Challenges & Opportunities
(Photo appears here)
Valley Resources, Inc.-Annual Report 1997
<PAGE>
focus
innovation
people
options
The only constant in today's public utility environment is change. The
companies that plan for the challenges brought about by that change and the
opportunities that those challenges present will thrive in the new environment.
Valley Resources, Inc. has structured itself to meet the challenges by
capitalizing on new opportunities in the ever-changing energy services
marketplace. This report will discuss the corporate focus to anticipate change,
the innovation used to address the marketplace, how its people provide the
energy to fuel its programs and the options it has to evaluate as we move
towards the 21st century.
Cover Photo: Valley Propane and Vamco
worked cooperatively to answer the need for an
economically viable alternative to expensive electric
heating at The Bay View Condominiums in
Jamestown, Rhode Island.
Valley Propane provided a competitively priced
propane contract and Vamco designed and
installed a high efficiency energy system.
<PAGE>
Corporate Overview
Valley Resources, Inc. (Valley or the Corporation) is a public utility
holding company. The Corporation has five active wholly-owned subsidiaries:
Valley Gas Company (Valley Gas or the Company) and Bristol & Warren Gas Company
(Bristol & Warren) (collectively the "Utilities"), both regulated natural gas
distribution companies; Valley Appliance and Merchandising Company (VAMCO), a
merchandising, appliance rental, sales and service company; Valley Propane,
Inc., a wholesale and retail propane sales company and Morris Merchants, Inc.
(Morris), d/b/a the Walter F. Morris Company, a representative distributor of
franchised lines. The Corporation also has an 80 percent interest in Alternate
Energy Corporation (AEC) which sells, installs and designs natural gas refueling
facilities, natural gas conversion systems and energy use control devices.
<TABLE>
Financial Highlights
<CAPTION>
For the year ended August 31 (in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues............................... $87,484 $80,360 $74,870
Operation expenses, maintenance and depreciation. 75,302 67,975 64,392
------- ------- -------
Operating income before taxes.................... 12,182 12,385 10,478
Taxes - other than Federal income................ 4,243 4,091 4,002
Taxes - Federal income........................... 1,335 1,444 732
Other income - net of taxes...................... 423 460 115
Interest charges................................. 3,368 3,312 3,304
------- ------- -------
Net income....................................... $ 3,659 $ 3,998 $ 2,555
------- ------- -------
Earnings per average common share outstanding.... $ 0.86 $ 0.94 $ 0.61
Dividends declared per common share.............. $ 0.735 $ 0.725 $ 0.71
Net utility plant (thousands).................... $50,447 $49,442 $47,411
Capital expenditures (thousands)................. $ 4,293 $ 5,009 $ 5,916
Average number of common shares outstanding...... 4,267,038 4,258,877 4,222,662
Number of stockholders........................... 2,774 2,824 2,887
</TABLE>
1
<PAGE>
Message to Stockholders
Nineteen ninety-seven was a year of accomplishment and growth for Valley
Resources. Our nonutility revenues and earnings reached record levels. Earnings
from our nonutility subsidiaries exceeded $1.0 million, an increase of more than
32 percent over the prior year. While utility revenues and earnings were
adversely affected by warmer than normal weather during the prime heating
season, continued growth in the number of customers served and the strong local
economy point toward improved future results. The communities served by our
regulated utilities continue to experience significant economic development in
both the residential and commercial sectors. Our nonutility businesses achieved
outstanding results in the year just completed and are poised to continue to
make major contributions to the success of the Corporation.
This year's report reviews the challenges facing Valley, and the
opportunities these challenges present, organized around the themes of focus,
innovation, people and options. The Corporate focus at Valley continues to be on
the long-term success of the organization and its many stakeholders. As the
energy business evolves and deals with issues such as customer choice, unbundled
services and products, and increased competition, Valley is well prepared to
succeed in this dynamic new marketplace. Our diversified portfolio of energy
products, services and equipment provides us with a unique opportunity to
maximize shareholder value and achieve consistent growth.
During 1997, Valley accelerated its efforts to develop and market
innovative products and services. Our VAMCO subsidiary intensified its efforts
in the commercial and institutional segments while maintaining a very
competitive position in the more traditional residential appliance sales, rental
and service business. VAMCO also introduced water filtration systems, under the
trade name of Val Pure, as a new and exciting product line during the latter
part of 1997. Initial sales of this product have been encouraging. Our propane
subsidiary achieved record earnings in 1997 by engaging in innovative marketing
and operating strategies. Morris Merchants which celebrated its 75th anniversary
this year, a significant milestone for any business entity, also had a very
successful 1997. In its first full year as a member of the Valley family,
Alternate Energy Corporation (AEC)
2
<PAGE>
(Photo appears here)
Photo Tag: Valley Resources Common Stock is traded on the American Stock
Exchange. In August of 1997, the Corporation sold an additional
620,000 shares through Edward D. Jones and First Albany Corporation.
continued to build on its strengths in the area of compressed natural gas
refueling facilities and vehicle conversions. Major projects were completed in
Rocky Hill, and Berlin, Connecticut and Manchester, New Hampshire. In addition,
AEC developed and has a patent pending for a fuel control system which provides
facility and equipment operators with an automated method to control fuel use
and improve efficiency.
Valley has long recognized that the strength of the organization lies with
the dedicated people whose individual commitment makes it possible to provide
the level of service necessary to compete successfully in the energy products
and services business. Whether it be a service technician who goes the extra
mile to ensure that a customer's heating system is operating properly on a cold
winter night or someone in our customer relations area who takes the time to
explain clearly to a customer the sometimes complex reasons for changes in their
monthly bill, Valley's employees have always responded with a dedication and
commitment second to none. This year our company embarked on an
3
<PAGE>
extensive employee training and development program designed to enhance employee
involvement in improving their competitiveness through an increased customer
service focus. Initial funding for this project was provided through a grant
from the State of Rhode Island.
Valley Gas and Utility Workers Union of America Local 472 also achieved a
milestone this year as they successfully negotiated a new labor agreement more
than three months before the expiration of the former agreement. A new early
agreement was also reached with bargaining unit employees at Bristol & Warren
Gas, represented by Service Employees International Union Local 134.
In considering corporate focus, innovation and people, we are well aware
that our customers, particularly in the utility subsidiaries, are facing options
which were not conceivable several years ago. During 1997 our utility companies
negotiated a firm transportation tariff, approved by the Rhode Island Public
Utilities Commission, which for the first time allows our largest customers to
purchase gas directly from third-party suppliers and marketers. The Utilities
will continue to deliver this gas through its distribution system and bill
customers for this service. The future will no doubt offer more options to
customers for the goods and services provided by Valley. We believe that these
options will result in increased gas utilization and promote growth for our
utility business.
Your Corporation successfully completed a major recapitalization during
1997. In August we issued 620,000 shares of common stock and sold $7.0 million
in debentures. The proceeds of this transaction were used to reduce short-term
debt and to position the Corporation to take advantage of investment and growth
opportunities as they become available.
In March 1997, the Board of Directors increased the Corporation's dividend,
marking the 19th consecutive year of dividend increases. The indicated annual
dividend rate is now 74 cents per share.
As we look back on 1997, we see a year of progress and opportunity. I
believe that Valley is well positioned to capitalize on the changing marketplace
for energy products and services. On behalf of the Board of Directors, I would
like to welcome the many new investors from our recent public offering. Please
be assured that the management and Board will work diligently to produce results
which will enhance the
4
<PAGE>
value of your investment. To our long-term shareholders, we thank you for your
continued support and confidence. To our employees, your ongoing commitment and
dedication is recognized and appreciated. Finally, to our many customers, we
appreciate your business and will do whatever is necessary to earn your ongoing
support in the years ahead.
Sincerely,
S/Alfred P. Degen
Alfred P. Degen
President & Chief Executive Officer
(Photo appears here)
Photo Tag: Alfred P. Degen, President & Chief Executive Officer
5
<PAGE>
Summary of Annual Earnings and Dividends
Consolidated net income is derived from the operations of the Corporation's
six active subsidiaries: Valley Gas Company, Bristol & Warren Gas Company,
Valley Appliance and Merchandising Company, Valley Propane, Inc., Morris
Merchants, Inc. and Alternate Energy Corporation. Consolidated net income for
fiscal 1997 was $3,659,300 or $0.86 per average common share outstanding, as
compared to $3,998,400 or $0.94 per share in fiscal 1996.
Valley Gas and Bristol & Warren, the utility subsidiaries, contributed
$2,607,500 to consolidated net income, down from $3,206,400 in fiscal 1996.
Utility operations experienced earnings declines as a result of the weather and
its impact on gas sales. Weather during the winter period, as measured on a
degree day basis, was 10.4 percent warmer than in the previous year and 5.4
percent warmer than normal. This resulted in a decline in annual gas sales of
3.2 percent from the prior year. Utility earnings were also affected by a
decline in the off-system sales market. In the prior year the Utilities were
able to make off-system sales as a result of the demand for natural gas caused
by the extremely cold weather in certain parts of the country. This market did
not materialize in fiscal 1997.
The contribution of the nonutility operating companies to consolidated
earnings was $1,051,800 compared to $792,000 for fiscal 1996. Retail, wholesale
and propane operations all contributed to the increased earnings of the
nonutility subsidiaries. Retail operations have continued to be positively
impacted by sales in the commercial market and conversions in the residential
heating market from electric to natural gas and propane. Improved sales and
margins for the wholesale operation also contributed to increased earnings. The
addition of new product lines enhanced the company's profitability. Valley
Propane, through new inventory management techniques, was able to improve
earnings despite decreased volumes sold. The installation of natural gas
refueling stations generated increased revenues for AEC; however, start-up
expenses resulted in losses in fiscal 1997.
In March 1997 the Board of Directors increased the dividend 1.4 percent to
an indicated annual rate of $0.74 per share. This is the nineteenth consecutive
year the dividend has been increased. The Board's continuing policy is to pay a
reasonable percentage of sustainable corporate earnings in the form of
dividends.
<TABLE>
Dividends and Market Data
<CAPTION>
Cash Market Price
1997 Dividend High Low
<S> <C> <C> <C>
First Quarter..... $.1825 $13.00 $11.75
Second Quarter.... .1825 12.00 11.00
Third Quarter..... .1850 12.50 10.75
Fourth Quarter.... .1850 11.94 10.50
1996
- -----------------------------------------------------
First Quarter..... $.18 $11.50 $10.25
- -----------------------------------------------------
Second Quarter.... .18 11.38 10.50
- -----------------------------------------------------
Third Quarter..... .1825 11.88 10.88
- -----------------------------------------------------
Fourth Quarter.... .1825 12.63 11.88
- -----------------------------------------------------
</TABLE>
6
<PAGE>
(Charts appear here)
<TABLE>
net income
<CAPTION>
Utility Nonutility
<S> <C> <C>
1993 2,879,500 847,700
1994 2,914,300 911,700
1995 1,665,400 889,500
1996 3,206,400 792,000
1997 2,607,500 1,051,800
</TABLE>
<TABLE>
<CAPTION>
dividends paid
<S> <C>
1993 $0.66
1994 $0.69
1995 $0.71
1996 $0.73
1997 $0.74
</TABLE>
<TABLE>
market price
<CAPTION>
High Low Close
<S> <C> <C> <C> <C>
1996 1st Quarter 11.50 10.25 10.63
1996 2nd Quarter 11.38 10.50 10.88
1996 3rd Quarter 11.88 10.88 11.88
1996 4th Quarter 12.63 11.88 11.88
1997 1st Quarter 13.00 11.75 11.88
1997 2nd Quarter 12.00 11.00 11.00
1997 3rd Quarter 12.50 10.75 11.81
1997 4th Quarter 11.94 10.50 11.00
</TABLE>
7
<PAGE>
a clear view of efficiency and progress
(Photo appears here)
Photo Tag: A view of the Naval War College and the Newport Bridge, Newport,
Rhode Island from The Bay View Condominiums.
