Cover Page
satisfaction
customer needs
initiative
teamwork
performance
(Photo appears here)
Valley Resources, Inc. Annual Report 1999
<PAGE>
Inside Front Cover
The Face of Performance
Fiscal 1999 brought us face to face with yet another set of risks,
responses and rewards. Once again, our diversified structure enabled us to
generate ore than a quarter of our revenues and net income from business units
operating outside of traditional, utility markets.
As we near the threshold of a new millennium replete with evolving energy
market expectations, Valley is well positioned to take advantage of our
expertise in meeting customer needs.
This report takes an up close look at the people and events of the last
year which have made an impact on the performance of Valley, and perhaps most
importantly, on the experiences of the customers we serve.
(Photo appears here)
<PAGE>
Overview and Financial Highlights
Corporate Overview
Valley Resources, Inc. has six active subsidiaries. Valley Gas Company and
Bristol & Warren Gas Company (collectively, the "Utilities") are natural gas
distribution companies regulated by the Rhode Island Public Utilities
Commission; Valley Appliance and Merchandising Company (VAMCO) merchandises and
rents appliances, energy conservation equipment and residential water filtration
equipment and offers appliance service contracts; Valley Propane, Inc. (Valley
Propane) sells propane at both retail and wholesale; and Morris Merchants, Inc.
(Morris) is a wholesale distributor of franchised lines in plumbing and heating
contractor supply and other energy related businesses. Alternate Energy
Corporation (AEC), 80 percent owned, designs and installs natural gas vehicle
conversion systems and refueling facilities, is an authorized representative of
the ONSI fuel cell, and holds patents for a natural gas/diesel co-firing system
and a device to control the flow of fuel on dual-fuel equipment.
<TABLE>
Financial Highlights
<CAPTION>
For the year ended August 31 (in thousands) 1999 1998 1997
- ------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Operating revenues ............................. $81,710 $81,589 $87,484
Operation expenses, maintenance and depreciation 68,925 69,781 75,302
Operating income before taxes .................. 12,785 11,808 12,182
Taxes - other than Federal income .............. 4,117 4,120 4,243
Taxes - Federal income ......................... 1,772 1,330 1,335
Other income - net of taxes .................... 299 289 423
Interest charges ............................... 3,008 3,041 3,368
Net income ..................................... $ 4,187 $ 3,606 $ 3,659
Basic and diluted earnings per share ........... $ 0.84 $ 0.73 $ 0.86
Dividends declared per common share ............ $ 0.75 $ 0.745 $ 0.735
Net utility plant (thousands) .................. $52,334 $51,310 $50,447
Capital expenditures (thousands) ............... $ 4,483 $ 4,534 $ 4,293
Average number of common shares outstanding .... 4,979,508 4,966,270 4,267,038
</TABLE>
(Photo appears here)
Photo tag: Left to right: Valley Resources, Inc. corporate offices; Bristol &
Warren Gas Company offices; Walter F. Morris Company offices; AEC
Natural Gas Vehicle refueling station in Cumberland.
1
<PAGE>
Message to Shareholders
Dear Fellow Shareholders,
This year marks the 20th anniversary of the incorporation of Valley
Resources as a holding company. The vision of the Corporation's management team
and Board of Directors at the time was critical in providing Valley with the
flexibility and corporate structure required to take advantage of non-regulated
business opportunities. This strategy has served Valley and its' shareholders
well throughout the years. During these past 20 years Valley has grown both its
regulated and non-regulated businesses through acquisition and internal growth.
Our utility business continues to offer a stable, relatively predictable
earnings stream for the Corporation. Our non-regulated activities provide a
level of diversity and the opportunity for growth at a pace above the usual
utility return.
Fiscal year 1999 provided more than its' share of challenges for the
Corporation. The weather in 1999 was again significantly warmer than normal. As
measured by degree days, the weather was nine percent warmer than normal which
approximated the weather experienced in fiscal year 1998. This past year the
Corporation purchased a weather insurance product designed to minimize the
effect on earnings from significant weather swings. This financial strategy
resulted in a positive impact on earnings for the year.
Despite the warmer than normal weather Valley's financial results were
strong. Earnings for the year were $4,186,600 or $0.84 per share, an increase of
16 percent over the prior year. Continued cost controls, the impacts of the
weather insurance product, and solid results from our propane operation were
primarily responsible for this improvement. Total shareholder return for the
year was 21 percent including stock appreciation and dividends. The
Corporation's balance sheet remains strong, leaving Valley well positioned to
pursue growth opportunities.
Our utility business continued to benefit from strong regional economic
activity. Combined, new housing construction and conversions from other fuels
resulted in the addition of over 800 new customers. Commercial development also
contributed to increased gas sales. In Highland Corporate Park, a major business
park in Cumberland,
2
<PAGE>
Message to Shareholders
the first two buildings were completed and occupied during this past year. Other
indicators of economic vitality in northern Rhode Island include the development
of a new hotel complex in Woonsocket and plans for a major renovation of the
Lincoln Mall. In the Bristol & Warren Gas service area, continued expansion of
the campus at Roger Williams University and new residential construction are
responsible for additional gas load.
On a broader scale, the energy business in New England will benefit from
increased pipeline capacity. Two new pipeline projects are scheduled to be on
line before the forthcoming winter season, bringing additional natural gas to
the region. These projects will bring gas supplies from western Canada and
offshore production from the Canadian Maritimes to the New England market. No
longer will the natural gas industry in New England be constrained by limited
capacity. Another significant infrastructure development was recently completed
as a liquefied natural gas (LNG) export facility in Trinidad and Tobago was
brought on line. This project will provide an additional source of LNG for New
England, thus enhancing supply security for this valuable peaking resource.
The results for Valley's non-regulated businesses approximated the prior
year's levels. VAMCO had another solid year in 1999. Major installation and
conversion projects in the commercial and institutional area contributed to
VAMCO's success. The appliance rental business also continued to be strong. A
renewed marketing focus also
(Photo appears here)
Photo tag: A Facelift for a
Landmark
McCoy Stadium, home of our local heroes, the Pawtucket Red Sox (AAA
affiliate team of the Major League Baseball Boston Red Sox) received a
major renovation this past year, as both public and private sector funding
was used to expand seating, construct additional on site facilities and
parking. The existing field was reconstructed with home plate pushed
eleven feet out from its former position. McCoy is located in Pawtucket,
the birthplace of Valley Gas Company.
3
<PAGE>
Message to Shareholders
produced positive results in the number of customers participating in the
ServGuard appliance repair contract program. Valley Propane, although adversely
affected by the warm weather during the critical heating season, experienced an
increase in gallons sold and earnings compared to the prior year. Morris
Merchants results were influenced in part by a labor stoppage experienced by one
of their major manufacturers which reduced production and availability for a
portion of the year. Additional resources were provided to AEC to enhance
marketing efforts. During the year, AEC completed construction of two compressed
natural gas refueling stations for the State of Rhode Island. Work was nearly
completed on the first fuel cell installation by AEC, at South County Hospital
in Wakefield, Rhode Island. AEC also recently received patent approval for its'
Passport System, which is a fuel system designed to control precisely the amount
of fuel used in dual fuel installations, which should have a positive impact on
the users' overall energy costs. AEC has a number of exciting projects currently
in process.
This past year we continued our commitment to involve employees from all
levels of the organization in process improvement efforts. For example, employee
work teams developed a new service order format which went into use in 1999.
This change should improve customer service and
(Photo appears here)
Photo tag: The Changing Face
of Downtown
The new Blackstone Valley Heritage Corridor Commission Tourist Center
is located in Pawtucket at the site of a former department store across the
street from Slater Mill, the birthplace of the American Industrial
Revolution. This center features a scale floor map of the Blackstone
Valley, a theater featuring seating and fixtures from Pawtucket's famed
Leroy Theater, a Rhode Island Public Transit Authority bus station, the
Slater Mill gift shop and gallery, and assorted retail spaces. The center
stands in the heart of Pawtucket's refurbished downtown area, adjacent to
the Blackstone River.
4
<PAGE>
Message to Shareholders
reduce operating expenses. A cross-functional team representing areas across the
organization was responsible for the success of this effort.
This December, Eleanor M. McMahon will be retiring as a member of the Board
of Directors after more than 15 years of outstanding service to the Corporation.
Dr. McMahon's wise counsel will be greatly missed.
As we look back on another year in the history of a business which started
nearly 150 years ago, I am confident that Valley is well positioned to continue
to provide solid returns for our shareholders, opportunities for our employees,
a working partnership with the communities we serve and outstanding customer
service. On behalf of the Board of Directors, I thank you for your continued
support and confidence.
s/A. P. Degen
- -----------------------------------------------
Alfred P. Degen
Chairman, President, & Chief Executive Officer
(Photo appears here)
Photo tag: Chairman, President, & CEO, Alfred P. Degen was elected
chairman of the New England Gas Association at the NEGA annual
meeting in March. The program content for the annual meeting was
geared toward the conference theme, " Exploring New England's
Changing Marketplace." In the months since, Al has presided over
the activities of the trade association.
5
<PAGE>
Summary of
Annual Earnings and Dividends
Summary of Annual Earnings
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 1999 was $4,186,609 or $0.84 per average common share outstanding, as
compared to $3,605,961 or $0.73 per share in fiscal 1998.
Valley Gas and Bristol & Warren, the utility subsidiaries, contributed
$3,037,900 to consolidated net income, an increase of $404,800 over fiscal 1998.
Utility earnings were positively affected by an increase in firm transportation,
decreased operating expenses and slightly lower interest expense. Weather, as
measured on a degree day basis, was less than one percent warmer than the
previous year and 9.1 percent warmer than normal.
In fiscal 1999, the contribution of the nonutility operating companies to
consolidated earnings was $1,148,700 compared to $972,900 for fiscal 1998.
