factors, and, therefore, future costs may differ from the
amounts discussed above.
Contingent Liability -- A lawsuit has been filed against Valley Gas and
other parties by Blackstone Valley Electric Company ("Blackstone") seeking
contribution towards a judgment against Blackstone's share of total clean-up
costs of approximately $6,000,000 at the Mendon Road site in Attleboro,
Massachusetts. The expenses relate to a site to which oxide waste was
transported in the 1930's prior to the incorporation of Valley Gas. Management
is of the opinion the Corporation will prevail as a result of the
indemnification provisions included in the agreement entered into when Valley
Gas acquired the utility assets from Blackstone. Management cannot determine the
future cash flow impact, if any, of this claim and related legal fees. Legal
fees associated with this claim are expected to be recovered in rates. In a
recent decision of the U.S. Court of Appeals for the First Circuit, Blackstone's
appeal of the judgment against it was sustained and the case was remanded for
further proceedings, including a referral of the case to the EPA to determine if
the substance in question (FFC) is hazardous.
Valley Gas received a letter of responsibility from the Rhode Island
Department of Environmental Management ("DEM") with respect to releases from
manufactured coal waste on its property that is the site of the former Tidewater
plant in Pawtucket, Rhode Island. Valley Gas and Blackstone have submitted a
site investigation report to DEM relating to certain releases on the site.
Management cannot determine the future cash flow impact, if any, of this claim
and related expenses. Management takes the position that it is indemnified by
Blackstone for any such expenses. Valley Gas intends to seek recovery from
Blackstone and any insurance carriers deemed to be at risk during the relevant
period. Remediation of sites such as the former Tidewater plant is governed by a
regulatory framework which now permits more flexibility in methods of
remediation and in property reuse.
Valley Gas received a letter of responsibility from DEM with respect to
releases from manufactured coal waste on its property that is the site of the
former Hamlet Avenue plant in Woonsocket, Rhode Island. Valley Gas and
Blackstone have submitted a site investigation work plan to address certain
releases at the site. Management cannot determine the future cash flow impact,
if any, of this claim and related expenses. Management takes the position that
it is indemnified by Blackstone for any such expenses. Valley Gas intends to
seek recovery from Blackstone and any insurance carriers deemed to be at risk
during the relevant period. Remediation of this site is also governed by a
regulatory framework that permits more flexibility in methods of remediation and
in property reuse.
F-17
<PAGE> 48
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
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.
F-18
<PAGE> 49
VALLEY RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
NOTE J: SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
NOVEMBER FEBRUARY MAY AUGUST
-------- ------- ------- -------
(IN THOUSANDS, EXCEPT AS TO EARNINGS (LOSS)
PER AVERAGE SHARE)
<S> <C> <C> <C> <C>
Fiscal 1996
Total operating revenues................... $14,095 $30,250 $23,665 $12,351
Income (loss) before Federal income
taxes.................................... $(1,214) $ 5,817 $ 2,934 $(1,948)
Net income (loss).......................... $ (775) $ 3,855 $ 1,995 $(1,077)
Earnings (loss) per average share.......... $ (.18) $ .90 $ .47 $ (0.25)
Fiscal 1995
Total operating revenues................... $14,774 $26,965 $21,438 $11,693
Income (loss) before Federal income
taxes.................................... $(1,186) $ 3,602 $ 2,242 $(1,300)
Net income (loss).......................... $ (735) $ 2,382 $ 1,586 $ (678)
Earnings (loss) per average share.......... $ (.17) $ .56 $ .38 $ (.16)
</TABLE>
NOTE K: NOTES TO UNAUDITED FINANCIAL INFORMATION
Earnings Per Share -- The Corporation computes earnings per average common
share based on the weighted average number of shares outstanding during the
period.
Results of Operations -- In the opinion of the Corporation, the
accompanying unaudited consolidated condensed financial statements contain all
adjustments (consisting of only normal recurring accruals and matters discussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations") necessary to present fairly the financial position as of May 31,
1997, the results of operations for the nine-months ended May 31, 1997 and 1996
and Statement of Cash Flows for the nine-months ended May 31, 1997 and 1996.
The results of operations for the nine-month periods ended May 31, 1997 and
1996 are not necessarily indicative of the results to be expected for the full
year.
F-19
<PAGE> 50
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS; ANY
INFORMATION OR REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE CORPORATION OR ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS; NOR DOES IT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES COVERED BY THIS PROSPECTUS BY THE CORPORATION OR ANY UNDERWRITER IN
ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE CORPORATION OR ANY
UNDERWRITER TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE CORPORATION
SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Incorporation of Certain Information
by Reference........................ 3
Prospectus Summary.................... 4
Risk Factors.......................... 6
Valley Resources, Inc. ............... 7
Use of Proceeds....................... 8
Capitalization........................ 8
Selected Financial Data............... 9
Management's Discussion and Analysis
of the Results of Operations and
Financial Condition................. 10
Business.............................. 16
Price Range of Common Stock and
Dividends........................... 21
Description of Common Stock........... 21
Description of Debentures............. 23
Underwriting.......................... 29
Legal Matters......................... 30
Experts............................... 30
Index to Consolidated Financial
Statements.......................... F-1
============================================
</TABLE>
======================================================
VALLEY RESOURCES, INC.
620,000 SHARES
OF
COMMON STOCK
($1 PAR VALUE)
$7,000,000
OF
7.70% DEBENTURES DUE 2027
------------------------
PROSPECTUS
DATED AUGUST 21, 1997
------------------------
EDWARD D. JONES & CO., L.P.
FIRST ALBANY CORPORATION
======================================================