Valley Resources has remained focused on our core business philosophy of
anticipating change in order to meet our customers' needs for innovative
approaches to delivering energy and energy-related services. The basis of this
philosophy is our strategic plan which has five key objectives:
- Improving corporate profitability and maximizing shareholder value,
- Creating a challenging corporate environment that will result in superior
customer service,
- Expanding marketing opportunities in the traditional marketplace,
- Improving the market share of the subsidiaries, and
- Preparing for marketing opportunities and the inherent risk in the new
deregulated environment.
The utility subsidiaries, Valley Gas and Bristol & Warren, maintained a
twofold objective in fiscal 1997. Traditional utility service responsibilities,
integrated with the demands of deregulation, continued to pose the challenges of
increasing natural gas volumes, maintaining gas supply flexibility and providing
competitive pricing. Conversions to natural gas from electric and oil provided a
valuable source of opportunities to increase volumes in an economic environment
that is benefiting from commercial growth and improved regional employment.
Identifying new marketing segments resulted in new loads in the residential
market, most notably at North Farm Condominiums in Bristol and several
multi-home subdivisions in Valley Gas' service area.
The utility subsidiaries maintained constant vigilance in the management of
supply contracts, a demanding task as deregulation allows customers to choose
their natural gas supplier. These contracts provide for least cost pricing while
at the same time preserving supply security. Deregulation of natural gas has
increased the complexity of supply contracting as well as the need for flexible
and creative methods of fuel cost management.
The nonregulated subsidiaries also adjusted their focus according to the
particular challenges each faced. Morris Merchants, Inc., located in Canton,
Massachusetts, a representative distributor of franchised plumbing and heating
lines from manufacturers across the United States, increased its sales volumes
with new marketing techniques for existing products and through additional,
established product lines. The successful internal analysis undertaken by Morris
in fiscal 1997 led to a restructure of its vendor contracts to better manage
inventory which resulted in increases in margins earned.
Valley Propane improved profitability by structuring its winter supply
strategy to mitigate weather-related price fluctuations. The result -- increased
earnings, despite the reduction in sales caused by the warmer than normal
winter.
VAMCO, the Corporation's merchandising subsidiary, effectively broadened
its scope in fiscal 1997. An expansion of products and services was accompanied
by a change in market approach. VAMCO 's traditional role was one of supporting
utility operations by supplying equipment and services that encouraged natural
gas growth in the Utilities' service area. In fiscal 1997, VAMCO's primary
marketing objective was to continue a more aggressive and comprehensive approach
in the commercial sector by providing packaged solutions which include design,
installation and financing services. This new approach facilitated the
identification and achievement of energy goals for small and mid-sized
businesses and expanded into projects that generated multiple sales
opportunities.
In fiscal 1997 AEC identified those markets where its technological
expertise added value. AEC focused its efforts on the construction of natural
gas fueling stations, while still responding to continuing demand for its
patented technology for the conversion of specialty vehicles.
8
<PAGE>
focus
(3 Photos appear here)
Photo tag: Robert White, Valley Propane Sales and Operation Manager,
a competitive sailor, keeps a watchful eye on the competition
and harnesses the wind in a regatta between Jamestown and Newport.
The focus required to compete effectively in order to meet our customers'
changing needs is driven by our strategic plan. Dynamic products and services,
delivered with a relentless passion for staying the course outlined by this
plan, allow us to be responsive to these changing customer needs.
9
<PAGE>
inspiration plus opportunity
(Photo appears here)
Photo tag: Chief Anthony Silva of Cumberland's
Police Department thanks AEC for the
innovative package of outside financing
and utility funding which allowed his
fleet to be powered by natural gas.
Innovation is bringing about change by providing a complete new product or
service in the marketplace or by providing an existing product or service in a
more unique way. During 1997, the subsidiaries of Valley Resources were able to
do both.
Collaboration between VAMCO and Morris Merchants allowed VAMCO to bring a
new product line to market while Morris established a new outlet for a long-time
supplier. In the summer of 1997, VAMCO introduced a new product; ValPure Water
Filtration Systems. This attractive package of home water filtration products
and services arose from a collaborative use of VAMCO's marketing and service
expertise and the technical know-how of its affiliate and product vendor, Morris
Merchants. Profits that will be earned are not only from the sales of the
products but, as important, from the continuous revenue stream afforded by
customers who sign up for the convenient option of automatic replacement of the
water filter cartridges. At the same time Morris Merchants benefited as the
distributor for the manufacturer of the filtration products and from the
expanding sales opportunities for these products.
Discussions with various industrial customers about their energy needs and
the cost savings afforded them by taking advantage of service offerings brought
about by deregulation provided an opportunity for AEC to bring a new product to
market. The result - a second patented technology. The new device permits
automated regulation of gas flow by volume and/or time of day. This technology
will enable commercial and industrial multiple-fuel users to achieve savings
through better fuel management.
As a result of meetings and discussions with large commercial and
industrial customers the Utilities recognized the desire of several of these
customers to purchase their own supplies. The Utilities decided that a complete
redesign of their rate structure would be necessary to be able to render firm
transportation service while maintaining a competitively priced residential
service. In June 1997, the Rhode Island Public Utilities Commission approved a
settlement agreement forged by the joint efforts of the Utilities, customers,
the Division of Public Utilities and Carriers and the office of the Rhode Island
Attorney General. The Utilities now offer a firm transportation service as well
as significantly lower firm service rates to large-volume customers. These rates
were designed to improve the competitive position of natural gas and increase
gas volumes.
(Photo appears here)
10
<PAGE>
innovation
(3 Photos appear here)
Photo tag: Tom Aubee, President of Alternate Energy Corporation, uses
innovative approaches to inspire the members of the soccer team
he coaches in North Kingstown, Rhode Island.
The collaboration of Valley's subsidiaries to anticipate the needs of customers
resulted in new innovative products and new unique approaches to traditional
markets. As our investment in innovation continues, it also brings new
opportunities for growth in earnings.
11
<PAGE>
Valley's greatest resource
(Photo appears here)
Photo tag: Through funding by the State of Rhode Island,
all employees are participating in workforce
development activities including leadership
development, work process evaluation and
instruction in competitiveness and problem
solving.
The Corporation realizes that it is through the employees of Valley
Resources that opportunity in challenge is recognized. The programs and products
outlined in this report illustrate that the employees of Valley Resources are
motivated to seize opportunities to successfully implement Valley's strategic
plan. To that end, fiscal 1997 was the beginning of an internal analysis
involving all employees. This ongoing initiative has resulted in an eagerness on
the part of employees to view themselves, their business and markets from a
fresh perspective. One concrete result of this process is a continuous
improvement effort undertaken by multi-disciplined teams of employees. These
teams are researching issues with the goal of making recommendations to enhance
customer satisfaction and operational efficiency.
While this continuous improvement process involves the review of
cross-functional processes, each department of the organization is evaluating
exactly what it is doing and why. This self-analysis has resulted in changes in
procedures and systems to improve customer service and efficiency. Additionally,
training is being offered in both problem-solving techniques for all employees
and leadership skills for management employees. Both of these training programs
are designed to equip employees with the skills needed to maintain our
competitive edge.
(Photo appears here)
Photo tag: In a cross-training exercise resulting from the desire
to understand work process and job responsibilities,
Jim Chadwick, Steve McManus, Mike Paquin and Bob Hallberg,
representatives of the construction and sales departments,
share information.
12
<PAGE>
People
(Photo appears here)
Photo tag: Members of a "work process" team, Sue Driscoll, Judy Tomlinson,
Alan Ladieu and Noelle Morin, provide a fresh perspective to the
customer bill design.
(Photo appears here)
Photo tag: Customer Service employee Noelle Morin and husband Brian meet the
challenges of the twists and turns on the Blackstone River.
(Photo appears here)
Photo tag: Valley Resources work process training creates interaction among
employees.
Valley Resources realizes that it must provide a challenging corporate
environment that fosters individuals to view themselves, our businesses and our
markets from a fresh perspective. These initiatives become the basis on which
teams are developed to enchance customer satisfaction and operational
efficiency, the cornerstone of superior customer service.
13
<PAGE>
Choices and opportunities
(Photo appears here)
Photo tag: VAMCO Residential Sales Supervisor, Tim Draper, explains the
features of ValPure Water Filtration System to a prospective
customer.
Change is ongoing, and success depends on the Corporation's maintaining
flexibility in both its outlook and in its commitments. The subsidiaries are
poised for rapid and competitively-priced responses to emerging market trends
while improving service performance in traditional markets. With the new
transportation service the Utilities have taken the first step toward unbundling
of services in this era of deregulation. Investigation of innovative
cost-management programs is an ongoing process in a competitive utility
environment. The Utilities are developing a flexible integrated resource plan
and reviewing approaches to rendering earnings less sensitive to the vagaries of
weather.
The greatest potential for growth is in unregulated markets. In addition to
its newly expanded offerings of its patented systems, AEC also plans to take
advantage of the market opportunities provided by the commercialization of
fuel-cell technology and will educate the markets about the value of emerging
natural gas technologies. Additionally, markets are being expanded beyond the
traditional Northeast sales region.
For VAMCO, expansion beyond the geographic area serviced by the Utilities
will provide growth in new markets for its known products. Morris Merchants'
growth potential can be pursued along three routes: increasing sales in existing
products lines, developing opportunities in new lines and expanding
geographically.
The Corporation will continue its diversification efforts through
acquisitions and alliances to strengthen its competitive position in the
changing world of energy products and services. The Corporation recently took an
important step to make sure that its options for the future remain open. In
August 1997, 620,000 shares of common stock and $7 million of 30-year debentures
were sold. This recapitalization provides a solid financial foundation for
flexibility, choice and growth.
(Photo appears here)
Photo tag: Commercial and Industrial Marketing Consultant, C. Mark Cataudella,
meets with Father Louis Natalizia. Father Natalizia turned to the
energy management expertise of Vamco to ensure a comfortable
environment for the parishioners and students of his parish.
14
<PAGE>
options
(Photo appears here)
Corporate profitability depends on our ability to
evaluate the options presented in prepareing for
new markets while mitigating the risk inherent in
the new deregulated environment. This is
achieved by maintaining flexibility in both our
outlook and our commitments.
(Photo appears here)
Photo tag: Mike Marks and Steve Healey review
supply contracts which will enable
the Utilities to maintain gas supply
flexibility.