Nonutility operations experienced earnings increases as a result of the
Corporation's weather insurance product and propane operations, offset by
declines in wholesale operations and AEC. The weather insurance product helped
mitigate the effects of the warmer than normal weather conditions experienced
during this past winter. Propane earnings reflect the ability to control margin
in a highly competitive environment resulting in increased gallons sold by
offering innovative solutions to customers. Retail and wholesale operations
experienced increased sales but were hindered by increased operating costs. The
operations of AEC generated a net loss in fiscal 1999 as a result of increased
staffing. New staffing levels have contributed to an increase in work in
progress.
<TABLE>
Dividends and Market Data
<CAPTION>
Cash Market Price
1999 Dividend High Low
<S> <C> <C> <C>
First Quarter $.1875 $13.38 $11.00
Second Quarter .1875 13.00 12.13
Third Quarter .1875 13.00 10.50
Fourth Quarter .1875 16.50 11.00
1998
First Quarter $.1850 $11.50 $10.25
Second Quarter .1850 12.38 10.63
Third Quarter .1875 12.13 11.13
Fourth Quarter .1875 12.13 11.13
</TABLE>
6
<PAGE>
(Charts appear here)
<TABLE>
<CAPTION>
Book Value/
Market Price
Book Value Market Price
<S> <C> <C>
FY 95 6.10 10.750
FY 96 6.33 11.875
FY 97 7.00 11.000
FY 98 7.05 11.625
FY 99 7.17 13.375
</TABLE>
<TABLE>
<CAPTION>
Weather Variance
from Normal
Actual Sales
Effective Normal
Degree Days Degree Days % Change
<S> <C> <C> <C>
FY 95 5821 6339 -8.2%
FY 96 6369 6339 0.5%
FY 97 6190 6339 -2.4%
FY 98 5797 6339 -8.6%
FY 99 5763 6339 -9.1%
</TABLE>
<TABLE>
<CAPTION>
Net Income
Utility Nonutility
<S> <C> <C>
FY 95 1,665,400 889,500
FY 96 3,206,400 792,000
FY 97 2,607,500 1,051,800
FY 98 2,633,100 972,900
FY 99 3,037,900 1,148,700
</TABLE>
<TABLE>
<CAPTION>
MMcf Sales
Mcf Transported
Natural Gas Volumes
Firm Interruptible
<S> <C> <C>
1995 7,369 5,717
1996 8,255 4,292
1997 7,994 6,152
1998 7,764 5,543
1999 7,787 5,134
</TABLE>
7
<PAGE>
(Photo appears here)
Photo tag: Marie Amaral, a customer service representative for Bristol & Warren
Gas Company and eighteen-year veteran of the company, recently
received her United States citizenship at a ceremony held at Bishop
McVinney Auditorium in Providence. Marie was born in the Azores and
emigrated to the United States May 25, 1969. The many Portuguese-
speaking customers of Bristol & Warren rely on Marie, who is
bilingual, to communicate information regarding their gas service.
8
<PAGE>
The Year in Review
Changing Roles in Robust Markets
During fiscal 1999, the Corporation continued to reap the benefits of a
healthy regional economy which brought increased demand for natural gas and
energy-related products and services. The Utilities' contribution to Valley
Resources financial performance benefited from increases in construction of new
housing, commercial and industrial occupancy and very competitive rates versus
other energy sources.
Natural gas is the fuel of choice as it continues to enjoy dominant market
share in new construction. The Utilities were prepared to handle this increase
in demand in new construction through our focus on process improvement.
Streamlined contacts with building contractors and developers have shortened the
lead time for getting natural gas service installed in new residential
developments. This process change has improved business relationships with
contractors and other energy specifiers.
This year our commercial and industrial marketing professionals capitalized
on the flexibility and competitiveness of the Utilities' rate structure which
brought numerous opportunities to expand the use of natural gas. We continue to
find ourselves working in advisory capacities in order to help customers
understand and maximize opportunities in a deregulated marketplace. This has led
customers, such as Heritage Kayaks, to seek assistance from our knowledgeable
marketing representatives in determining the appropriate energy solutions.
Additionally, the Utilities enjoyed a continued expansion into markets
which generate revenues from the transportation of natural gas. Greater numbers
of commercial and industrial customers have chosen to select their natural gas
suppliers and at the same time increase the volumes of gas used. The Utilities
benefited from the transportation of larger volumes of gas.
In order to mitigate the impact of warm weather trends on the Utilities and
the propane company and to stabilize earnings, the Corporation purchased a
weather insurance product for the winter heating season consisting of the months
November 1998 through March 1999. This product provided a collar of 2.7 percent
variance above and below normal weather. In the face of a warmer than normal
winter, the policy resulted in a positive impact on fiscal 1999 earnings.
(Photo appears here)
Photo tag: The Face of Industry
In the Bristol & Warren Gas service area, known to Rhode Islanders as
the "East Bay", marine manufacturing is a core industry and one which
utilizes clean natural gas for many production processes. Here, Patricia
Abbruzzi of Heritage Kayaks in Bristol is busy producing "SeaDarts", one of
the many models in the company's unique line of open cockpit self baling
kayaks. Heritage uses natural gas ovens to heat the cast aluminum molds
used in the rotational molding process.
9
<PAGE>
(Photo appears here)
Photo tag: Michele Amaral, Cathy Puget and Judy Tomlinson are three of our
customer service representatives who participated in a program
tailored toward providing rewards to customer contact personnel for
generating incremental sales of the company's service plan,
ServGuard. The company increased sales of ServGuard plans as
compared with the previous year, the result of making the effort to
qualify the appliances and equipment in place in individual
customers' homes, and using their marketing training to sell
customers on the benefits of the company's warranty protection plan.
10
<PAGE>
The Year in Review
Improving Processes For
Greater Responsiveness
Valley's continued commitment to making change happen through processes
which deliver quality, provide for continuous learning, and foster personal
development led to the implementation of a new service order process. This
effort included training for personnel involved in all aspects of customer
service administration and delivery. This cross-functional team effort was
created in response to customer demands for information, including customer
service, credit, information systems, and appliance service. The completed
service order has enjoyed widespread acceptance and an improvement in the
quality of service rendered by making better information available to customer
service representatives and technicians.
Streamlining the protocols through which service technicians communicate
with customers and other key audiences was a priority during the past year. The
implementation of wireless phone technology in functional areas with customer
contact employees provides direct communication among customers and service
personnel, resulting in improved service levels, more efficient inventory and
parts management and greater diagnostic accuracy in service calls.
In addition, an extensive customer service training program was initiated
to improve customer service, increase revenues, and reduce expenses. Customer
contact employees from our call center, credit and collections areas, and meter
reading teams attended monthly training sessions designed to improve results and
individual core competencies. These performance enhancements in tandem with the
development of a comprehensive customer service department business plan have
resulted in significant benefits. Efforts to increase revenues and decrease
costs in the customer contact areas have resulted in marked improvements in
measures such as average contact handling time, accuracy in call handling, meter
reading, information collection and ancillary product and service sales. Both
the Utilities and the nonregulated subsidiaries are generating increased
revenues from the various efforts focusing on using customer contact personnel
to increase customers' awareness of the products and services marketed by the
Corporation.
(Photo appears here)
Photo tag: The Face of Community
In April, a celebration was held to recognize the ten-year
partnership between the ARC (Association for Retarded Citizens) of
Northern Rhode Island and Valley Resources. The ARC has been
operating the food service function since 1989. Here, Barbara Kelly,
a RIARC client, prepares luncheon specialties in the cafeteria.
11
<PAGE>
(Photo appears here)
Photo tag: As more homeowners are counting on clean, versatile,
environmentally friendly natural gas, area homebuilders like Phil
Garcia (L) of Milestone Homes know they can depend on Dan Charest
(R), Service Installation Coordinator, to work closely with them in
the field to coordinate the installation of natural gas service to
new homes. Phil Garcia specifies natural gas for heating, water
heating, cooking, drying, and fireplace logs in the quality homes
Milestone is known for.
12
<PAGE>
The Year in Review
Collaboration Among Subsidiaries
The Corporation continues to benefit from the collaborative effort of its
subsidiaries to generate increased revenues. VAMCO continued to build on its
recent series of successes in commercial heating, water heating, and air
conditioning systems markets within the Utilities' franchised service area. This
year it continued a long term relationship with Roger Williams University in
Bristol, as clean natural gas energy was specified for both new installations
and upgrades of existing energy systems and equipment. This was another example
of the "win-win" experience for both customers and the Corporation, the result
of a custom approach which draws from our collective energy product and service
experience. The result was a comprehensive energy management project, for which
VAMCO provided design, engineering, installation, financing, and general
contracting services for the conversion of facilities from oil to natural gas,
at Roger Williams.
Included among the various projects which VAMCO completed in fiscal 1999
and in which the Utilities also benefited, was the renovation of the heating and
air conditioning systems in the offices of the Rhode Island Department of
Children Youth and Families facility, located in Pawtucket.
In the residential market, VAMCO and Morris work closely together to
capitalize on synergies which offer Morris indirect access to other wholesale
channels of distribution and provides VAMCO with a variety of quality lines of
heating, water heating, water filtration and other home comfort products. VAMCO
continued its line expansions in the residential consumer markets this year,
with the addition of new lines of water filtration products and services,
boilers, furnaces, space heaters and the gas industry's fastest growing segment,
hearth products, which includes gas logs, fireplaces, and cast iron stoves.
Valley Propane and VAMCO collaborated on several unique projects this year.
In particular, at Crestwood Country Club, a local golf course, Valley Propane
developed a creative storage solution for discreetly camouflaging four 1,000
gallon propane tanks underground under a landscaped flower bed. Barely visible
are the tank covers, concealed by shrubs and plantings. In addition to this
creative solution, Valley Propane signed a three-year supply contract for all of
the club's propane, and VAMCO coordinated the sale and installation of the
heating equipment.
At Stonehenge Condominiums in Smithfield, Valley Propane performed
conversions of condominium units from electric water heating to propane, with
VAMCO marketing new high efficiency propane fired water heating systems. In
addition, Valley Propane signed many new propane delivery customers in the
development under fixed price contracts.
(Photo appears here)
Photo tag: The Face Behind
Customer Satisfaction
John Jackson, Commercial & Industrial Project Manager, VAMCO, has
worked closely with Roger Williams University to ensure that the many
energy projects the company is managing are working smoothly and
efficiently. John is deeply committed to success in this ongoing customer
relationship, and his efforts continue to be rewarded with repeat business.