(Photo appears here)
Photo tag: Corrosion Control Technician,
Joe Goudreau, an expert rock climber,
reinforces the need to evaluate
one's options carefully as he feels
for the "right" grip ascending a
natural peak in Lincoln Woods State
Park
15
<PAGE>
(Charts appear here)
<TABLE>
Weather Variance from Normal
<CAPTION>
Actual Normal %Change
<S> <C> <C> <C>
1993 6,341 6,405 -1.0%
1994 6,459 6,339 1.9%
1995 5,820 6,339 -8.2%
1996 6,369 6,339 0.5%
1997 6,191 6,339 -2.3%
</TABLE>
<TABLE>
Natural Gas Volumes
<CAPTION>
MMcf Sales MMcf Transported
<S> <C> <C>
1993 8,420 4,031
1994 8,890 3,624
1995 8,667 4,419
1996 9,302 3,273
1997 9,104 5,043
</TABLE>
<TABLE>
<CAPTION>
Book Value/Market Price
Year End
<S> <C> <C>
1993 5.92 15.375
1994 6.18 12.375
1995 6.10 10.750
1996 6.33 11.875
1997 7.00 11.000
</TABLE>
<TABLE>
<CAPTION>
Yield on Year End
Market Price
<S> <C>
1993 4.3%
1994 5.6%
1995 6.6%
1996 6.1%
1997 6.7%
</TABLE>
16
<PAGE>
Financial Information
Consolidated Statements of Earnings ..................................... 18
Consolidated Statements of Cash Flows ................................... 19
Consolidated Balance Sheets ............................................. 20-21
Consolidated Statements of Changes in Common Stock Equity ............... 22
Consolidated Statements of Capitalization ............................... 22
Notes to Consolidated Financial Statements .............................. 23-31
Report of Independent Certified Public Accountants ...................... 31
Management's Discussion and Analysis .................................... 32-36
Summary of Consolidated Operations ...................................... 37
Gas Operating Statistics ................................................ 38
Directors ............................................................... 39
Officers ................................................................ 40
Corporate Information ................................................... 40
17
<PAGE>
<TABLE>
Consolidated Statements of Earnings
<CAPTION>
For the year ended August 31 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
Utility gas revenues ..................... $66,230,787 $60,773,519 $56,012,913
Nonutility revenues ...................... 21,253,190 19,586,615 18,857,277
----------- ----------- -----------
Total ................................ 87,483,977 80,360,134 74,870,190
----------- ----------- -----------
Operating expenses:
Cost of gas sold ......................... 37,843,842 31,951,154 30,229,359
Cost of sales - nonutility ............... 14,790,835 13,688,935 13,189,797
Operations ............................... 17,890,281 17,706,904 16,752,501
Maintenance .............................. 1,633,671 1,671,971 1,535,206
Depreciation (Note A) .................... 3,143,719 2,956,727 2,684,755
Taxes - other than Federal income ....... 4,242,841 4,090,751 4,002,076
- Federal income (Notes A and F) .. 1,334,677 1,443,547 731,947
----------- ----------- -----------
Total ................................ 80,879,866 73,509,989 69,125,641
----------- ----------- -----------
Operating income ............................ 6,604,111 6,850,145 5,744,549
Other income - net of tax (Notes A and F) ... 423,476 459,938 115,032
----------- ----------- -----------
Total income before interest ......... 7,027,587 7,310,083 5,859,581
----------- ----------- -----------
Interest charges:
Long-term debt ........................... 1,957,052 1,927,154 1,947,205
Other .................................... 1,411,222 1,384,569 1,357,451
----------- ----------- -----------
Total ................................ 3,368,274 3,311,723 3,304,656
----------- ----------- -----------
Net income available for common stock ....... $ 3,659,313 $ 3,998,360 $ 2,554,925
=========== =========== ===========
Average number of common shares outstanding . 4,267,038 4,258,877 4,222,662
Earnings per average common share outstanding $ 0.86 $ 0.94 $ 0.61
The accompanying Notes are an integral part of these statements.
</TABLE>
18
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
For the year ended August 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Net income ....................................... $ 3,659,313 $ 3,998,360 $ 2,554,925
Adjustments to reconcile net income to net cash:
Depreciation ................................... 3,143,719 2,956,727 2,684,755
Provision for uncollectibles ................... 1,603,597 1,459,761 1,274,238
Deferred Federal income taxes .................. . 441,638 922,007 619,918
Amortization of investment tax credits ......... (49,090) (49,452) (50,144)
Change in assets and liabilities:
Accounts receivable ............................ (2,841,404) (718,826) (1,612,297)
Deferred fuel costs ............................ 1,620,252 (3,977,779) 2,629,056
Unbilled gas costs ............................. (1,140) (4,603) (4,617)
Fuel and other inventories ..................... (71,908) (663,964) 502,202
Prepayments .................................... 119,631 (249,971) (72,088)
Common stock held for dividend reinvestment plan (220,829) 158,876 (271,315)
Prepaid pensions ............................... (924,745) (625,374) (572,320)
Accounts payable ............................... (944,778) 921,892 (275,189)
Security deposits .............................. (61,952) (65,258) 30,945
Taxes accrued .................................. 171,730 (317,791) (131,917)
Other .......................................... 520,799 (75,564) (578,144)
------------ ------------ ------------
Total adjustments ............................ 2,505,520 (329,319) 4,173,083
------------ ------------ ------------
Net cash provided by operating activities ........ 6,164,833 3,669,041 6,728,008
------------ ------------ ------------
Cash flows from investing activities:
Utility capital expenditures ..................... (3,599,752) (4,396,081) (5,335,159)
Nonutility capital expenditures .................. (693,229) (612,628) (580,772)
Other investments ................................ (81,222) (49,360) (13,400)
------------ ------------ ------------
Net cash used by investing activities ............ (4,374,203) (5,058,069) (5,929,331)
------------ ------------ ------------
Cash flows from financing activities:
Dividends paid ................................... (3,130,413) (3,083,369) (2,989,702)
Common stock transactions ........................ 6,450,861 184,615 391,278
Issuance of long-term debt, net of issuance cost.. 9,655,515 -0- -0-
Issuance of revolving credit arrangement ......... 100,000 2,200,000 -0-
Retirement of long-term debt ..................... (1,553,395) (860,000) (1,333,000)
Increase (decrease) in notes payable ............. (13,000,000) 3,000,000 3,000,000
------------ ------------ ------------
Net cash (used) provided by financing activities . (1,477,432) 1,441,246 (931,424)
------------ ------------ ------------
Net increase (decrease) in cash ..................... 313,198 52,218 (132,747)
Cash, beginning ..................................... 506,813 454,595 587,342
------------ ------------ ------------
Cash, ending ........................................ $ 820,011 $ 506,813 $ 454,595
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ....................................... $ 3,378,894 $ 3,311,577 $ 3,265,612
============ ============ ============
Federal income taxes ........................... $ 861,140 $ 885,000 $ 380,000
============ ============ ============
Supplemental disclosures of noncash activity:
Capital lease obligations incurred ............... $ 388,139 $ 1,844,817 $ 300,972
============ ============ ============
The accompanying Notes are an integral part of these statements.
</TABLE>
19
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
August 31 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Utility plant, at cost (Notes A and D) ...................................... $79,728,717 $76,534,841
Less: Accumulated provision for depreciation (Note A) ...................... 29,281,602 27,092,766
----------- -----------
Net utility plant ........................................................... 50,447,115 49,442,075
----------- -----------
Leased property-less accumulated amortization of $3,379,848 and $2,789,155 .. 2,377,376 2,944,581
----------- -----------
Nonutility property-less accumulated provision for depreciation of $4,076,160
and $3,850,692 (Note A) ................................................... 3,711,869 3,567,797
----------- -----------
Other investments ........................................................... 1,591,682 1,510,460
----------- -----------
Current assets:
Cash .................................................................... 820,011 506,813
Accounts receivable-less allowance for uncollectibles of $840,433
and $719,721 ........................................................... 11,183,288 9,945,481
Deferred fuel costs (Note A) ............................................. -0- 827,012
Deferred unbilled gas costs (Note A) ..................................... 440,034 438,894
Fuel and other inventories (Note A) ...................................... 6,120,355 6,048,447
Prepayments .............................................................. 1,289,671 1,409,302
Common stock held for dividend reinvestment plan (Note B) ................ 351,648 130,819
----------- -----------
Total current assets .................................................. 20,205,007 19,306,768
----------- -----------
Deferred debits:
Recoverable postretirement benefit (Note H) .............................. 461,948 692,922
Recoverable vacations accrued ............................................ 595,781 633,194
Recoverable deferred Federal income taxes (Note F) ....................... 6,043,670 5,969,839
Recoverable transition obligation (Note H) ............................... 373,200 1,700,000
Unamortized debt discount and expense .................................... 1,745,161 1,523,092
Prepaid pensions (Note H) ................................................ 7,095,582 6,170,837
Other .................................................................... 3,048,746 3,227,420
----------- -----------
Total deferred debits ................................................ 19,364,088 19,917,304
----------- -----------
Total assets ......................................................... $97,697,137 $96,688,985
=========== ===========
The accompanying Notes are an integral part of these statements.
</TABLE>
20
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
August 31 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalization and liabilities:
Capitalization (see Consolidated Statements of Capitalization) $66,293,195 $50,348,234
----------- -----------
Revolving credit arrangement (Note D) ........................ 2,300,000 2,200,000
----------- -----------
Obligations under capital leases (Note D) .................... 1,541,418 2,133,543
----------- -----------
Current liabilities:
Current maturities of long-term debt (Note D) ............. 150,000 500,000
Obligations under capital leases (Note D) ................. 835,957 811,036
Notes payable (Note C) .................................... 1,900,000 14,900,000
Accounts payable .......................................... 4,298,429 5,243,207
Security deposits ......................................... 1,034,795 1,096,747
Taxes accrued ............................................. 361,755 190,025
Deferred fuel costs (Note A) .............................. 793,240 -0-
Accrued interest .......................................... 541,359 551,979
Other ..................................................... 696,889 712,413
----------- -----------
Total current liabilities .............................. 10,612,424 24,005,407
----------- -----------
Commitments and contingencies (Note H)
Deferred credits:
Unamortized investment tax credit (Note A) ................ 674,598 723,688
Transition obligation (Note H) ............................ 373,200 1,700,000
Unfunded deferred Federal income taxes (Note F) ........... 1,886,708 1,922,773
Postretirement benefit obligation (Note H) ................ 461,948 692,922
Other ..................................................... 1,734,012 1,700,469
----------- -----------
Total deferred credits .................................. 5,130,466 6,739,852
----------- -----------
Deferred Federal income taxes (Notes A and F) ................ 11,819,634 11,261,949
----------- -----------
Total liabilities ....................................... 31,403,942 46,340,751
----------- -----------
Total capitalization and liabilities .................... $97,697,137 $96,688,985
=========== ===========
The accompanying Notes are an integral part of these statements.
</TABLE>
21
<PAGE>
<TABLE>
Consolidated Statements of Changes in Common Stock Equity
<CAPTION>
Common Shares Issued Paid in Retained
& Outstanding Capital Earnings
- ------------------------------------------------------------------------------------------------------------------
Number Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, August 31, 1994........................ 4,213,043 $4,213,043 $17,695,155 $7,270,192
--------- ---------- ----------- ----------
Add (deduct):
Net income................................... 2,554,925
Cash dividends on common stock............... (2,989,702)
Dividend reinvestment plan (Note B).......... 47,754 47,754 465,376
Other ....................................... (121,852)
--------- ---------- ----------- ----------
Balance, August 31, 1995........................ 4,260,797 4,260,797 18,038,679 6,835,415
--------- ---------- ----------- ----------
Add (deduct):
Net income................................... 3,998,360
Cash dividends on common stock............... (3,083,369)
Dividend reinvestment plan (Note B).......... 19,231 19,231 202,680
Other ....................................... (37,296)
--------- ---------- ----------- ----------
Balance, August 31, 1996........................ 4,280,028 4,280,028 18,204,063 7,750,406
--------- ---------- ----------- ----------
Add (deduct):
Net income................................... 3,659,313
Cash dividends on common stock............... (3,130,413)
Issuance of Common Stock..................... 620,000 620,000 5,893,100
Other ....................................... (62,239)
--------- ---------- ----------- ----------
Balance, August 31, 1997........................ 4,900,028 $4,900,028 $24,034,924 $8,279,306
========= ========== =========== ==========
The accompanying Notes are an integral part of these statements.
</TABLE>
<TABLE>
Consolidated Statements of Capitalization
<CAPTION>
August 31 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Common stock equity:
Common stock, $1 par value (Note B)
Authorized 20,000,000 shares
Issued and outstanding 4,900,028 and 4,280,028 shares $ 4,900,028 $ 4,280,028
Paid in capital (Note B) ................................. 24,034,924 18,204,063
Retained earnings (Notes B and E) ........................ 8,279,306 7,750,406
----------- -----------
37,214,258 30,234,497
Less: Accounts receivable from Valley Gas
Employee Stock Ownership Plan (Note D) ................ 2,907,049 3,142,200
----------- -----------
Total common stock equity ....................... 34,307,209 27,092,297
----------- -----------
Long-term debt (Note D):
8% First Mortgage Bonds, due 2022 ..................... 20,090,000 20,212,000
7.7% Debentures, due 2027 ............................. 7,000,000 -0-
9% Notes Payable, due 1999 ............................ 2,138,937 2,138,937
Note payable .......................................... 2,907,049 1,405,000
----------- -----------
Total ........................................... 32,135,986 23,755,937
Less: Current maturities............................... 150,000 500,000
----------- -----------
Total long-term debt ............................ 31,985,986 23,255,937
----------- -----------
Total capitalization ............................ $66,293,195 $50,348,234
=========== ===========
The accompanying Notes are an integral part of these statements.
</TABLE>
22
<PAGE>
Notes to Consolidated Financial Statements
Note A: Summary of Significant Accounting Policies
Consolidation - The consolidated financial statements include the accounts of
Valley Resources, Inc. and its active wholly-owned subsidiaries (the
"Corporation")--Valley Gas Company ("Valley Gas"), Valley Appliance and
Merchandising Company ("VAMCO"), Valley Propane, Inc. ("Valley Propane"), Morris
Merchants, Inc. ("Morris Merchants") (d/b/a the Walter F. Morris Company), and
Bristol & Warren Gas Company ("Bristol & Warren"). The consolidated financial
statements also include the Corporation's 80% interest in Alternate Energy
Corporation ("AEC"). All significant intercompany transactions have been
eliminated where required.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Regulation - The utility operations of Valley Gas and Bristol & Warren
(collectively the "Utilities") are subject to regulation by the Rhode Island
Public Utilities Commission ("RIPUC"). Accounting policies conform with
generally accepted accounting principles, as applied in the case of regulated
public utilities, and are in accordance with the accounting requirements and
rate making practices of the RIPUC.
Depreciation - Annual provisions for depreciation for the Utilities are
determined on a composite straight-line basis. The composite rate for fiscal
1997 and 1996 was 2.91% and for fiscal 1995 it was 2.72%. Depreciation
provisions for other subsidiary companies are provided on the straight-line and
accelerated methods at rates ranging from 2.86% to 34%.
Deferred Fuel Costs - The Utilities' tariffs include a Purchased Gas Price
Adjustment ("PGPA") which allows an adjustment of rates charged to customers in
order to recover all changes in gas costs from stipulated base gas costs. The
PGPA provides for an annual reconciliation of total gas costs billed with the
actual cost of gas incurred. Any excess or deficiency in amounts collected as
compared to costs incurred is deferred and either reduces the PGPA or is billed
to customers over subsequent periods.
Deferred Unbilled Gas Costs - Revenue is recorded on the basis of bills rendered
on a cycle basis throughout the month. Valley Gas defers to the following month
that portion of the base cost of gas delivered but not yet billed under the
cycle billing system.
Accounting for Income Taxes - Income tax regulations allow recognition of
certain transactions for tax purposes in time periods other than the period
during which these transactions will be recognized in the determination of net
income for financial reporting purposes. As required by generally accepted
accounting principles, deferred income taxes are provided to reflect the tax
effect of these timing differences in the proper accounting periods.
In accordance with Financial Accounting Standards Board Statement No. 109
"Accounting for Income Taxes," deferred income taxes are recorded for all book
and tax temporary timing differences.
Investment tax credits relating to the Utilities property have been
deferred and will be amortized to income over the productive lives of the
related assets. Investment tax credits earned by the Corporation's other
subsidiary companies were recognized as a reduction of Federal income tax
expense in the year utilized.
Pension Plans - The Utilities maintain two non-contributory defined benefit
pension plans covering substantially all of their employees, Bristol & Warren
employees became eligible May 1, 1997. The plans provide benefits based on
compensation and years of service. The Utilities fund pension costs that are
deductible for Federal income tax purposes (see Note H).
On January 1, 1997, the Valley Gas Company 401(k) plan and the Valley Gas
Employee Stock Ownership Plan ("ESOP") were merged into the Valley Resources
401(k) Employee Stock Ownership Plan ("KSOP"). The
23
<PAGE>
Notes to consolidated financial statements (continued)
plan covers all Corporate employees, if eligible (see Note D). Plan expense,
including contributions to the Valley Gas 401(k) and ESOP, in fiscal 1997, 1996
and 1995 were $160,800, $226,100 and $122,400, respectively.
Morris Merchants maintains an employee profit sharing plan covering
substantially all of the employees who have completed one year of service.
Contributions to the plan are at the discretion of the Board of Directors. In
fiscal 1997, 1996, and 1995 profit sharing expense was $64,600, $68,400, and
$68,400, respectively.
Bristol & Warren maintained a non-contributory defined contribution pension
plan covering substantially all of its employees. The plan provided for benefits
based on hours worked and rate of pay. In fiscal 1997, 1996 and 1995 plan
expense was $14,200, $23,000, and $27,500, respectively. The plan was terminated
on April 30, 1997.
New Accounting Standard - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 "Earnings per
Share" and Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure", which are not expected to have a material
impact on the Corporation's financial condition or results of operations.
Inventories - Fuel and other inventories at August 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Fuels (at average cost)................................ $3,809,617 $3,622,698
Merchandise and other (at average cost)................ 1,252,846 1,199,856
Merchandise (at LIFO).................................. 1,057,892 1,225,893
---------- ----------
$6,120,355 $6,048,447
========== ==========
</TABLE>
Merchandise (at LIFO), if valued at current cost, would have been greater by
$270,900 in fiscal 1997 and $327,300 in fiscal 1996.
Note B: Common Stock and Rights
On August 26, 1997, the Corporation issued 620,000 shares of Common Stock.
The net proceeds of this offering were used to reduce the short-term debt of the
Utilities, to make loans to nonutility subsidiaries to repay short-term debt and
for working capital requirements. Subsequent to fiscal year end, the
Underwriters of the stock offering exercised their over-allotment option; 93,000
additional common shares were issued for additional net proceeds of
approximately $977,000.
Pursuant to the Corporation's dividend reinvestment plan, stockholders can
reinvest dividends and make limited additional cash investments. Shares issued
through dividend reinvestment can be acquired on the open market or original
issue. All shares issued pursuant to the plan in fiscal 1997 were open-market
purchases. In fiscal 1996 and 1995, the Corporation issued 19,231 and 47,754
shares of common stock, respectively, under provisions of the dividend
reinvestment plan. At August 31, 1997 and 1996, 31,179 and 10,813 shares,
respectively, were held by the Corporation for issuance to the plan.
On August 31, 1997, except as mentioned above, no shares of common stock of
the Corporation were held by or for the account of the Corporation or were
reserved for officers or employees or for options, warrants or other rights,
except 41,125 shares of common stock reserved subject to sale under the
Corporation's dividend reinvestment plan.
Each share of common stock of the Corporation includes one preferred stock
purchase Right which entitles the holder to purchase one one-hundredth of a
share of Cumulative Participating Junior Preferred Stock, par value $100, at a
price of $35 per one one-hundredth of a share subject to adjustment. The Rights
are not currently exercisable, and trade automatically with the common stock.
The Rights will generally become exercisable and separate certificates
representing the Rights will be distributed, upon occurrence of certain events
in excess of a stipulated percentage of ownership.
The Rights should not interfere with any merger or business combination
approved by the Board of Directors because, prior to the Rights becoming
exercisable, the Rights may be redeemed by the Corporation at $0.01 per Right.
The Rights have no dilutive effect and will not affect reported earnings per
share.
24
<PAGE>
Notes to consolidated financial statements (continued)
Note C: Short-Term Debt
The Corporation borrows on bank lines of credit at the prevailing interest
rate available at the time of borrowing. The Corporation either pays commitment
fees or maintains compensating balances in connection with these lines of
credit. Commitment fees paid in fiscal 1997, 1996, and 1995 amounted to
$110,000, $114,800, and $94,500, respectively. There are no legal restrictions
on withdrawal of compensating balances.
A detail of short-term borrowings for fiscal 1997, 1996, and 1995 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At year end
Weighted average interest rate....................... 5.7% 5.7% 5.9%
Unused lines of credit............................... $35,100,000 $14,100,000 $15,100,000
For the year ended
Weighted average interest rate....................... 5.7% 6.0% 6.2%
Average borrowings................................... $16,800,000 $12,908,300 $11,283,300
Maximum month-end borrowings......................... $22,000,000 $16,000,000 $16,000,000
Month of maximum borrowings.......................... January November December
</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 1997 are: 1998, $986,000; 1999, $5,203,800; 2000, $757,100;
2001, $320,200; and 2002, $215,700, inclusive of capitalized lease obligations.
Valley Gas utility plant and equipment have been pledged as collateral to
secure its long-term debt. In accordance with the redemption provisions of the
Valley Gas 8% First Mortgage Bonds, $122,000, $860,000 and $1,333,000 of the
bonds were redeemed by holders in fiscal 1997, 1996 and 1995, respectively.
The fair market value of the Corporation's long-term debt is estimated
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Corporation for debt of the same remaining
maturities. Management believes the carrying value of the debt approximates the
fair value at August 31, 1997.
Regulatory treatment allows payments under capital leases to be recorded as
rental expenses. Rental expenses for all leases in fiscal 1997, 1996, and 1995
were $1,169,500, $1,437,900, and $1,179,800, respectively.
Valley Gas entered into an intermediate term financing arrangement with a
bank in November 1995. The terms of the arrangement call for a $6,000,000
revolving line of credit which matures in 1999, with the option to extend the
termination date to November 30, 2000.
The Corporation borrowed funds under a line of credit at rates less than
the prevailing prime rate, which are restricted in their use to being loaned to
the KSOP. The receivable from the KSOP has been shown as a reduction of common
stock equity. The financing by the KSOP is secured by the common stock of two
unregulated subsidiaries and the unallocated shares held by the KSOP.