13
<PAGE>
(Photo appears here)
Photo tag: Christine Carpenter, Alan Ladieu and Gladys Sarji are among the
many dedicated customer service contact persons behind the scene who
make sure each customer we speak with has a positive experience and
is greeted with a "voice with a smile" when they call. Gladys,
Christine, and Alan have embarked on a program of continuous
learning and personal development, and to date customers agree that
this training effort is a worthwhile endeavor.
14
<PAGE>
The Year in Review
New Products and Services
VAMCO has enhanced its offerings in the areas of general commercial and
industrial contracting including relatively new specialties such as water piping
and sprinkler system retrofitting. These new services will provide VAMCO with
continued growth in the commercial and industrial markets.
Morris continues to build on its relationship with customers and suppliers.
A new line of safety products has been added to its mix to complement its lines
of plumbing and water heating equipment.
Valley Propane enjoyed an increase in gallons sold and its earnings were
positively impacted by offering fixed price contracts which allowed customers to
lock in pricing to protect against future price increases. Valley Propane also
implemented a new electronic delivery ticket system which has resulted in
improved inventory management and cost control. These innovative approaches
contributed to earnings improvements for this subsidiary.
During fiscal 1999 AEC was awarded a United States Patent to protect its
proprietary Passport FMS Multi Fuel Management System. This system is designed
to provide control of the natural gas utilized in firm or interruptible
applications.
The Passport also facilitates transfer from and to natural gas and other
fuels including fuel oil and propane, based upon consumption and curtailment
requirements. This new product offering was developed to satisfy customer needs
which have evolved as a result of natural gas unbundling.
Clean Energy Solutions
Construction of alternate fuel refueling stations continues to be a key
market segment for AEC. Two natural gas refueling stations were sold to the
State of Rhode Island and installed at a Department of Transportation facility
in Middletown and at The University of Rhode Island in South Kingstown. These
stations are being used to accommodate the fast growing number of natural gas
powered vehicles operated by the various state agencies and departments in Rhode
Island.
AEC also began the process of designing and installing its first fuel cell
project, consisting of an ONSI PC-25 fuel cell at South County Hospital in
Wakefield, Rhode Island. AEC is providing the design and installation expertise
for this 200 kilowatt fuel cell which will provide premium power for this health
care facility. It is expected that this project will be completed during the
first quarter of fiscal 2000.
(Photo appears here)
Photo tag: The Face Behind
Achievement
At this year's New England Gas Association annual conference, Dennis
Francis, Manager of Safety & Training, accepted another safety award citing
the Utilities' exemplary safety achievement as evidenced by our record of
improvement in employee safety among new England gas utilities with less
than 300 employees.
15
<PAGE>
The Year in Review
Facing the Millennium
In 1996 we initiated our Year 2000 Readiness Plan. Our Y2K Project Team has
been working diligently ever since to ensure the safe and reliable delivery of
products and services on and after January 1, 2000. As of July, we believe all
of our systems and protocols were addressed and remediated where necessary.
In February we provided a comprehensive overview of our Y2K preparedness
activities to the Rhode Island Public Utilities Commission. In April and May we
conducted similar presentations through public forums in our utility service
areas, as part of an overall public information campaign coordinated by the
Rhode Island Year 2000 Program Office and the Rhode Island Emergency Management
Agency.
The year 2000 will also mark the 150th anniversary of Valley Resources. The
Corporation began as the Pawtucket Gas Company, the form through which we began
our tradition of excellence in energy products and services in 1850.
Summary
The fiscal 1999 results are a reflection of the people whose drive and
commitment have furthered the Corporation's success. Valley Resources has the
talent and initiative to face and capitalize on the opportunities and challenges
brought about by the deregulated natural gas industry.
(Photo appears here)
Photo tag: The Face Behind
Y2K Readiness
Robert Ricciardi of Information Systems is a lead member of our Y2K
project team. Through his and others' efforts in remediating Y2K-sensitive
hardware, software, and other protocols, we've completed our Y2K review and
we're confident in our ability to ensure the safe and reliable delivery of
products and service on January 1, 2000 and beyond.
16
<PAGE>
Financial Information
Consolidated Statements of Earnings...........................................18
Consolidated Statements of Cash Flows.........................................19
Consolidated Balance Sheets...................................................20
Consolidated Statements of Changes in Common Stock Equity.....................22
Consolidated Statements of Capitalization.....................................22
Notes to Consolidated Financial Statements....................................23
Report of Independent Certified Public Accountants............................32
Management's Discussion and Analysis..........................................33
Summary of Consolidated Operations............................................38
Gas Operating Statistics......................................................39
Corporate Information.........................................................40
Directors......................................................Inside Back Cover
Officers.......................................................Inside Back Cover
17
<PAGE>
<TABLE>
Consolidated Statements of Earnings
<CAPTION>
For the year ended August 31 1999 1998 1997
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Operating revenues:
Utility gas revenues ................... $58,529,386 $59,343,603 $66,230,787
Nonutility revenues .................... 23,180,791 22,245,293 21,253,190
----------- ----------- -----------
Total .............................. 81,710,177 81,588,896 87,483,977
----------- ----------- -----------
Operating expenses:
Cost of gas sold ....................... 30,493,570 31,437,159 37,843,842
Cost of sales - nonutility ............. 15,787,006 15,516,609 14,790,835
Operations ............................. 17,557,983 17,880,673 17,890,281
Maintenance ............................ 1,689,664 1,671,829 1,633,671
Depreciation ........................... 3,397,598 3,274,513 3,143,719
Taxes - other than Federal income ...... 4,116,642 4,119,808 4,242,841
- Federal income ................. 1,772,370 1,330,045 1,334,677
----------- ----------- -----------
Total .............................. 74,814,833 75,230,636 80,879,866
----------- ----------- -----------
Operating income .......................... 6,895,344 6,358,260 6,604,111
Other income - net of tax ................. 299,205 288,464 423,476
----------- ----------- -----------
Total income before interest .............. 7,194,549 6,646,724 7,027,587
----------- ----------- -----------
Interest charges:
Long-term debt ......................... 2,388,817 2,482,840 1,957,052
Other .................................. 619,123 557,923 1,411,222
----------- ----------- -----------
Total .............................. 3,007,940 3,040,763 3,368,274
----------- ----------- -----------
Net income available for common stock ..... $ 4,186,609 $ 3,605,961 $ 3,659,313
=========== =========== ===========
Average number of common shares outstanding 4,979,508 4,966,270 4,267,038
Basic and diluted earnings per share ...... $ 0.84 $ 0.73 $ 0.86
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 1999 1998 1997
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Net income ...................................... $ 4,186,609 $ 3,605,961 $ 3,659,313
Adjustments to reconcile net income to net cash:
Depreciation .................................. 3,397,598 3,274,513 3,143,719
Provision for uncollectibles .................. 1,247,842 1,912,813 1,603,597
Deferred Federal income taxes ................. 274,752 773,217 441,638
Amortization of investment tax credits ........ (47,688) (48,402) (49,090)
Change in assets and liabilities:
Accounts receivable ........................... (1,380,511) (413,842) (2,841,404)
Deferred fuel costs ........................... 911,178 (1,277,658) 1,620,252
Unbilled gas costs ............................ 6,104 1,702 (1,140)
Fuel and other inventories .................... (140,622) 301,688 (71,908)
Prepayments ................................... (157,965) (63,281) 119,631
Common stock held for dividend reinvestment plan (21,472) 230,552 (220,829)
Prepaid pensions .............................. (1,564,044) (1,728,432) (924,745)
Accounts payable .............................. 1,110,923 (23,435) (944,778)
Security deposits ............................. (9,155) (57,230) (61,952)
Taxes accrued ................................. 173,400 73,554 171,730
Other ......................................... 118,264 548,114 520,799
------------ ------------ ------------
Total adjustments ............................... 3,918,604 3,503,873 2,505,520
------------ ------------ ------------
Net cash provided by operating activities ......... 8,105,213 7,109,834 6,164,833
------------ ------------ ------------
Cash flows from investing activities:
Utility capital expenditures .................... (3,841,768) (3,555,028) (3,599,752)
Nonutility capital expenditures ................. (640,849) (978,538) (693,229)
Other investments ............................... (103,422) (44,924) (81,222)
------------ ------------ ------------
Net cash used by investing activities ............. (4,586,039) (4,578,490) (4,374,203)
------------ ------------ ------------
Cash flows from financing activities:
Dividends paid .................................. (3,723,724) (3,698,155) (3,130,413)
Common stock transactions ....................... (54,870) 869,155 6,450,861
Issuance of long-term debt, net of issuance cost -0- -0- 9,655,515
Issuance of revolving credit arrangement ........ -0- 100,000 100,000
Retirement of long-term debt .................... (2,303,875) (209,200) (1,553,395)
Increase (decrease) in notes payable ............ 2,500,000 400,000 (13,000,000)
------------ ------------ ------------
Net cash used by financing activities ............. (3,582,469) (2,538,200) (1,477,432)
------------ ------------ ------------
Net (decrease) increase in cash ................... (63,295) (6,856) 313,198
Cash, beginning ................................... 813,155 820,011 506,813
------------ ------------ ------------
Cash, ending ...................................... $ 749,860 $ 813,155 $ 820,011
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ...................................... $ 2,932,870 $ 2,788,390 $ 3,378,894
============ ============ ============
Federal income taxes .......................... $ 1,341,309 $ 500,000 $ 861,140
============ ============ ============
Supplemental disclosures of noncash activity:
Capital lease obligations incurred .............. $ 30,297 $ 832,026 $ 388,139
============ ============ ============
The accompanying Notes are an integral part of these statements.
</TABLE>
19
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
August 31 1999 1998
- --------- ---- ----
<S> <C> <C>
Assets:
Utility plant, at cost ........................................... $ 86,445,703 $ 82,964,897
Less: Accumulated provision for depreciation .................... 34,111,279 31,655,080
------------ ------------
Net utility plant ................................................ 52,334,424 51,309,817
------------ ------------
Leased property-less accumulated amortization of $4,604,837
and $4,007,748 ................................................. 1,555,855 2,302,601
------------ ------------
Nonutility property-less accumulated provision for depreciation of
$4,510,553 and $4,315,566 ...................................... 4,162,601 4,106,232
------------ ------------
Other investments ................................................ 1,740,028 1,636,606
------------ ------------
Current assets:
Cash ........................................................... 749,860 813,155
Accounts receivable-less allowance for uncollectibles of
$1,309,410 and $928,279 ...................................... 9,816,986 9,684,317
Deferred fuel costs ............................................ -0- 484,418
Deferred unbilled gas costs .................................... 432,228 438,332
Fuel and other inventories ..................................... 5,959,289 5,818,667
Prepayments .................................................... 1,510,917 1,352,952
Common stock held for dividend reinvestment plan ............... 142,568 121,096
------------ ------------
Total current assets ......................................... 18,611,848 18,712,937
------------ ------------
Deferred debits:
Recoverable postretirement benefit ............................. -0- 230,974
Recoverable vacations accrued .................................. 610,798 632,966
Recoverable deferred Federal income taxes ...................... 6,062,414 6,108,997
Recoverable transition obligation .............................. 10,700 21,300
Unamortized debt discount and expense .......................... 1,643,382 1,711,815
Prepaid pensions ............................................... 10,388,058 8,824,014
Other .......................................................... 3,102,418 2,882,349
------------ -----------
Total deferred debits ........................................ 21,817,770 20,412,415
------------ ------------
Total assets ................................................. $100,222,526 $ 98,480,608
============ ============
The accompanying Notes are an integral part of these statements.
</TABLE>
20
<PAGE>
<TABLE>
Consolidated Balance Sheets
<CAPTION>
August 31 1999 1998
- --------- ---- ----
<S> <C> <C>
Capitalization and liabilities:
Capitalization ............................. $ 65,278,234 $64,860,725
------------ -----------
Revolving credit arrangement ............... 2,400,000 2,400,000
------------ -----------
Obligations under capital leases ........... 775,132 1,527,655
------------ -----------
Current liabilities:
Current maturities of long-term debt ..... 150,000 2,288,937
Obligations under capital leases ......... 780,723 774,946
Notes payable ............................ 4,800,000 2,300,000
Accounts payable ......................... 5,385,917 4,274,994
Security deposits ........................ 968,410 977,565
Taxes accrued ............................ 608,709 435,309
Deferred fuel costs ...................... 426,760 -0-
Accrued interest ......................... 760,848 793,732
Other .................................... 716,594 740,971
------------ -----------
Total current liabilities .................. 14,597,961 12,586,454
------------ -----------
Commitments and contingencies
Deferred credits:
Unamortized investment tax credit ........ 578,508 626,196
Transition obligation .................... 10,700 21,300
Unfunded deferred Federal income taxes ... 1,802,439 1,849,022
Postretirement benefit obligation ........ -0- 230,974
Other .................................... 1,911,733 1,785,230
------------ -----------
Total deferred credits ................. 4,303,380 4,512,722
------------ -----------
Deferred Federal income taxes .............. 12,867,819 12,593,052
------------ -----------
Total liabilities ...................... 34,944,292 33,619,883
------------ -----------
Total capitalization and liabilities ... $100,222,526 $98,480,608
============ ===========
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, 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
--------- ---------- ----------- -----------
Add (deduct):
Net income ................... 3,605,961
Cash dividends on common stock (3,698,155)
Issuance of common stock ..... 93,000 93,000 795,296
Other ........................ (19,141)
--------- ---------- ----------- -----------
Balance, August 31, 1998 ........ 4,993,028 4,993,028 24,811,079 8,187,112
--------- ---------- ----------- -----------
Add (deduct):
Net income ................... 4,186,609
Cash dividends on common stock (3,723,724)
Other ........................ (54,870)
--------- ---------- ----------- -----------
Balance, August 31, 1999 ........ 4,993,028 $4,993,028 $24,756,209 $ 8,649,997
========= ========== =========== ===========
The accompanying Notes are an integral part of these statements.
</TABLE>
<TABLE>
Consolidated Statements of Capitalization
<CAPTION>
August 31 1999 1998
- --------- ---- ----
<S> <C> <C>
Common stock equity:
Common stock, $1 par value
Authorized 20,000,000 shares
Issued and outstanding 4,993,028 shares ..................... $ 4,993,028 $ 4,993,028
Paid in capital ............................................... 24,756,209 24,811,079
Retained earnings ............................................. 8,649,997 8,187,112
----------- -----------
38,399,234 37,991,219
Less: Accounts receivable from Valley Resources, Inc. 401(k)
Employee Stock Ownership Plan ............................... 2,593,911 2,768,343
----------- -----------
Total common stock equity ............................... 35,805,323 35,222,876
----------- -----------
Long-term debt:
8% First Mortgage Bonds, due 2022 ............................. 20,029,000 20,039,000
7.7% Debentures, due 2027 ..................................... 7,000,000 7,000,000
9% Notes Payable, due 1999 .................................... -0- 2,138,937
Note payable, due 2007 ........................................ 2,593,911 2,748,849
----------- -----------
Total ................................................... 29,622,911 31,926,786
Less: Current maturities ...................................... 150,000 2,288,937
----------- -----------
Total long-term debt .................................... 29,472,911 29,637,849
----------- -----------
Total capitalization .................................... $65,278,234 $64,860,725
=========== ===========
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
1999, 1998 and 1997 was 2.91%. Depreciation provisions for other subsidiary
companies are provided on the straight-line and accelerated methods at rates
ranging from 2.86% to 34%.
OTHER ASSETS - Included in other assets is goodwill which is amortized on the
straight-line basis over forty years. The Corporation continually evaluates the
carrying value of goodwill. Any impairments would be recognized when the
expected undiscounted future operating cash flows derived from goodwill is less
than the carrying value.
UNAMORTIZED DEBT EXPENSE - Costs incurred to obtain debt financing are amortized
over the expected term of the related debt. Amortization of deferred financing
costs is recorded as interest expense.
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.
23
<PAGE>
Notes to Consolidated Financial Statements
PENSION PLANS - The Utilities maintain two non-contributory defined benefit
pension plans covering substantially all of their employees which 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 KSOP covers all Corporate
employees, if eligible (see Note D). The expense of these plans, in fiscal 1999,
1998 and 1997 was $173,300, $144,000, and $160,800, 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 1999, 1998, and 1997 profit sharing expense was $53,500, $72,000, and
$64,600, respectively.
NEW ACCOUNTING STANDARDS - In June of 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value, it also requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. The new
standard is effective for fiscal years beginning after June 15, 2000. Adoption
of SFAS No. 133 will not affect the Corporation's financial condition or results
of operations.
INVENTORIES - Fuel and other inventories at August 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Fuels (at average cost) .............................. $3,462,277 $3,542,932
Merchandise and other (at average cost) .............. 1,234,326 1,241,224
Merchandise (at LIFO) ................................ 1,262,686 1,034,511
---------- ----------
$5,959,289 $5,818,667
========== ==========
</TABLE>
Merchandise (at LIFO), if valued at current cost, would have been greater by
$205,000 in fiscal 1999 and $246,300 in fiscal 1998.
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. On September 24, 1997, the Underwriters of the
stock offering exercised their over-allotment option and 93,000 additional
common shares were issued.
Pursuant to the Corporation's direct stock purchase 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 1999 and 1998 were
open-market purchases. On August 31, 1999 and 1998, 10,019 and 10,116 shares,
respectively, were held by the Corporation for issuance to the plan.
On August 31, 1999, 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 direct stock purchase 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
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 1999, 1998, and 1997 amounted to
$105,900, $106,800 and $110,000, respectively. There are no legal restrictions
on withdrawal of compensating balances.
A detail of short-term borrowings for fiscal 1999, 1998, and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
At year end
Weighted average interest rate .. 5.4% 5.7% 5.7%
Unused lines of credit .......... $24,200,000 $34,700,000 $35,100,000
For the year ended
Weighted average interest rate .. 5.5% 5.8% 5.7%
Average borrowings .............. $ 4,162,500 $ 2,433,300 $16,800,000
Maximum month-end borrowings .... $ 7,400,000 $ 6,200,000 $22,000,000
Month of maximum borrowings ..... December December January
</TABLE>
Note D: Long-Term Debt
The composition of long-term debt is included in these financial statements
in the separate Consolidated Statements of Capitalization. The aggregate amount
of maturities and sinking fund requirements for each of the five fiscal years
following fiscal 1999 are: 2000, $930,700; 2001, $2,904,800; 2002, $383,400;
2003, $224,600 and 2004, $212,600, 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, $10,000, $51,000, and $122,000 of the bonds
were redeemed by holders in fiscal 1999, 1998, and 1997, 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, 1999.
Regulatory treatment allows payments under capital leases to be recorded as
rental expenses. Rental expenses for all leases in fiscal 1999, 1998, and 1997,
were $1,028,700, $1,218,600, and $1,169,500, 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 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
On August 31, 1999, $1,751,400 of the retained earnings of Valley Gas were
available for the payment of cash dividends to the Corporation under the most
restrictive provisions of Valley Gas' first mortgage bonds. There are no
restrictions as to the payment of dividends for the other subsidiaries.