The Corporation's common stock purchased by the KSOP with the borrowed
money is held by the KSOP trustee in a "suspense account." As the Corporation
matches employee 401(k) contributions and makes discretionary contributions to
the plan, a portion of the common stock is released from the suspense account
and allocated to participating employees. Any dividends on unallocated shares
are used to pay loan interest.
Note E: Restriction on Retained Earnings
At August 31, 1997, $1,613,100 of the retained earnings of Valley Gas were
available for the payment of cash dividends to the Corporation under the most
restrictive provisions of Valley Gas' first mortgage bonds. There are no
restrictions as to the payment of dividends for the other subsidiaries.
25
<PAGE>
Notes to consolidated financial statements (continued)
Note F: Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS 109"), the Corporation's financial
statements are required, among other things, to record the cumulative deferred
income taxes on all temporary timing differences. As approved by the RIPUC, the
Utilities did not fully record deferred income taxes but, rather, "flowed
through" certain tax benefits to utility customers prior to fiscal 1994. At
August 31, 1997, the Corporation has a liability of $6,043,700 on the
Consolidated Balance Sheets as recoverable deferred income taxes and a
corresponding recoverable deferred charge. The liability represents the tax
effect of timing differences for which deferred income taxes had not been
provided, increased in accordance with SFAS 109 for the tax effect of future
revenue requirements. The Utilities are recovering unfunded deferred taxes from
utility customers over the remaining book life of utility property.
Federal income tax expense has been calculated based on filing a
consolidated corporate tax return and is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current income tax expense:
Operating expense .................................. $ 893,039 $ 521,540 $112,029
Nonoperating expense................................ 103,200 147,065 71,230
---------- ---------- --------
996,239 668,605 183,259
---------- ---------- --------
Deferred income tax expense:
Accelerated depreciation............................ 332,771 276,474 194,537
Pensions............................................ 314,413 212,627 194,588
Deferred fuel costs................................. (229,039) 293,801 -0-
Uncollectibles...................................... (23,830) (21,840) 2,142
Directors' fees and interest........................ (36,845) (36,453) (8,744)
Bond premium ....................................... (6,240) (6,240) (6,242)
Rate case expenses.................................. (97,257) (37,626) 174,290
Capitalization of inventory costs................... 28,869 (6,897) (2,079)
Consulting contracts................................ 30,570 64,392 64,389
Software amortization............................... 140,856 140,856 140,856
Alternative minimum tax............................. -0- 8,617 (180,000)
Excess VEBA contribution............................ (78,532) -0- -0-
Other .............................................. 65,902 34,296 46,181
---------- ---------- --------
441,638 922,007 619,918
---------- ---------- --------
Total .............................................. $1,437,877 $1,590,612 $803,177
========== ========== ========
</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>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory Federal rate....................................... 34% 34% 34%
Maintenance costs capitalized for book purposes........... (4) (3) (4)
Cost of removal........................................... (1) (1) (1)
ESOP dividends............................................ (1) (1) (2)
Prior year over accrual................................... -0- -0- (2)
Other..................................................... -0- (1) (1)
--- --- ---
Total..................................................... 28% 28% 24%
=== === ===
</TABLE>
26
<PAGE>
Notes to consolidated financial statements (continued)
Temporary differences which gave rise to the following deferred tax assets
and liabilities at August 31, 1997 and 1996 are:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Unbilled revenues ............................................ $ 273,872 $ 271,504
Directors' fees and interest ................................. 252,322 215,477
Other ........................................................ 549,248 525,365
------------ ------------
Total deferred tax assets ................................. 1,075,442 1,012,346
------------ ------------
Accelerated depreciation ..................................... (8,879,705) (8,446,411)
Pensions ..................................................... (2,431,184) (2,116,771)
Software amortization ........................................ (676,918) (536,062)
Deferred fuel costs .......................................... (64,762) (293,801)
Other ........................................................ (842,507) (881,250)
------------ ------------
Total deferred tax liabilities ............................ (12,895,076) (12,274,295)
------------ ------------
Total deferred taxes ......................................... $(11,819,634) $(11,261,949)
============ ============
</TABLE>
The Corporation's nonutility operations are subject to state income taxes.
For fiscal 1997, 1996, and 1995, state income taxes totaled $170,700, $124,300,
and $131,800, respectively.
Note G: Regulatory Matters
On June 1, 1997, the Utilities received approval to redesign their rates
and offer transportation services to large commercial and industrial customers.
On October 18, 1995, the RIPUC authorized the Utilities to adjust their
tariffs to collect $1,100,000 and consolidate their rate structure.
Note H: Commitments and Contingencies
Pension Plans - The Utilities have two non-contributory defined benefit pension
plans covering substantially all of their employees and a supplemental pension
plan covering certain officers.
Net periodic pension income for fiscal 1997, 1996, and 1995 included the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period........... $ 543,241 $ 534,961 $ 470,907
Interest cost on projected benefit obligation.............. 1,337,602 1,321,504 1,232,168
Actual return on plan assets............................... (8,425,498) (3,266,264) (3,448,848)
Net amortization and deferral.............................. 5,619,910 784,425 1,173,453
---------- ---------- ----------
Net periodic pension income................................ $ (924,745) $ (625,374) $ (572,320)
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Plans Funded Status - July 31 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligations:
Vested............................................................... $ 16,661,224 $ 15,511,957
Nonvested............................................................ 219,424 225,232
------------ ------------
Accumulated.......................................................... 16,880,648 15,737,189
Due to recognition of future salary increases........................ 4,308,115 3,757,612
------------ ------------
Total.............................................................. (21,188,763) (19,494,801)
Plan assets at fair value............................................... 36,565,680 29,152,063
------------ ------------
Plan assets in excess of projected benefit obligation................... 15,376,917 9,657,262
Unrecognized transition amount.......................................... (676,708) (824,232)
Unrecognized net gains.................................................. (7,604,627) (2,662,193)
----------- ------------
Prepaid pension costs................................................... $ 7,095,582 $ 6,170,837
=========== ============
</TABLE>
27
<PAGE>
Notes to consolidated financial statements (continued)
Plan assets are invested in common stock, short-term investments and various
other fixed income securities.
The weighted-average discount rate used in determining the projected
benefit obligation was 7 3/4% as of July 31, 1997 and 1996. The assumed rate of
future compensation increases was 5 1/2% per year. The expected long-term rate
of return on assets was 9% for all years presented.
Postretirement Life and Health Benefit Plan - Valley Gas sponsors a
postretirement benefit plan that covers substantially all of its employees
except for nonunion employees hired on or after September 1, 1993 and union
employees hired on or after April 1, 1994. The plan provides medical, dental and
life insurance benefits. The plan is non-contributory.
In accordance with Statement of Financial Accounting Standards No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
106"), Valley Gas records the cost for this plan on an accrual basis. As
permitted by SFAS 106, Valley Gas will record the transition obligation over a
twenty-year period. Valley Gas' cost under this plan for fiscal 1997, 1996 and
1995 was $775,600, $809,500 and $815,100, respectively. The regulatory asset
represents the excess of postretirement benefits on the accrual basis over
amounts authorized to be recovered in rates. The RIPUC authorized Valley Gas a
phase-in recovery of the tax deductible portion of these postretirement
benefits, if funded.
Valley Gas has funded a portion of these costs through trusts established
under Section 501(c)(9) of the Internal Revenue Code for the bargaining and
nonbargaining unit plans. Valley Gas is currently funding the amount recovered
through rates.
The following table sets forth the Plans' funded status reconciled with the
amounts recognized in Valley Gas' financial statements at August 31:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees ............................................................ $(2,986,423) $(2,787,993)
Fully eligible active plan participants ............................. (639,520) (775,563)
Other active plan participants ...................................... (2,432,046) (2,007,935)
----------- -----------
(6,057,989) (5,571,491)
Plan assets at fair value .............................................. 1,699,662 951,546
----------- -----------
Accumulated postretirement benefit obligation in excess of plan
assets............................................................... (4,358,327) (4,619,945)
Unrecognized transition obligation ..................................... 4,444,372 4,722,146
Unrecognized net (gain) from past experience different from that
assumed and from changes in assumptions ............................. (547,993) (795,123)
----------- -----------
Accrued postretirement benefit cost .................................... $ (461,948) $ (692,922)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Net periodic postretirement benefit cost consisted of the following: 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits attributable to service during the period....... $ 136,372 $156,991 $140,882
Interest cost on accumulated postretirement benefit obligation.......... 419,243 417,117 420,725
Actual return (loss) on plan assets..................................... (57,041) 33,712 (10,575)
Net amortization and deferral........................................... 277,015 201,640 264,026
---------- -------- --------
Net periodic postretirement benefit cost................................ 775,589 809,460 815,058
Regulatory asset........................................................ (230,974) -0- 252,365
---------- -------- --------
Net expense............................................................. $1,006,563 $809,460 $562,693
========== ======== ========
</TABLE>
For measurement purposes, an 11% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; the rate was assumed
to decrease gradually to 5% by fiscal 2002 and to remain at that level
thereafter. The rates of increase assumed for post-age 65 medical benefits were
slightly lower. The health care cost trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the assumed health
care cost trend rates by 1% in each year would increase the accumulated
postretirement benefit obligation at August 31, 1997 by $450,000 and the
aggregate of the service and the interest cost components of
28
<PAGE>
Notes to consolidated financial statements (continued)
net periodic postretirement benefit cost ("NPPBC") for the year by $54,000. The
discount rate was 7 3/4% for the development of the NPPBC. The assumed rate of
future compensation increases was 5 1/2% per year. The trend rates were set by
the RIPUC.
Long-Term Obligations - The Utilities have contracts which expire at various
dates through the year 2012 for the purchase, delivery and storage of natural
gas and supplemental gas supplies. Certain contracts for the purchase of the
supplemental gas supplies contain minimum purchase obligations which approximate
2% of total system requirements.
FERC Order No. 636 Transition Costs - As a result of FERC Order 636, the
Utilities' interstate pipeline service providers have unbundled their supply,
storage and transportation services. This unbundling caused the interstate
pipeline companies to incur substantial costs in order to comply with Order 636.
These transition costs include four types: (1) unrecovered gas costs (gas costs
that have been incurred but not yet recovered by the pipelines when they were
providing bundled service to local distribution companies); (2) gas supply
realignment costs (the cost of renegotiating existing gas supply contracts with
producers); (3) stranded costs (unrecovered costs of assets that cannot be
assigned to customers of unbundled services); and (4) new facilities costs
(costs of new facilities required to physically implement Order 636).
Pipelines are expected to be allowed to recover prudently incurred
transition costs from customers primarily through a demand charge, after
approval by FERC. The Utilities' pipeline suppliers began direct billing these
costs in fiscal 1994 as a component of demand charges. The Utilities estimate
their remaining portion of transition costs to be $373,200 and have recognized a
liability for these costs as of August 31, 1997. The RIPUC has allowed the
recovery of transition costs through the PGPA. Under the provisions of SFAS 71,
regulatory assets totaling $373,200 were recorded for the expected future
recovery of the transition obligations. Actual transition costs to be incurred
depend on various factors, and, therefore, future costs may differ from the
amounts discussed above.