25
<PAGE>
Notes to Consolidated Financial Statements
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. On
August 31, 1999, the Corporation has a liability of $6,062,400 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current income tax expense:
Operating expense ................. $1,497,618 $ 556,828 $ 893,039
Nonoperating expense .............. (4,279) 57,482 103,200
---------- ---------- ----------
1,493,339 614,310 996,239
---------- ---------- ----------
Deferred income tax expense:
Accelerated depreciation .......... 303,332 316,197 332,771
Pensions .......................... 531,775 587,667 314,413
Deferred fuel costs ............... (111,946) 99,941 (229,039)
Uncollectibles .................... (126,488) (36,985) (23,830)
Directors' fees and interest ...... (47,438) (42,525) (36,845)
Bond premium ...................... (6,240) (6,240) (6,240)
Rate case expenses ................ (11,926) (61,308) (97,257)
Capitalization of inventory costs . (8,748) 1,155 28,869
Consulting contracts .............. (19,920) (19,920) 30,570
Software amortization ............. (140,332) (86,136) 140,856
Alternative minimum tax ........... -0- 96,359 -0-
Excess VEBA contribution .......... (78,532) (78,532) (78,532)
Other ............................. (8,785) 3,544 65,902
274,752 773,217 441,638
---------- ---------- ----------
Total ............................. $1,768,091 $1,387,527 $1,437,877
========== ========== ==========
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Federal rate ............................. 34% 34% 34%
Maintenance costs capitalized for book purposes .... (4) (4) (4)
Cost of removal .................................... (1) (1) (1)
ESOP dividends ..................................... (1) (1) (1)
Prior year over accrual ............................ -0- (2) -0-
Other .............................................. 2 2 -0-
--- --- ---
Total .............................................. 30% 28% 28%
=== === ===
</TABLE>
26
<PAGE>
Notes to Consolidated Financial Statements
Temporary differences which gave rise to the following deferred tax assets
and liabilities at August 31, 1999 and 1998 are:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Unbilled revenues ................... $ 262,737 $ 266,652
Directors' fees and interest ........ 342,285 294,847
Other ............................... 793,234 568,055
------------ ------------
Total deferred tax assets ........ 1,398,256 1,129,554
------------ ------------
Accelerated depreciation ............ (9,499,234) (9,195,902)
Pensions ............................ (3,550,626) (3,018,851)
Software amortization ............... (450,450) (590,782)
Deferred fuel costs ................. (52,757) (164,703)
Other ............................... (713,008) (752,368)
------------ ------------
Total deferred tax liabilities ... (14,266,075) (13,722,606)
------------ ------------
Total deferred taxes ................ $(12,867,819) $(12,593,052)
============ ============
</TABLE>
The Corporation's nonutility operations are subject to state income taxes.
For fiscal 1999, 1998, and 1997, state income taxes totaled $93,800, $124,100,
and $170,700, 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.
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 cost (income) is comprised
of the following components:
<TABLE>
<CAPTION>
For the year ended August 31 1999 1998 1997
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Service cost ................................... $ 704,892 $ 640,994 $ 543,241
Interest cost on projected benefit obligation .. 1,448,757 1,360,031 1,337,602
Expected return on plan assets ................. (3,373,477) (3,245,272) (2,579,914)
Recognition of actuarial gain .................. (280,738) (400,878) (142,367)
Net amortization and deferral .................. (63,478) (83,307) (83,307)
----------- ----------- -----------
Net periodic pension income .................... $(1,564,044) $(1,728,432) $ (924,745)
=========== =========== ===========
</TABLE>
Assumptions used in actuarial calculations were as follows:
<TABLE>
<CAPTION>
For the year ended August 31 1999 1998 1997
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate .................. 7.00% 7.00% 7.25%
Future compensation increases ................... 5.50 5.50 5.50
Expected long-term rate of return on assets ..... 9.00 9.00 9.00
</TABLE>
27
<PAGE>
Notes to Consolidated Financial Statements
The following tables set forth the reconciliation of the plans' benefit
obligation and fair value of assets as follows:
<TABLE>
<CAPTION>
For the year ended August 31 1999 1998
- ---------------------------- ---- ----
<S> <C> <C>
Reconciliation of benefit obligation:
Obligation at September 1 ....................................... $ 21,240,659 $ 19,266,157
Service cost .................................................... 704,892 640,994
Interest cost ................................................... 1,448,757 1,360,031
Amendments ...................................................... -0- 297,429
Actuarial (gain) loss ........................................... (598,721) 716,918
Benefit payments ................................................ (1,118,340) (1,040,870)
------------ ------------
Obligation at August 31 ......................................... $ 21,677,247 $ 21,240,659
============ ============
Reconciliation of fair value of plan assets:
Fair value of plan assets at September 1 ........................ $ 38,027,205 $ 36,565,680
Actual return on plan assets .................................... 3,327,389 2,502,395
Benefit payments ................................................ (1,118,340) (1,040,870)
------------ ------------
Fair value of plan assets at August 31 .......................... $ 40,236,254 $ 38,027,205
============ ============
</TABLE>
The funded status of the plans is as follows:
<TABLE>
<CAPTION>
August 31 1999 1998
- --------- ---- ----
<S> <C> <C>
Plan assets at fair value:
Projected benefit obligation less than (in excess of) plan assets $ 20,401,395 $ 18,802,795
Unrecognized net gain ........................................... (10,609,146) (10,511,112)
Unrecognized transition amount .................................. (381,660) (529,184)
Unrecognized prior service cost ................................. 977,469 1,061,515
------------ ------------
Prepaid pension costs ........................................... $ 10,388,058 $ 8,824,014
============ ============
</TABLE>
Assets of the employee benefit plans are invested in domestic and international
equities, domestic and international fixed income securities and other
short-term debt instruments.
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 20
years. Valley Gas' cost under this plan for fiscal 1999, 1998 and 1997 was
$701,000, $725,000, and $775,600, 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.
28
<PAGE>
Notes to Consolidated Financial Statements
The following table sets forth the reconciliation of the plans' benefit
obligation and fair value of plan assets as follows:
<TABLE>
<CAPTION>
For the year ended August 31 1999 1998
- ---------------------------- ---- ----
<S> <C> <C>
Reconciliation of benefit obligation:
Obligation at September 1 ...................... $ 6,523,627 $ 6,057,989
Service cost ................................... 144,363 147,852
Interest cost .................................. 443,516 426,588
Actuarial loss ................................. 418,504 184,606
Benefit payments ............................... (311,095) (293,408)
----------- -----------
Obligation at August 31 ........................ $ 7,218,915 $ 6,523,627
=========== ===========
Reconciliation of fair value of plan assets:
Fair value of plan assets at September 1 ....... $ 2,351,191 $ 1,699,662
Actual return on plan assets ................... 97,620 (40,980)
Employer contributions ......................... 1,242,884 985,917
Benefit payments ............................... (311,095) (293,408)
----------- -----------
Fair value of plan assets at August 31 ......... $ 3,380,600 $ 2,351,191
=========== ===========
</TABLE>
The following table sets forth the plan's funded status reconciled with the
amounts recognized in the company's financial statements is as follows:
<TABLE>
<CAPTION>
August 31 1999 1998
- --------- ---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation in excess of plan assets .. $(3,838,315) $(4,172,436)
Unrecognized net loss (gain) from past experience different from that
assumed and from changes in assumptions ............................... 208,257 (277,466)
Unrecognized transition obligation ...................................... 3,888,824 4,166,598
----------- -----------
Prepaid (accrued) postretirement benefit cost ........................... $ 258,766 $ (283,304)
=========== ===========
</TABLE>
Net periodic postretirement benefit cost consisted of the following:
<TABLE>
<CAPTION>
For the year ended August 31 1999 1998 1997
- ---------------------------- ---- ---- ----
<S> <C> <C> <C>
Service cost - benefits attributable to service during the period ... $ 144,363 $ 147,852 $ 136,372
Interest cost on accumulated postretirement benefit obligation ...... 443,516 426,588 419,246
Expected return on plan assets ...................................... (147,746) (105,934) (55,569)
Net amortization and deferral ....................................... 277,774 277,774 277,774
Recognition of net actuarial gain ................................... (17,093) (21,232) (23,414)
--------- --------- ---------
Net periodic postretirement benefit cost ............................ $ 700,814 $ 725,048 $ 754,409
========= ========= =========
</TABLE>
For measurement purposes, a 9% (4.5% for dental costs) annual rate of increase
in the per capita cost of covered health care benefits was assumed for 1999; the
rate of increase for medical costs was assumed to decrease gradually to 5% by
fiscal 2002 and to remain at that level thereafter. 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 one percentage point in
each year would increase the accumulated postretirement benefit obligation at
August 31, 1999 by $534,000 and the aggregate of the service and the interest
cost components of net periodic postretirement benefit cost for the year then
ended by $54,000. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.0%, 7.0% and 7.25% for
fiscal 1999, 1998 and 1997, respectively. The expected long-term rate of return
on plan assets was 8.50% for fiscal 1999, 1998 and 1997.
29
<PAGE>
Notes to Consolidated Financial Statements
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 $10,700 and have recognized a
liability for these costs as of August 31, 1999. The RIPUC has allowed the
recovery of transition costs through the PGPA. Under the provisions of SFAS 71,
regulatory assets totaling $10,700 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 letters of responsibility from the Rhode Island
Department of Environmental Management ("DEM") with respect to releases from
coal waste on its properties that were the site of the former Tidewater gas
manufacturing plant in Pawtucket, Rhode Island and the former Hamlet Avenue gas
manufacturing plant in Woonsocket, Rhode Island. Valley Gas and Blackstone have
submitted site investigation reports to DEM relating to certain releases on
these sites. Management cannot determine the future cash flow impact, if any, of
these claims 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 periods. Remediation of sites such as the former Tidewater
plant and the Hamlet Avenue plant are governed by a regulatory framework which
now permits more flexibility in methods of remediation and in property reuse.
Note I: Segment Information
The Corporation adopted SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information," during fiscal 1999. SFAS 131 established
standards for reporting information about operating segments ("business
segments") in annual financial statements and requires selected information in
interim financial statements. Business segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, to make decisions on how to allocate resources and to assess performance.
The Corporation's chief operating decision making group is the Chief Executive
Officer ("CEO") and certain other executive officers that report directly to the
CEO. The operating segments are organized and managed separately because each
segment offers different products or services. The Corporation evaluates the
performance of its business segments based on the operating income generated.
Operating income does not include income taxes, interest expense, extraordinary
charges, and non-operating income and expense items.
30
<PAGE>
Notes to Consolidated Financial Statements
Under SFAS 131, an operating segment that does not exceed certain
quantitative levels is not considered a reportable segment. Instead, the results
of all segments that do not exceed the quantitative thresholds are combined and
reported as one segment and referred to as "all other." The Corporation's
subsidiaries VAMCO, Valley Propane and AEC business segments did not meet these
quantitative thresholds and have been grouped into the "all other" category.
The accounting policies of the operating segments are the same as those
described in Note A except the intercompany transactions have not been
eliminated in determining individual segment results.
The following information is presented relative to the gas, contract sales
and other operations of the Corporation.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gas Operations
Operating revenues ............................. $58,529,386 $59,343,603 $66,230,787
Operating income before Federal income taxes ... 6,991,106 6,178,629 6,465,007
Identifiable assets at August 31 ............... 95,121,383 89,713,540 88,927,776
Depreciation ................................... 2,817,161 2,692,326 2,594,712
Capital expenditures ........................... 3,841,768 3,555,028 3,599,752
Contract Sales
Operating revenues ............................. $15,291,428 $15,104,272 $14,243,778
Operating income before Federal income taxes ... 549,041 646,303 612,744
Identifiable assets at August 31 ............... 3,959,667 3,993,215 3,749,762
Depreciation ................................... 44,866 45,703 51,704
Capital expenditures ........................... 9,255 30,704 21,703
All Other Operations, including Corporate &
Eliminations
Operating revenues ............................. $ 7,889,363 $ 7,141,021 $ 7,009,412
Operating income before Federal income taxes ... 1,127,567 863,373 861,037
Identifiable assets at August 31 ............... 1,141,476 4,773,853 5,019,599
Depreciation ................................... 535,571 536,484 497,303
Capital expenditures ........................... 631,594 947,834 671,526
Total Corporation
Operating revenues ............................. $81,710,177 $81,588,896 $87,483,977
Operating income before Federal income taxes ... 8,667,714 7,688,305 7,938,788
Federal income tax expense ..................... (1,772,370) (1,330,045) (1,334,677)
Nonoperating income-net ........................ 299,205 288,464 423,476
Interest expense ............................... (3,007,940) (3,040,763) (3,368,274)
Net income ..................................... 4,186,609 3,605,961 3,659,313
Identifiable assets at August 31 ............... 100,222,526 98,480,608 97,697,137
Depreciation ................................... 3,397,598 3,274,513 3,143,719
Capital expenditures ........................... 4,482,617 4,533,566 4,292,981
</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.
Segment Information at August 31, 1998 and 1997 has been restated to
conform with the presentation of SFAS 131 at August 31, 1999.
31
<PAGE>
Notes to Consolidated Financial Statements
Note J: Summarized Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Three months ended
(in thousands, except as to basic and
diluted earnings (loss) per share) November February May August
- ------------------------------------- -------- -------- --- ------
<S> <C> <C> <C> <C>
Fiscal 1999
Total operating revenues ..................... $15,270 $29,201 $23,581 $13,658
Income (loss) before Federal income taxes .... $(1,091) $ 5,057 $ 3,228 $(1,287)
Net income (loss) ............................ $ (637) $ 3,292 $ 2,320 $ (789)
Basic and diluted earnings (loss) per share .. $ (0.13) $ 0.66 $ 0.47 $ (0.16)
Fiscal 1998
Total operating revenues ..................... $15,824 $30,428 $22,587 $12,750
Income (loss) before Federal income taxes .... $(1,288) $ 4,818 $ 2,692 $(1,229)
Net income (loss) ............................ $ (761) $ 3,232 $ 1,828 $ (693)
Basic and diluted earnings (loss) per share .. $ (0.15) $ 0.65 $ 0.37 $ (0.14)
</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, 1999 and 1998 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, 1999.
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, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1999, in conformity with generally
accepted accounting principles.
S/Grant Thornton LLP
--------------------
Grant Thornton LLP
Boston, Massachusetts
September 27, 1999
32
<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
(collectively the "Utilities"), 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, designs and installs
natural gas refueling facilities, natural gas conversion systems and energy use
control devices.
Operating results are derived from three major business segments - Gas
Operations, Contract Sales and All Other Operations. Gas Operations consist of
utility earnings generated from the sale and transportation of natural gas.
Contract Sales, included in nonutility earnings, consists of the Morris
Merchants operations. All Other Operations is comprised of VAMCO, Valley
Propane, AEC, Corporate and Eliminations and are also included in nonutility
earnings (See footnote I Business Segments).
Natural gas sales and transportation to customers, on a year-round basis,
for heating, water heating, cooking and processing are the primary source of
firm utility revenues for gas operations. Firm customers can be residential,
commercial or industrial. 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 firm sales customers changes in gas costs from those included in the
regulated tariffs, and an adjustment to collect post-retirement benefits.
Utility revenues also include seasonal and dual-fuel sales. These sales,
which are made when excess gas supplies are available and gas prices are
competitive with alternative fuel markets, 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
interruptible transportation services through their distribution systems.
Morris Merchants generates nonutility revenues through wholesale sales of
franchised business lines of plumbing and heating equipment.
Vamco generates its revenues through the sales and installation of heating
equipment and appliances. VAMCO, also, generates revenues from appliance
rentals, service contract repair program and water filtration sales. Valley
Propane sells propane at both wholesale and retail and provides service to
propane customers in Rhode Island and southeastern Massachusetts. AEC 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 owned an 80% interest in AEC during fiscal 1999. The Corporation
received an additional 10% interest from AEC's current management on September
1, 1999 and has the obligation to acquire the remaining 10% in 2001.
RESULTS OF OPERATIONS
Fiscal 1999 versus 1998
GAS OPERATIONS
Utility gas revenues in fiscal 1999 totaled $58,529,400, a decrease of 1.4%
from fiscal 1998. This decrease was attributable to a weather related decline in
firm gas sales, and a decrease of $137,900 in gas costs recovered through the
PGPA which were, offset slightly by an increase in transportation revenues. The
PGPA does not impact operating income as it effectuates a dollar for dollar
recovery of gas costs. The transfer of customers to transportation does not
affect margins although it does produce less revenues.
Firm gas throughput, firm gas sales and transportation was 7,786,900 Mcf in
fiscal 1999, an increase of less than one percent over fiscal 1998. The slight
increase was primarily the result of increased firm transportation service
mitigating the effect of decreased firm gas sales. Firm gas sales declined as a
result of weather, which was less than one percent warmer than the prior year
and 9.1% warmer than a normal year, and the transfer of sales customers to firm
transportation. Firm gas sales were primarily impacted by weather related
declines during the critical heating period, December through February. During
this period weather was 3.2% warmer than the prior year and 10.6% warmer than a
normal year.
Throughput to interruptible customers in fiscal 1999 decreased 7.4% as
compared to fiscal 1998 due to the lower price of competing fuels. Interruptible
throughput includes sales to seasonal and dual-fuel customers and the
transportation of customer-owned natural gas to interruptible and off-peak
customers. Interruptible sales and transportation, excluding off-peak, are
dependent on the availability of natural gas and the cost of competitive fuels.
Profits on seasonal sales are returned to firm sales customers through the PGPA
and do not impact operating income. Interruptible transportation revenues
decreased $5,700 from the prior year.
33
<PAGE>
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
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 in fiscal 1999 in gas costs
for utility operations are passed through to firm sales customers through the
PGPA. Therefore, changes in gas costs do not impact the profitability of the
Utilities.
Other operation expenses in fiscal 1999 totaled $12,759,500, a decline of
6.2% from fiscal 1998. A decrease in uncollectible accounts and labor cost
savings associated with the warmer weather caused the decline.
Maintenance expenses increased in fiscal 1999 by 2.0% over the prior fiscal
year to $1,627,600. The slight increase was the result of normal wage and
inflation costs.
Taxes - other than Federal income taxes totaled $3,840,400, a less than one
percent increase over the prior fiscal year. The slight increase over the prior
fiscal period was the result of increased property taxes offset by decreased
gross receipts tax on lower utility revenues.
Other income - net of tax was $25,900 in fiscal 1999 and $75,300 in fiscal
1998. A decrease in earnings from other investments was responsible for the
reduction.
Fiscal 1999 interest expense was $2,788,900, a decrease of less than one
percent when compared to the prior fiscal year. A slight reduction in long-term
debt interest expense was offset slightly by increased interest expense on an
increase in average short-term debt outstanding.
CONTRACT SALES
Contract Sales revenues totaled $15,291,400, an increase of 1.2% over
fiscal 1998. Revenues generated from wholesale operations increased over the
prior year through continued emphasis on sales of existing products and an
improvement in economic conditions.
Cost of sales - nonutility includes the cost of goods sold for wholesale
merchandise sold. Fiscal 1999 cost of sales increased 1.9% over fiscal 1998 due
to increased sales.
Other operation expenses in fiscal 1999 totaled $2,342,100, a 2.9% increase
over fiscal 1998. Increased commissions, wages and selling expenses were
responsible for the increase.
Other income - net of tax declined $10,600 when compared to fiscal 1998.
Other income is derived primarily from interest on temporary cash investments
and rebates offered from manufacturers.
ALL OTHER OPERATIONS
The nonutiltiy revenues associated with this segment were $7,889,400, a
10.5% increase over the prior fiscal year. The increase was the result of
increased sales by VAMCO and the Corporation's weather insurance product.
VAMCO's commitment to the commercial and industrial markets continued to
contribute to increased revenues. An increase in the number of customers
participating in the service contract and rental programs also contributed to an
improvement in retail revenues. The Corporation's weather insurance product
produced revenues as a result of the warmer than normal weather experienced
during the measurement period of November through March of fiscal 1999.
Propane revenues experienced a slight decline due to price competition and
the warmer than normal winter weather, despite an increase in gallons sold.
Propane revenues are derived from the sale of liquid propane gas to both retail
and wholesale customers for the use of cooking, heating, hot water and clothes
drying. Although price competition effects the revenue component of this
segment, the focus on margin retention through inventory management and
marketing strategy was responsible for the increased gallons sold. Gallons sold
increased 2.5% over fiscal 1998 as a result of offering customers fixed price
contracts. AEC revenues remained flat when compared to fiscal 1998.