Contingent Liabilities - A lawsuit has been filed against Valley Gas and other
parties by Blackstone Valley Electric Company ("Blackstone") seeking
contribution towards a judgment against Blackstone's share of total cleanup
costs of approximately $6,000,000 at the Mendon Road site in Attleboro,
Massachusetts. The expenses relate to a site to which oxide waste was
transported in the 1930's prior to the incorporation of Valley Gas. Management
is of the opinion the Corporation will prevail as a result of the
indemnification provisions included in the agreement entered into when Valley
Gas acquired the utility assets from Blackstone. Management cannot determine the
future cash flow impact, if any, of this claim and related legal fees. Legal
fees associated with this claim are recovered in rates. In a recent decision of
the U.S. Court of Appeals for the First Circuit, Blackstone's appeal of the
judgment against it was sustained and the case was remanded for further
proceedings, including a referral of the case to the EPA to determine if the
substance in question (FFC) is hazardous.
Valley Gas received a letter of responsibility from the Rhode Island
Department of Environmental Management ("DEM") with respect to releases from
coal waste on its property that is the site of the former Tidewater
manufacturing plant in Pawtucket, Rhode Island. Valley Gas and Blackstone have
submitted a site investigation report to DEM relating to certain releases on the
site. Management cannot determine the future cash flow impact, if any, of this
claim and related expenses. As noted above, management takes the position that
it is indemnified by Blackstone for any such expenses. Management intends to
seek recovery from Blackstone and any insurance carriers deemed to be at risk
during the relevant period. Remediation of sites such as the former Tidewater
plant is governed by a regulatory framework which now permits more flexibility
in methods of remediation and in property reuse.
Valley Gas received a letter of responsibility from DEM with respect to
releases from coal waste on its property that is the site of the former Hamlet
Avenue manufacturing plant in Woonsocket, Rhode Island. Valley Gas and
Blackstone have submitted a site investigation work plan to address certain
releases at the site. Management cannot determine the future cash flow impact,
if any, of this claim and related expenses. As noted above, management takes the
position that it is indemnified by Blackstone for any such expenses. Management
intends to seek recovery from Blackstone and any insurance carriers deemed to be
at risk during the relevant period. Remediation of this site is also governed by
a regulatory framework that permits more flexibility in methods of remediation
and in property reuse.
29
<PAGE>
Notes to consolidated financial statements (continued)
Note I: Segment Information
The following information is presented relative to the gas, merchandising
and other operations of the Corporation.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gas Operations
Operating revenues........................................... $66,230,787 $60,773,250 $56,012,913
Operating income before Federal income taxes................. 6,465,007 7,150,140 5,157,534
Identifiable assets at August 31............................. 82,074,205 84,646,797 83,952,630
Depreciation................................................. 2,594,712 2,364,999 2,131,425
Capital expenditures......................................... 3,599,752 4,396,081 5,335,159
Appliance & Contract Sales & Rentals
Operating revenues........................................... $18,490,238 $17,617,481 $17,216,397
Operating income before Federal income taxes................. 1,274,805 986,920 1,111,530
Identifiable assets at August 31............................. 9,384,412 8,116,782 8,148,961
Depreciation................................................. 464,564 512,242 475,456
Capital expenditures......................................... 572,069 531,152 521,345
Other Operations, including Corporate & Eliminations
Operating revenues........................................... $2,762,952 $1,969,403 $1,640,880
Operating income before Federal income taxes................. 198,976 156,632 207,432
Identifiable assets at August 31............................. 6,238,520 3,925,406 235,915
Depreciation................................................. 84,443 79,486 77,874
Capital expenditures......................................... 121,160 81,476 59,427
Total Corporation
Operating revenues........................................... $87,483,977 $80,360,134 $74,870,190
Operating income before Federal income taxes................. 7,938,788 8,293,692 6,476,496
Federal income tax expense................................... (1,334,677) (1,443,547) (731,947)
Nonoperating income-net...................................... 423,476 459,938 115,032
Interest expense............................................. (3,368,274) (3,311,723) (3,304,656)
Net income................................................... 3,659,313 3,998,360 2,554,925
Identifiable assets at August 31............................. 97,697,137 96,688,985 92,337,506
Depreciation................................................. 3,143,719 2,956,727 2,684,755
Capital expenditures......................................... 4,292,981 5,008,709 5,915,931
</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.
30
<PAGE>
Notes to consolidated financial statements (continued)
Note J: Summarized Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Three months ended
(in thousands, except as to earnings (loss)
per average share) November February May August
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1997
Total operating revenues............................ $16,340 $30,932 $26,281 $13,931
Income (loss) before Federal income taxes........... $(1,263) $ 4,916 $ 2,830 $(1,386)
Net income (loss)................................... $ (772) $ 3,260 $ 1,956 $ (785)
Earnings (loss) per average share................... $ (0.18) $ 0.76 $ 0.46 $ (0.18)
Fiscal 1996
Total operating revenues............................ $14,095 $30,250 $23,665 $12,351
Income (loss) before Federal income taxes........... $(1,214) $ 5,817 $ 2,934 $(1,948)
Net income (loss)................................... $ (775) $ 3,855 $ 1,995 $(1,077)
Earnings (loss) per average share................... $ (0.18) $ 0.90 $ 0.47 $ (0.25)
</TABLE>
Report of Independent Certified Public Accountants
To the Stockholders of Valley Resources, Inc.
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Valley Resources, Inc. (a Rhode
Island corporation) and subsidiaries as of August 31, 1997 and 1996 and the
related consolidated statements of earnings, cash flows and changes in common
stock equity for each of the three years in the period ended August 31, 1997.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Valley Resources, Inc. and subsidiaries as of August 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1997, in conformity with generally
accepted accounting principles.
S/Grant Thornton LLP
Boston, Massachusetts
September 26, 1997
31
<PAGE>
Management's Discussion and Analysis of the
Results of Operations and Financial Condition
OVERVIEW
The discussion and analysis that follows reflect the operations of the
Corporation and its six active subsidiaries: Valley Gas and Bristol & Warren,
both regulated natural gas distribution companies; VAMCO, a merchandising,
appliance rental, and service company; Valley Propane, a propane sales and
service company; Morris Merchants, a representative distributor of franchised
lines; and AEC, which sells, installs and designs natural gas refueling
facilities, natural gas conversion systems and energy use control devices.
Operating results are derived from two major classifications - utility and
nonutility. Utility earnings are generated from the operations of the regulated
natural gas distribution companies and include the distribution and sale of
natural gas to firm and seasonal customers. Nonutility earnings are a
consolidation of the earnings of VAMCO, Valley Propane, Morris Merchants and
AEC.
The distribution and sale of natural gas to customers on a year-round basis
for heating, water heating, cooking and processing are the source of firm
utility revenues. Firm customers can be residential, commercial or industrial.
The revenues from firm customers are determined by regulated tariff schedules
and through Rhode Island Public Utilities Commission ("RIPUC") approved
commodity charge factors. These factors include the Purchased Gas Price
Adjustment ("PGPA"), which requires the Utilities to collect from or return to
sales customers changes in gas costs from those included in the regulated
tariffs, and an adjustment to collect post-retirement benefits.
Seasonal and dual-fuel sales are made when excess gas supplies are
available and gas prices are competitive with alternative fuel markets. These
sales are generally made in non-winter months and can be interrupted by the
Utilities at any time. Margins from seasonal sales and margins above $1 per
thousand cubic feet ("Mcf") of gas sold to dual fuel customers are returned to
firm sales customers through a reduction in the PGPA. The Utilities also provide
off-peak transportation services through their distribution systems.
Morris Merchants and VAMCO generate nonutility revenues through the
wholesale and retail sales of plumbing and heating supplies and appliances.
Additionally, VAMCO generates revenues from appliance rentals and a service
contract repair program.
Valley Propane sells propane at both wholesale and retail and provides
service to propane customers in Rhode Island and southeastern Massachusetts.
AEC, acquired in May 1996, generates revenues through the design and
installation of natural gas refueling facilities and through the conversion of
vehicles and stationary engines to natural gas. The Corporation owns an 80%
interest in AEC and has the obligation to acquire the remaining 20% of the
company currently held by the management of AEC. AEC did not materially impact
the operations of the Corporation in fiscal 1997 or fiscal 1996.
RESULTS OF OPERATIONS
Fiscal 1997 versus Fiscal 1996
Fiscal 1997 utility gas revenues totaled $66,230,800, a 9.0% increase over
fiscal 1996. Revenues generated from firm sales increased in fiscal 1997 by 8.6%
over fiscal 1996. The increase in firm revenues is the result of a $1,580,600
decrease in base revenues, resulting from warmer weather in fiscal 1997, offset
by a $6,461,000 increase in gas costs recovered through the PGPA, which has no
direct earnings impact. Utility gas revenues were also positively impacted by
increased revenues from seasonal and transportation customers.
Gas sales to firm customers were 7,994,400 Mcf in fiscal 1997, a decrease
of 3.2% from the prior year. The primary contributor to the sales decrease was
warmer weather. Weather, as measured by degree days, in fiscal 1997 was 2.3%
warmer than normal and 2.8% warmer than fiscal 1996. Weather during the critical
heating period, December through February, was 10.4% warmer than the prior year
and 5.4% warmer than normal.
In fiscal 1997, gas sales to seasonal customers increased 6.0% over the
prior fiscal year. Sales to seasonal customers are dependent upon the
availability of natural gas and the price of alternate fuels. Margins earned
from seasonal sales are returned to firm customers through the PGPA and do not
impact the profitability of the company. The Utilities also transport natural
gas owned by customers. Transportation revenues increased
32
<PAGE>
Management's Discussion and Analysis of the Results of
Operations and Financial Condition (continued)
$301,700 in fiscal 1997.
Nonutility revenues in fiscal 1997 were $21,253,200, an increase of 8.5%
over fiscal 1996. All nonutility operations enjoyed increased revenues in fiscal
1997 and were favorably impacted by an improving regional economy. VAMCO's
revenue improvement was the result of increased equipment sales resulting from
traditional conversions from electric heating in the residential market and its
more aggresive and comprehensive focus on the commercial and industrial market
segments. This has also led to an improvement in the gross margin of the retail
operations. The rental and service contract programs continued to impact
earnings positively. Revenues generated from wholesale operations improved
through the addition of new product lines and new marketing directions for
existing products. AEC also contributed to increased nonutility revenues
although start-up costs have resulted in losses for this subsidiary.
Propane revenues in fiscal 1997 increased 6.1% despite an 8.0% decrease in
gallons sold. The warm weather impact on sales volumes was offset by increased
revenues and margins. Market timing differences in retail pricing and utility
cost basis were the primary reasons for this increase. Price competition
continued to be a critical factor in the ability to expand these operations.
The Utilities distribute natural gas, underground storage gas, liquefied
natural gas and a limited amount of liquid propane gas to meet sales customer
demands; the cost of these fuels is included in the cost of gas sold. The
average cost per Mcf of gas distributed in fiscal 1997 was $4.07 versus $3.84 in
fiscal 1996. Gas costs increased as a result of both the purchase price of
natural gas and increased gas costs related to the PGPA reconciliation.
Cost of sales - nonutility includes the cost of sales for VAMCO, Valley
Propane, Morris Merchants and AEC. Cost of merchandise sold increased 8.0% in
fiscal 1997 over fiscal 1996 which was directly attributable to the increase in
sales. The average cost of propane for the retail propane operations, included
in cost of sales, was $0.55 per gallon in fiscal 1997 versus $0.48 per gallon in
fiscal 1996.
Operations expenses in fiscal 1997 increased 1.0% over fiscal 1996.
Expenses recovered in the Utilities most recent rate filing, normal wage
increases and uncollectible expense were offset by decreased expenses related to
operation of the LNG plant due to the warmer winter.
Maintenance expense in fiscal 1997 was $1,633,700, a 2.3% decrease from
fiscal 1996. A shift of maintenance projects to capital and the lack of snow
removal costs were responsible for the decrease. Operation and maintenance
expenses were impacted by wages and general inflation.
Taxes - other than Federal income were $4,242,800 in fiscal 1997, an
increase of $152,100 over the prior year. The impact of gross receipts taxes on
increased utility revenues is responsible for the increase. The effective
Federal income tax rate for the years ended August 31, 1997 and 1996 was 28%.
Fiscal 1997 other income - net of tax decreased $36,500 from the prior year
as a direct result of a decline in off-system sales. The decrease was slightly
offset by increased interest income and the recognition of income on other
investments.
Interest expense in fiscal 1997 totaled $3,368,300, an increase of 1.7%
over fiscal 1996. Increased short-term borrowings were responsible for the
increase in interest expense. This increase was offset by a reduction in
interest accrued on deferred fuel costs and lower borrowing rates.
Fiscal 1996 versus Fiscal 1995
Utility gas revenues in fiscal 1996 totaled $60,773,500, an increase of
8.5% over fiscal 1995. Revenues from sales to firm customers increased 9.8% over
the prior fiscal year as a result of increased gas sales and rate relief.
Offsetting the increase in revenues was a decrease of $2,654,800 in gas costs
recovered through the PGPA. The PGPA does not impact operating income as it
effectuates a dollar for dollar recovery of gas costs.
In fiscal 1996, gas sold to firm customers increased 12.0% over fiscal 1995
and totaled 8,255,500 Mcf. The primary contributor to the increase in gas sales
was the weather which was 17.0% colder than the prior year and 5.6% colder than
normal during the critical heating period, December through February.
33
<PAGE>
Management's Discussion and Analysis of the Results of
Operations and Financial Condition (continued)
In October 1995, the Utilities were authorized by the RIPUC to consolidate
their rate structures and to increase their tariffs to collect an additional
$1,100,000 in revenues. The new tariffs collect an increased share of revenues
through the customer charge, thus reducing sensitivity of utility revenues to
weather. Approximately $825,000 of this revenue increase is reflected in fiscal
1996 revenues.
Sales to seasonal customers in fiscal 1996 decreased 21.2% as compared to
fiscal 1995. Seasonal sales are dependent on the availability of gas and the
price of competing fuels. The colder winter period resulted in less gas
available for sales to this market. Since profits on seasonal sales are returned
to firm sales customers through the PGPA, seasonal sales have no impact on
operating income.
Transportation revenues declined by $124,800, or 24.6%, in fiscal 1996 as
compared to fiscal 1995. The reduction in transportation revenues was the result
of a decrease in gas delivered to Valley Gas on behalf of customers.
Nonutility revenues totaled $19,586,600, an increase of 3.9% over fiscal
1995. Revenues from retail merchandising operations, inclusive of rental and
service program revenues, increased 12.6% over the prior fiscal year. The focus
on the commercial and industrial markets led to an increase in retail
merchandising revenues and related gross profit, even though a lower profit
margin percentage is earned on these sales. The service contract and rental
program revenues increased due to new customers and price increases. The
wholesale operations have faced gross profit margin declines because of pricing
competition among manufacturers and consolidation of wholesale outlets within
their market. Wholesale merchandise revenues declined slightly in fiscal 1996.
The revenues generated from the propane company are included in nonutility
revenues. Propane revenues increased 17.5% in fiscal 1996 over the prior fiscal
year. The increase was due to a 12.3% increase in gallons of propane sold and an
increase in the retail price of propane. Colder weather and sales to the
construction heating market accounted for the increase in sales.
Cost of gas sold includes the cost of natural gas, underground storage gas,
liquefied natural gas and liquid propane gas to serve utility sales customers.
The average cost per Mcf of natural gas distributed for utility operations in
fiscal 1996 and fiscal 1995 was $3.84 and $3.21, respectively. Cold weather in
November and December required the use of storage gas before the peak winter
period which caused increased demands for natural gas supply during the winter
period and resulted in increased natural gas prices. Changes in gas costs of the
utility operations are passed through to firm sales customers in the
calculations of the PGPA. Therefore, increases and decreases in gas costs do not
impact the profit margins of the utility operations.
The cost of sales for nonutility operations in fiscal 1996 increased 3.8%
over the prior fiscal year. The increase was the result of increased retail
sales and increased gallons sold of propane. The average cost of propane
distributed was $0.48 per gallon in fiscal 1996 versus $0.44 per gallon in
fiscal 1995.
Other operation expenses increased 5.7% in fiscal 1996 over fiscal 1995 due
to wages and increased costs associated with the operation of the peak shaving
facilities. An increase in uncollectible expenses also contributed to the
increase.
Maintenance expense in fiscal 1996 was $1,672,000, an increase of 8.9% over
the prior year. Maintenance expense increased due to costs related to the record
snowfall experienced during the winter period and computer maintenance.
Operation and maintenance expenses are impacted by general inflation and wages.
Taxes - other than Federal income increased 2.2% to $4,090,800 in fiscal
1996. Gross receipts taxes on increased utility revenues were responsible for
the increase. The effective Federal income tax rates for the years ended August
31, 1996 and 1995 were 28% and 24%, respectively.
Other income - net of tax totaled $459,900 in fiscal 1996 and $115,000 in
fiscal 1995. The increase in fiscal 1996 was a result of off-system natural gas
sales and investment income. Off-system natural gas sales are natural gas sales
to customers outside the franchise area at market clearing prices. The
opportunities for off-system sales are dependent upon market demand and the
ability of other gas suppliers to meet their delivery
34
<PAGE>
Management's Discussion and Analysis of the Results of
Operations and Financial Condition (continued)
requirements. Management believes it is unlikely that conditions will exist for
this level of off-system sales in subsequent years.
Fiscal 1996 interest expense was $3,311,700, an increase of 0.2% over the
prior fiscal year. Interest expense was impacted by an increase in short-term
debt only partially offset by a reduction in the deferred fuel cost liability
and the related interest accrual.
LIQUIDITY AND CAPITAL RESOURCES
The cash requirements of the Corporation are generated through the
distribution and sale of natural gas, propane and merchandise. Additional
revenues are collected through the rental and service contract programs.
Operations, external financings and investments are also used to meet corporate
cash needs. Short-term financings under existing lines of credit are available
to meet working capital requirements. Long-term and intermediate financings and,
when appropriate, equity issues are used to refinance short-term debt when
deemed appropriate by management.
Utility operations are subject to seasonality. The bulk of firm
distribution and sales are made during the months of November through March. As
a result, the highest levels of earnings and cash flow are generated in the
quarters ending in February and May. The bulk of the capital expenditure
programs are undertaken during the months of May through October, causing cash
flow to be at its lowest during the quarters ending in November and August.
Short-term borrowing requirements vary according to the seasonal nature of
sales and expense activities of the Utilities, creating greater need for
short-term borrowings during periods when internally generated funds are not
sufficient to cover all capital and operating requirements, particularly in the
summer and fall. Short-term borrowings utilized for construction expenditures
generally are replaced by permanent financing when it becomes economical and
practical to do so and where appropriate to maintain an acceptable relationship
between borrowed and equity resources.
The requirement to inventory supplemental gas supplies and the timing of
inventory acquisitions to meet the peak winter demand of the Utilities
negatively impact the cash requirements of the Corporation. Supplemental gas
inventories are filled in the summer period for use during the winter period.
The full impact of the rate increase granted to the Utilities in October
1995 positively impacted liquidity in fiscal 1997. However, warmer than normal
weather, especially during the critical heating season, December through
February, resulted in decreased gas sales and a negative impact on cash flow.
Cash flows were positively impacted during fiscal 1997 by the receipt of a
natural gas supplier refund in the amount of $1,700,000 which was credited to
the PGPA.
An increase in collections through the PGPA during fiscal 1997 positively
impacted cash flows. PGPA revenues increased in fiscal 1997 due to prior year
under recoveries and an increase in the PGPA effective in February 1997 to
collect winter price increases. However, due to lower than anticipated spring
pricing the Utilities have over recovered gas costs which will be returned to
customers in fiscal 1998, negatively impacting liquidity. Interest costs and the
timing of Federal and state tax payments also impact liquidity.
In fiscal 1997, the Corporation refinanced a line of credit that was used
exclusively to make loans to its Employee Stock Ownership Plan to purchase
Valley Resources common stock. As the Corporation makes contributions to the
plan, the funds are used to repay the loan. A portion of the proceeds,
$1,431,400, was used to repay short-term funding done through the utility
operations, which favorably impacted liquidity.
On August 26, 1997, Valley Resources issued 620,000 additional shares of
common stock and $7,000,000 of 7.7% Debentures due 2027. The net proceeds of
this offering, $13,233,000 before deduction of expenses payable by the
Corporation, were used to reduce the short-term debt of utility operations, to
make loans to nonutility subsidiaries to repay short-term debt and for working
capital requirements. This financing favorably impacted liquidity. In addition,
the Underwriters of the stock offering exercised their over-allotment option,
35
<PAGE>
Management's Discussion and Analysis of the Results of
Operations and Financial Condition (continued)
93,000 additional shares, in September 1997 which will favorably impact
liquidity in fiscal 1998.
Funding requirements are met through short-term borrowings under existing
lines of credit. At August 31, 1997, the Corporation had $35,100,000 of
available borrowings under its lines of credit. These lines are reviewed
annually by the lending banks, and management believes they will be renewed or
replaced. Management believes the available financings are sufficient to meet
cash requirements for the foreseeable future.
A lawsuit has been filed against Valley Gas and other parties by Blackstone
Valley Electric Company ("Blackstone") seeking contribution towards a judgment
against Blackstone's share of total cleanup costs of approximately $6,000,000 at
the Mendon Road site in Attleboro, Massachusetts. The expenses relate to a site
to which oxide waste was transported in the 1930's prior to the incorporation of
Valley Gas. Management is of the opinion the Corporation will prevail as a
result of the indemnification provisions included in the agreement entered into
when Valley Gas acquired the utility assets from Blackstone. Management cannot
determine the future cash flow impact, if any, of this claim and related legal
fees. In a recent decision of the U.S. Court of Appeals for the First Circuit,
Blackstone's appeal of the judgment against it was sustained and the case was
remanded for further proceedings, including a referral of the case to the EPA to
determine if the substance in question (FFC) is hazardous.
Valley Gas received a letter of responsibility from the Rhode Island
Department of Environmental Management ("DEM") with respect to releases from
coal waste on its property that is the site of the former Tidewater gas
manufacturing plant in Pawtucket, Rhode Island. Valley Gas and Blackstone have
submitted a site investigation report to DEM relating to certain releases on the
site. Management cannot determine the future cash flow impact, if any, of this
claim and related expenses. As noted above, management takes the position that
it is indemnified by Blackstone for any such expenses. Management intends to
seek recovery from Blackstone and any insurance carriers deemed to be at risk
during the relevant period. Remediation of sites such as the former Tidewater
plant is governed by a regulatory framework which now permits more flexibility
in methods of remediation and in property reuse.