Cost of goods sold for VAMCO and AEC and the purchase, storage and delivery
of liquid propane gas for Valley Propane is included in cost of sales -
nonutility. Fiscal 1999 cost of sales for this segment increased 1.1% when
compared to fiscal 1998. The increase was directly attributable to the increase
in sales of VAMCO.
Other operation expenses in fiscal 1999 totaled $2,456,400, a 22.9%
increase over fiscal 1998. Increased repairs in the rental program, additional
personnel and normal wage and general operating expense increases were
responsible for the increase over the prior fiscal year.
Taxes - other than Federal income taxes totaled $208,900, a 1.8% increase
over fiscal 1998. The increase over the prior fiscal year was the result of
increased property tax values and assessments.
34
<PAGE>
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Fiscal 1998 versus 1997
GAS OPERATIONS
Utility gas revenues in fiscal 1998 totaled $59,343,600, a decrease of
10.4% from fiscal 1997. The decrease in revenues from the prior year was
attributable to a weather-related decline in firm gas sales, a decrease of
$2,518,000 in gas costs recovered through the PGPA, and the transfer of
customers from sales to transportation.
Firm gas throughput, firm gas sales and transportation, was 7,763,400 Mcf
in fiscal 1998, a decrease of 2.9% from fiscal 1997. The primary contributor to
the decline in gas throughput was weather which was 8.5% warmer than a normal
year and 6.4% warmer than the prior year.
Throughput to interruptible customers in fiscal 1998 decreased 9.9% as
compared to fiscal 1997 due to the lower price of competitive fuels. Margins
earned from seasonal sales are returned to firm customers through the PGPA and
do not impact the profitability of the Utilities. Interruptible transportation
revenues decreased $206,100 from the prior year.
Cost of gas sold includes the costs of all commodity, storage,
transportation and peak shave fuel requirements to serve utility sales
customers. The average cost per Mcf of natural gas distributed in fiscal 1998
was $4.02 versus $4.07 in fiscal 1997.
Other operation expenses in fiscal 1998 totaled $13,606,400, a decrease of
1.4% from fiscal 1997. Other operation expenses declined as a result of a
decrease in administrative and general expenses due to an additional $803,700 of
net periodic pension income. This decrease was partially offset by increased
uncollectible expense and wages.
Maintenance expenses increased for fiscal 1998 by less than one percent
when compared to fiscal 1997. Normal wage and inflation was primarily
responsible for the increase.
Taxes - other than Federal income taxes totaled $3,833,400, a decrease of
2.7% when compared to fiscal 1997. The impact of gross receipts tax on lower
utility revenues was responsible for the decrease.
Other income - net of tax was $103,600 less than fiscal 1997 as a result of
lower earnings from other investments.
Interest expense for fiscal 1998 was $2,790,800 a decrease of 13.5% from
fiscal 1997. The decrease was the result of the net proceeds of the Valley
Resources debt and equity offerings in August 1997 reducing the short-term
borrowings of utility operations.
CONTRACT SALES
Contract Sales revenues totaled $15,104,200, an increase of 6.0% over
fiscal 1997. Revenues generated from wholesale operations increased over the
prior year through emphasis on existing products and a new approach to marketing
these products.
Cost of sales - nonutility for wholesale merchandise operations for fiscal
1998 was $12,055,200, a 5.9% increase over fiscal 1997. The increase was the
direct result of increased sales.
Other operation expenses in fiscal 1998 totaled $2,275,800, an 8.0%
increase over fiscal 1997. Increased commissions, wages and selling expenses
were responsible for the increase.
Other income - net of tax declined $15,200 for fiscal 1998 when compared
with the prior fiscal year. The decline was the result of decreased income from
manufacturer rebates.
ALL OTHER OPERATIONS
The nonutility revenues associated with this segment were $7,141,000, a
1.9% increase over the prior fiscal year. The increase was the result of
increased residential and commercial retail sales, offset by a decline in
propane and AEC revenues. VAMCO's commitment to the commercial and industrial
market, as well as continued efforts in the residential heating replacement
market, contributed to increased revenues. An increase in the number of
customers participating in the service contract and rental programs was also
responsible for improvement in retail revenues. Despite an increase in gallons
of propane sold and increased customers, revenues from the propane operation
declined from the prior year. A decrease in revenues from AEC also impacted
nonutility revenues.
Cost of sales - nonutility for other operations increased 1.6% in 1998 when
compared with the prior fiscal year The increase in cost of sales is directly
attributable to the increase in retail sales partially offset by a decrease in
the cost of propane gas sold.
Other operation expenses in fiscal 1998 totaled $1,998,400, an increase of
less than one percent over fiscal 1997. Normal wage increases were responsible
for the increase.
Maintenance expenses totaled $76,200, an increase of $23,400 over fiscal
1997. Repairs to a propane delivery vehicle was responsible for the increased
expense.
Taxes - other than Federal income taxes totaled $208,900, a 1.8% increase
over fiscal 1997. The increase over the prior fiscal year was the result of
increased property tax values and assessments.
35
<PAGE>
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
Cash is 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 financing and investments are
also used to meet corporate cash needs. Short-term financing under existing
lines of credit are available to meet working capital requirements. When deemed
appropriate by management, long-term and intermediate financing and equity
issues have been used to refinance short-term debt.
Utility operations are subject to seasonality. The bulk of firm sales and
transportation are made during the months ending in February and May. Most
capital expenditures occur 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. The need for short-term borrowing
arises 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 flow of the Corporation. Supplemental gas inventories
are filled primarily in the summer period for use during the winter period.
Warmer than normal weather in fiscal 1999 resulted in decreased gas sales
and a negative impact on cash flow. Interest costs and the timing of Federal and
state tax payments also impact liquidity.
The Corporation received a payment from its weather insurance product which
positively impacted cash flow. The weather insurance product was paid to the
Corporation as a result of the weather during the measurement period of November
1998 through March 1999 being 6% warmer than normal, based on degree days.
Cash flow was negatively impacted by the maturity of the $2,138,900, 9%
notes which were due April 1, 1999. The Corporation used short-term borrowings
to retire this debt.
Funding requirements are met through short-term borrowings under existing
lines of credit. On August 31, 1999, the Corporation had $24,200,000 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 financing are sufficient to meet
cash requirements for the foreseeable future.
A lawsuit has been filed against Valley Gas and other parties by Blackstone
Valley Electric Company ("Blackstone") seeking contribution towards a judgment
against Blackstone's share of total clean-up costs of approximately $6,000,000
at the Mendon Road site in Attleboro, Massachusetts. The expenses relate to a
site to which oxide waste was transported in the 1930's prior to the
incorporation of Valley Gas. Management is of the opinion the Corporation will
prevail as a result of the indemnification provisions included in the agreement
entered into when Valley Gas acquired its 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 letters of responsibility from the Rhode Island
Department of Environmental Management ("DEM") with respect to releases from
coal waste on its properties that were the site of the former Tidewater gas
manufacturing plant in Pawtucket, Rhode Island and the former Hamlet Avenue gas
manufacturing plant in Woonsocket, Rhode Island. Valley Gas and Blackstone have
submitted site investigation reports to DEM relating to certain releases on
these sites. Management cannot determine the future cash flow impact, if any, of
these claims 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 periods. Remediation of sites such as the former Tidewater
plant and the Hamlet Avenue plant are governed by a regulatory framework which
now permits more flexibility in methods of remediation and in property reuse.
The Corporation's net cash from operating activities in fiscal 1999 was
$8,105,200 versus $7,109,800 in fiscal 1998 and $6,164,800 in fiscal 1997.
Investing activities used cash primarily for capital expenditures in the amounts
of $4,586,000 in fiscal 1999, $4,578,500 in fiscal 1998 and $4,374,200 in fiscal
1997. Financing activities in fiscal 1999 used cash of $3,582,500 primarily for
the payment of dividends and the payment of the 9% notes due in this fiscal
36
<PAGE>
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
period, offset by increased short-term borrowings. Fiscal 1998 financing
activities used cash of $2,538,200 primarily for the payment of dividends.
Fiscal 1997 financing activities used cash of $1,477,400 which is the result of
proceeds from the Corporation's issuance of common equity and long-term debt
that were used to reduce short-term debt and from the payment of dividends.
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 1999, capital expenditures were $4,482,600 compared with $4,533,600 in
fiscal 1998 and $4,293,000 in fiscal 1997. Fiscal 2000 capital expenditures are
estimated to be $8,036,300 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.
YEAR 2000 ISSUES
Software applications currently in use by the Corporation are certified to
be Year 2000 compliant by the software vendors from whom the applications were
purchased. The Corporation has modified, replaced or upgraded those applications
which were not Year 2000 compliant and based on its testing of its systems,
management believes its systems are Year 2000 compliant. The Corporation
compiled cost estimates of the effort involved to perform those modifications,
replacements and upgrades and to date Year 2000 related costs have not been
material to the Corporation.
The Corporation has inquired of third parties; i. e., vendors, suppliers
and customers, which have a material relationship with the Corporation as to the
status of their Year 2000 readiness. The Corporation continues to work with
critical vendors, suppliers and customers to gain assurance of their readiness
for Year 2000 and has developed contingency plans to mitigate anticipated
shortcomings in their readiness. The Corporation cannot guarantee that the
systems of other companies on which the Corporation's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Corporation's systems, would not have a
material adverse impact on the Corporation.
The Corporation expects that its Year 2000 plan will be adequate to address
its Year 2000 issues and has developed contingency plans to further assure that
vital functions of the Corporation dependent on third parties will continue
uninterrupted. Contingency plans include existence of short-term in house
capabilities (i.e. back up power generation), alternate communications equipment
and increased inventory of critical material and supplies. There can be no
assurance as to whether the contingency plans will successfully address all
contingencies that may arise.
FORWARD LOOKING STATEMENTS; RISK AND UNCERTAINTIES
Statements contained in this report that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward looking statements. Certain factors that could cause the actual
results to differ materially from those projected in these forward-looking
statements include, but are not limited to: variations in weather, changes in
the regulatory environment, customers' preferences on energy sources, general
economic conditions, increased competition and other uncertainties all of which
are difficult to predict, and many of which are beyond the control of the
Corporation.