Valley Gas received a letter of responsibility from DEM with respect to
releases from coal waste on its property that is the site of the former Hamlet
Avenue gas manufacturing plant in Woonsocket, Rhode Island. Valley Gas and
Blackstone have submitted a site investigation work plan to address certain
releases at the site. Management cannot determine the future cash flow impact,
if any, of this claim and related expenses. As noted above, management takes the
position that it is indemnified by Blackstone for any such expenses. Management
intends to seek recovery from Blackstone and any insurance carriers deemed to be
at risk during the relevant period. Remediation of this site is also governed by
a regulatory framework that permits more flexibility in methods of remediation
and in property reuse.
The Corporation's net cash from operating activities in fiscal 1997 was
$6,164,800 versus $3,669,000 in fiscal 1996 and $6,728,000 in fiscal 1995. Cash
from operations was positively impacted by the deferred fuel cost account which
generated funds of $1,620,300 in fiscal 1997 compared to the use of funds in the
amount of $3,977,800 in fiscal 1996. Investing activities used cash in the
amount of $4,374,200 in fiscal 1997, $5,058,100 in fiscal 1996 and $5,929,300 in
fiscal 1995 primarily for capital expenditures. Financing activities in fiscal
1997 used cash of $1,477,400 which is the result of the Corporation's issuance
of common equity and long-term debt net of a reduction in short-term debt and
the payment of dividends. Financing activities generated cash of $1,441,200 in
fiscal 1996 and used cash of $931,400 in fiscal 1995.
Capital expenditures are primarily for the expansion and improvement of the
gas utility plant and for the purchase of rental and propane equipment. In
fiscal 1997, capital expenditures were $4,293,000 versus $5,008,700 in fiscal
1996 and $5,915,900 in fiscal 1995. Fiscal 1998 capital expenditures are
estimated to be $5,515,200 and will be primarily for the expansion and
improvements of gas utility property. It is anticipated that such expenditures
will be financed through funds from operations and short-term borrowings.
36
<PAGE>
<TABLE>
Summary of Consolidated Operations
<CAPTION>
August 31 (in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Utility plant - net.......................... $50,447 $49,442 $47,411 $44,207 $42,313
Leased property - net........................ 2,377 2,945 2,014 2,436 2,395
Nonutility plant - net....................... 3,712 3,568 3,547 3,519 3,334
Current assets............................... 20,205 19,307 18,409 18,358 20,727
Other assets................................. 20,956 21,427 20,957 22,549 12,026
------- ------- ------- ------- -------
Total.................................... $97,697 $96,689 $92,338 $91,069 $80,795
======= ======= ======= ======= =======
Capitalization and liabilities
Capitalization
Common equity.............................. $34,307 $27,092 $25,993 $26,036 $24,943
Long-term debt
(less current maturities).................. 31,986 23,256 24,616 27,035 27,580
------- ------- ------- ------- -------
Total.................................... 66,293 50,348 50,609 53,071 52,523
Revolving credit arrangement.................... 2,300 2,200 -0- -0- -0-
Obligations under capital leases................ 1,541 2,134 1,255 1,747 1,847
Current liabilities............................. 10,612 24,005 23,932 18,530 18,982
Other liabilities............................... 16,951 18,002 16,542 17,721 7,443
------- ------- ------- ------- -------
Total.................................... $97,697 $96,689 $92,338 $91,069 $80,795
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the year ended August 31,
(in thousands, except as to share
and per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues.............................. $87,484 $80,360 $74,870 $83,553 $77,286
------- ------- ------- ------- -------
Operating expenses:
Cost of gas sold............................. 37,844 31,951 30,229 38,234 33,410
Cost of sales - nonutility................... 14,791 13,689 13,190 12,784 12,715
Other operation and maintenance.............. 19,524 19,379 18,288 17,784 17,300
Depreciation................................. 3,143 2,956 2,685 2,474 2,304
Taxes - other than Federal income............ 4,243 4,091 4,002 4,463 4,073
- Federal income....................... 1,335 1,444 732 1,313 1,400
------- ------- ------- ------- -------
Total.................................. 80,880 73,510 69,126 77,052 71,202
------- ------- ------- ------- -------
Operating income................................ 6,604 6,850 5,744 6,501 6,084
Other income - net.............................. 423 460 115 227 253
Total interest charges.......................... 3,368 3,312 3,304 2,902 2,610
------- ------- ------- ------- -------
Net income...................................... $ 3,659 $ 3,998 $ 2,555 $ 3,826 $ 3,727
======= ======= ======= ======= =======
Shares outstanding - average.................... 4,267,038 4,258,877 4,222,662 4,205,760 4,203,398
Shares outstanding - year-end................... 4,900,028 4,280,028 4,260,797 4,213,043 4,213,043
Earnings per share.............................. $0.86 $0.94 $0.61 $0.91 $0.89
Dividends declared per share.................... $0.735 $0.725 $0.71 $0.69 $0.66
Year-end book value per share................... $7.00 $6.33 $6.10 $6.18 $5.92
</TABLE>
37
<PAGE>
<TABLE>
Gas Operating Statistics
<CAPTION>
For the year ended August 31 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gas utility revenues (in thousands):
Residential .................... $37,340 $34,678 $30,606 $37,065 $34,250
Commercial ..................... 16,267 14,891 13,212 15,633 13,964
Industrial - firm .............. 8,156 7,314 8,011 9,057 7,683
Industrial - seasonal .......... 3,605 3,335 3,507 2,945 2,762
Transportation ................. 684 382 507 372 408
Other .......................... 179 173 170 252 227
------- ------- ------- ------- -------
Total ....................... $66,231 $60,773 $56,013 $65,324 $59,294
======= ======= ======= ======= =======
Sales-MMcf:
Residential .................... 4,393 4,612 4,078 4,517 4,439
Commercial ..................... 2,161 2,252 1,953 2,078 1,978
Industrial - firm .............. 1,440 1,391 1,338 1,299 1,185
Industrial - seasonal .......... 1,110 1,047 1,298 996 818
------- ------- ------- ------- -------
Total ....................... 9,104 9,302 8,667 8,890 8,420
Company use and losses............. 179 198 128 176 194
Transportation..................... 5,043 3,273 4,419 3,624 4,031
------- ------- ------- ------- -------
Total sendout ..................... 14,326 12,773 13,214 12,690 12,645
======= ======= ======= ======= =======
Gas purchased and transported-MMcf:
Liquid propane gas ............. 17 70 -0- -0- 158
Liquefied natural gas .......... 805 992 378 574 206
Natural gas stored underground . 1,373 1,348 1,156 1,075 1,494
Pipeline natural gas ........... 7,088 7,090 7,261 7,417 6,756
Transportation ................. 5,043 3,273 4,419 3,624 4,031
------- ------- ------- ------- -------
Total ....................... 14,326 12,773 13,214 12,690 12,645
======= ======= ======= ======= =======
Average number of customers:
Residential .................... 56,048 55,676 55,186 54,715 54,541
Commercial ..................... 5,448 5,333 5,212 5,111 5,077
Industrial - firm .............. 230 237 241 249 253
Industrial - seasonal .......... 51 54 59 58 58
Transportation ................. 3 2 2 2 2
------- ------- ------- ------- -------
Total ....................... 61,780 61,302 60,700 60,135 59,931
======= ======= ======= ======= =======
Average revenue per
residential customer ........... $ 666 $ 623 $ 555 $ 677 $ 628
Average use per
residential customer-Mcf ....... 78 84 74 83 81
Maximum daily throughput-Mcf ...... 72,675 70,904 65,619 76,910 69,003
Sales degree days ................. 6,191 6,369 5,820 6,459 6,341
</TABLE>
38
<PAGE>
Corporate Information
Annual Meeting and Proxies
The Annual Meeting of Stockholders will be held in Cumberland, Rhode Island, on
December 9, 1997. Notice of the meeting and form of proxy along with this report
are being mailed by the management to each holder of record of common stock on
October 21, 1997.
Form 10-K
The Corporation is required to file an annual report on Form 10-K with the
Securities and Exchange Commission which includes additional information
concerning the Corporation and its operations. A copy of this report will be
forwarded to you upon written request to Mr. K. W. Hogan, Senior Vice President,
Chief Financial Officer & Secretary, Valley Resources, Inc., P. O. Box 7900,
1595 Mendon Road, Cumberland, Rhode Island 02864-0700. Telephone: (401) 334-1188
Certified Public Accountants
Grant Thornton LLP
98 North Washington Street
Boston, Massachusetts 02114
Registrar & Transfer Agent
The Bank of New York
Shareholder Relations - Department 11E
P. O. Box 11258
Church Street Station
New York, NY 10286
Telephone: 1-800-524-4458
Stock Listing
The common stock of Valley Resources, Inc. is listed on the American Stock
Exchange under the symbol VR. Quotes of Valley Resources, Inc. common stock are
listed in The Wall Street Journal and many daily newspapers among the AMEX
stocks traded for the day.
39
<PAGE>
Directors
Ernest N. Agresti
Retired Partner,
Edwards & Angell,
Providence, Rhode Island
Melvin G. Alperin
President,
Brewster Industries,
Pawtucket, Rhode Island
C. Hamilton Davison
President & Chief
Executive Officer,
Paramount Cards, Inc.
Pawtucket, Rhode Island
Don A. DeAngelis
Vice Chairman & Chief
Executive Officer, Murdock
Webbing Company, Inc.
Central Falls, Rhode Island
Alfred P. Degen
President & Chief
Executive Officer,
Valley Resources, Inc.,
Cumberland, Rhode Island
James M. Dillon
Retired Director of Development,
The Roman Catholic Diocese,
Bridgeport, Connecticut
Jonathan K. Farnum
Chairman & President,
Wardwell Braiding
Machine Company,
Central Falls, Rhode Island
John F. Guthrie, Jr.
Vice President,
The New England,
Boston, Massachusetts
Eleanor M. McMahon, Ed.D.
Distinguished Visiting Professor,
A. Alfred Taubman Center for
Public Policy, Brown University,
Providence, Rhode Island
Officers of the Corporation
Alfred P. Degen
President &
Chief Executive Officer
Kenneth W. Hogan
Senior Vice President,
Chief Financial Officer
& Secretary
Richard G. Drolet
Vice President,
Information Systems &
Corporate Planning
Charles K. Meunier
Vice President,
Operations
Jeffrey P. Polucha
Vice President, Marketing
& Development
James P. Carney
Assistant Vice President,
Human Resources
Sharon Partridge
Assistant Vice President,
Finance & Treasurer
Alan H. Roy
Assistant Vice President,
Gas Supply
Robert A. Young
Assistant Vice President
& Chief Engineer
Clement W. Bethel
Assistant Treasurer
Patricia A. Morrison
Assistant Secretary;
Clerk, Morris Merchants, Inc.
Other Officers
David L. Hickerson
President,
Morris Merchants, Inc.
Richard C. Hadfield
Executive Vice President,
Morris Merchants, Inc.
Rosemary Platt
Controller,
Morris Merchants, Inc.
Thomas A. Aubee
President,
Alternate Energy Corp.
40
<PAGE>
Logo and Address Back Cover
Valley Resources, Inc. & Subsidiaries
1595 Mendon Road
P. O. Box 7900
Cumberland, Rhode Island 02864-0700
(401) 334-1188
http://www.valleyresources.com