NEW ACCOUNTING STANDARD
In June of 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" . SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. It
also requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. The new standard is effective for
fiscal years beginning after June 15, 2000. Adoption of SFAS No. 133 will not
effect the Corporation's financial condition or results of operations.
37
<PAGE>
<TABLE>
Summary of Consolidated Operations
<CAPTION>
August 31 (in thousands) 1999 1998 1997 1996 1995
- ------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets
Utility plant - net ................. $ 52,334 $51,310 $50,447 $49,442 $47,411
Leased property - net ............... 1,556 2,303 2,377 2,945 2,014
Nonutility plant - net .............. 4,163 4,106 3,712 3,568 3,547
Current assets ...................... 18,612 18,713 20,205 19,307 18,409
Other assets ........................ 23,558 22,049 20,956 21,427 20,957
-------- ------- ------- ------- -------
Total .......................... $100,223 $98,481 $97,697 $96,689 $92,338
======== ======= ======= ======= =======
Capitalization and liabilities
Capitalization
Common equity ....................... $ 35,805 $35,223 $34,307 $27,092 $25,993
Long-term debt
(less current maturities) ......... 29,473 29,638 31,986 23,256 24,616
-------- ------- ------- ------- -------
Total .......................... 65,278 64,861 66,293 50,348 50,609
======== ======= ======= ======= =======
Revolving credit arrangement ........ 2,400 2,400 2,300 2,200 -0-
Obligations under capital leases .... 775 1,528 1,541 2,134 1,255
Current liabilities ................. 14,598 12,586 10,612 24,005 23,932
Other liabilities ................... 17,172 17,106 16,951 18,002 16,542
-------- ------- ------- ------- -------
Total .......................... $100,223 $98,481 $97,697 $96,689 $92,338
======== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the year ended August 31
(in thousands, except as to share
and per share data) 1999 1998 1997 1996 1995
- --------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating revenues .................... $ 81,710 $81,589 $87,484 $80,360 $74,870
Operating expenses:
Cost of gas sold .................... 30,494 31,437 37,844 31,951 30,229
Cost of sales - nonutility .......... 15,787 15,517 14,791 13,689 13,190
Other operation and maintenance ..... 19,246 19,553 19,524 19,379 18,288
Depreciation ........................ 3,398 3,274 3,143 2,956 2,685
Taxes - other than Federal income ... 4,117 4,120 4,243 4,091 4,002
- Federal income .............. 1,772 1,330 1,335 1,444 732
-------- ------- ------- ------- -------
Total .......................... 74,814 75,231 80,880 73,510 69,126
======== ======= ======= ======= =======
Operating income ...................... 6,896 6,358 6,604 6,850 5,744
Other income - net .................... 299 289 423 460 115
Total interest charges ................ 3,008 3,041 3,368 3,312 3,304
-------- ------- ------- ------- -------
Net income ............................ $ 4,187 $ 3,606 $ 3,659 $ 3,998 $ 2,555
======== ======= ======= ======= =======
Shares outstanding - average .......... 4,979,508 4,966,270 4,267,038 4,258,877 4,222,662
Shares outstanding - year-end ......... 4,993,028 4,993,028 4,900,028 4,280,028 4,260,797
Basic and diluted earnings per share .. $0.84 $0.73 $0.86 $0.94 $0.61
Dividends declared per share .......... $0.75 $0.745 $0.735 $0.725 $0.71
Year-end book value per share ......... $7.17 $7.05 $7.00 $6.33 $6.10
</TABLE>
38
<PAGE>
<TABLE>
Gas Operating Statistics
<CAPTION>
For the year ended August 31 1999 1998 1997 1996 1995
- ---------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gas utility revenues (in thousands):
Residential ......................... $35,323 $35,733 $37,340 $34,678 $30,606
Commercial .......................... 14,735 14,792 16,267 14,891 13,212
Industrial - firm ................... 5,174 5,697 8,156 7,314 8,011
Industrial - seasonal ............... 1,934 2,072 3,605 3,335 3,507
Transportation ...................... 1,139 882 684 382 507
Other ............................... 224 167 179 173 170
------- ------- ------- ------- -------
Total .......................... $58,529 $59,343 $66,231 $60,773 $56,013
======= ======= ======= ======= =======
Gas sold and transported-MMcf:
Residential ......................... 4,165 4,225 4,393 4,612 4,078
Commercial .......................... 2,054 2,060 2,161 2,252 1,953
Industrial - firm.................... 1,024 1,133 1,440 1,391 1,338
Industrial - seasonal ............... 692 648 1,110 1,047 1,298
Transportation - firm ............... 543 346 -0- -0- -0-
Transportation - seasonal ........... 4,442 4,895 5,043 3,273 4,419
------- ------- ------- ------- -------
Total throughput ............... 12,920 13,307 14,147 12,575 13,086
Company use and losses .............. 136 91 179 198 128
------- ------- ------- ------- -------
Total .......................... 13,056 13,398 14,326 12,773 13,214
======= ======= ======= ======= =======
Gas received-MMcf:
Liquid propane gas .................. -0- -0- 17 70 -0-
Liquefied natural gas ............... 807 848 805 992 378
Natural gas stored underground ...... 980 1,009 1,373 1,348 1,156
Pipeline natural gas ................ 6,259 6,304 7,088 7,090 7,261
Transportation gas .................. 5,010 5,237 5,043 3,273 4,419
------- ------- ------- ------- -------
Total .......................... 13,056 13,398 14,326 12,773 13,214
======= ======= ======= ======= =======
Average number of customers:
Residential ......................... 57,249 57,001 56,048 55,676 55,186
Commercial .......................... 5,651 5,626 5,448 5,333 5,212
Industrial - firm.................... 209 228 230 237 241
Industrial - seasonal ............... 49 51 51 54 59
Transportation ...................... 14 4 3 2 2
------- ------- ------- ------- -------
Total .......................... 63,172 62,910 61,780 61,302 60,700
======= ======= ======= ======= =======
Average revenue per
residential customer ................ $617 $627 $666 $623 $555
Average use per
residential customer-Mcf ............ 73 74 78 84 74
Maximum daily throughput-Mcf .......... 71,152 69,564 72,675 70,904 65,619
Sales degree days ..................... 5,763 5,797 6,191 6,369 5,820
</TABLE>
39
<PAGE>
Corporate Information
Annual Meeting and Proxies
The Annual Meeting of Stockholders will be held in Cumberland, Rhode Island, on
December 14, 1999. 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 26, 1999.
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 Ms. Sharon Partridge, Vice President,
Chief Financial Officer, Secretary & Treasurer, Valley Resources, Inc., 1595
Mendon Road, P. O. Box 7900, Cumberland, Rhode Island 02864-0700. Telephone:
(401) 334-1188.
Certified Public Accountants
Grant Thornton LLP
98 North Washington Street
Boston, Massachusetts 02114
Registrar & Transfer Agent
The Bank of New York
1-888-269-8845
Address Shareholder Inquiries To:
Shareholder Relations Department - 11E
P. O. Box 11258
Church Street Station
New York, NY 10286
E-Mail Address: [email protected]
The Bank of New York's Stock Transfer Website:
http://stock.bankofny.com
Send Certificates For Transfer and Address Changes To:
Receive and Deliver Department - 11W
P. O. Box 11002
Church Street Station
New York, NY 10286
Stock Listing
The common stock of Valley Resources, Inc. is listed on the American Stock
Exchange under the symbol VR and on the Boston Stock Exchange. 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.
40
<PAGE>
Inside Back Cover
Directors Officers of the Corporation Other Offices
- --------- --------------------------- -------------
Ernest N. Agresti Alfred P. Degen David L. Hickerson
Retired Partner, Chairman, President & President,
Edwards & Angell, Chief Executive Officer Morris Merchants,
Providence, Rhode Island Inc.
Richard G. Drolet
Melvin G. Alperin Vice President, Richard C. Hadfield
President, Information Systems & Executive Vice
Brewster Industries, Corporate Planning President,
Pawtucket, Rhode Island Morris Merchants,
Charles K. Meunier Inc.
C. Hamilton Davison Vice President,
President & Chief Operations Rosemary Platt
Executive Officer, Controller,
Paramount Cards, Inc., Sharon Partridge Morris Merchants,
Pawtucket, Rhode Island Vice President, Inc.
Chief Financial Officer,
Don A. DeAngelis Secretary & Treasurer Thomas A. Aubee
Vice Chairman & Chief President
Executive Officer, Murdock Jeffrey P. Polucha Alternate Energy
Webbing Company, Inc., Vice President, Marketing Corp.
Central Falls, Rhode Island & Development
Alfred P. Degen James P. Carney
Chairman, President & Assistant Vice President,
Chief Executive Officer, Human Resources
Valley Resources, Inc.,
Cumberland, Rhode Island William D. Mullin
Assistant Vice President,
James M. Dillon Operations
Retired Director of Development, (effective October 1, 1999)
The Roman Catholic Diocese,
Bridgeport, Connecticut Alan H. Roy
Assistant Vice President
Jonathan K. Farnum Gas Supply
Chairman & President,
Wardwell Braiding Robert A. Young
Machine Company, Assistant Vice President
Central Falls, Rhode Island & Chief Engineer
John F. Guthrie, Jr. Thomas E. Philbin
Vice President, Controller
The New England,
Boston, Massachusetts Patricia A. Morrison
Assistant Secretary
Eleanor M. McMahon, Ed.D. Clerk, Morris Merchants, Inc.
Distinguished Visiting Professor,
A. Alfred Taubman Center for
Public Policy, Brown University,
Providence, Rhode Island
(Photo appears here)
Photo tag: The Directors, officers, and employees of Valley Resources, Inc. &
Subsidiaries wish to formally express our deep and genuine gratitude
to Eleanor M. McMahon, Ed.D. for her valuable advice and wise
counsel during her 15 years as a member of the Board of Directors.
<PAGE>
Back Cover
Logo and Address
Valley Resources, Inc. & Subsidiaries
1595 Mendon Road
P. O. Box 7900
Cumberland, Rhode Island 02864-0700
(401) 334-1188
http://www.valleyresources.com