FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 1OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________to ____________
Commission File number 1-7924
VALLEY RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
Rhode Island 05-0384723
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1595 Mendon Road 02864
Cumberland, Rhode Island (Zip Code)
(Address of principal executive offices)
(401) 334-1188
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X . No ___.
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Outstanding at
Class of Common Stock May 31, 1999
--------------------- --------------
$1 Par Value 4,983,597
VALLEY RESOURCES, INC.
FORM 10-Q
May 31, 1999
Page of
Form 10-Q
---------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Earnings--for
the three- and nine-months ended May 31, 1999
and 1998...................................................... 3
Consolidated Condensed Balance Sheets--May 31,
1999 and August 31, 1998.................................. 4 & 5
Consolidated Condensed Statements of Cash Flows--for
the nine-months ended May 31, 1999 and 1998................... 6
Notes to Consolidated Condensed Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 8
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 11
PART I: FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
VALLEY RESOURCES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
(Unaudited)
3 Months Ended 9 Months Ended
May 31, May 31, May 31, May 31,
1999 1998 1999 1998
------- ------- ------- -------
(in thousands except share and per share numbers)
Operating Revenues:
Utility Gas Revenues $18,303 $17,207 $51,471 $52,120
Nonutility Revenues 5,278 5,380 16,581 16,719
------- ------- ------- -------
Total 23,581 22,587 68,052 68,839
------- ------- ------- -------
Operating Expenses:
Cost of Gas Sold 9,332 8,726 27,200 28,008
Cost of Sales - Nonutility 3,587 3,786 10,996 11,613
Operations 4,326 4,309 13,429 13,842
Maintenance 437 431 1,274 1,246
Depreciation and Amortization 854 826 2,563 2,476
Taxes - Other Than Federal Income 1,149 1,120 3,344 3,340
- Federal Income 926 870 2,252 1,938
------- ------- ------- -------
Total 20,611 20,068 61,058 62,463
------- ------- ------- -------
Operating Income 2,970 2,519 6,994 6,376
Other Income - Net of Tax 53 36 203 158
------- ------- ------- -------
Total Income 3,023 2,555 7,197 6,534
------- ------- ------- -------
Interest Charges:
Long-Term Debt 588 629 1,818 1,862
Other 115 97 403 373
------- ------- ------- -------
Total 703 726 2,221 2,235
------- ------- ------- -------
Net Income $ 2,320 $ 1,829 $ 4,976 $ 4,299
======= ======= ======= =======
Average Number of Common
Shares Outstanding 4,975,467 4,976,848 4,978,924 4,962,375
Basic Earnings Per Average Common
Share Outstanding $0.47 $0.37 $1.00 $0.87
Dividends Declared on Common Stock $0.1875 $0.1875 $0.5625 $0.5575
The accompanying Notes are an integral part of these statements.
3
VALLEY RESOURCES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(Unaudited)
May 31, Aug. 31,
1999 1998
------- --------
(in thousands)
ASSETS
Utility Plant - Net $ 51,811 $51,310
-------- -------
Leased Property - Net 1,752 2,303
-------- -------
Nonutility Property-Net 4,175 4,106
-------- -------
Other Investments 1,668 1,637
-------- -------
Current Assets:
Cash 961 813
Accounts Receivable - Net 12,490 9,684
Deferred Fuel Costs -0- 485
Deferred Unbilled Gas Costs 525 438
Fuel and Other Inventories (Note 3) 4,624 5,819
Prepayments 712 1,353
Common Stock held for Dividend Reinvestment-amounting
to 9,431 and 10,116 shares respectively (Note 4) 116 121
-------- -------
Total 19,428 18,713
-------- -------
Deferred Debits:
Recoverable Postretirement Benefits 58 231
Recoverable Vacations Accrued 829 633
Unamortized Debt Discount and Expense 1,660 1,712
Prepaid Pensions 9,997 8,824
Recoverable Deferred FIT 5,997 6,109
Recoverable Transition Obligation 21 21
Other 3,370 2,882
-------- -------
21,932 20,412
-------- -------
Total $100,766 $98,481
======== =======
The accompanying Notes are an integral part of these statements.
4
VALLEY RESOURCES, INC. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets (Cont'd)
(Unaudited)
May 31, Aug. 31,
1999 1998
------- --------
(in thousands)
CAPITALIZATION & LIABILITIES
Capitalization:
Common Stock $ 4,993 $ 4,993
Paid In Capital 24,741 24,811
Retained Earnings 10,373 8,187
Less: Accounts Receivable from ESOP (2,640) (2,768)
-------- --------
Total Common Stock Equity 37,467 35,223
-------- --------
Long-Term Debt (Less Current Maturities):
8% First Mortgage Bonds, Series Due 2022 20,029 20,039
7.7% Debentures, Due 2027 7,000 7,000
Notes Payable 2,486 2,599
-------- --------
Total Long-Term Debt 29,515 29,638
-------- --------
Total Capitalization 66,982 64,861
-------- --------
Revolving Credit Arrangement 2,400 2,400
-------- --------
Obligation Under Capital Lease 971 1,528
-------- --------
Current Liabilities:
Current Maturities of Long-Term Debt 150 2,289
Obligation Under Capital Lease 781 775
Notes Payable 900 2,300
Accounts Payable 4,717 4,275
Security Deposits & Refund Obligations 974 977
Taxes Accrued 2,182 435
Deferred Fuel Costs 1,602 -0-
Accrued Interest 989 794
Other 855 741
-------- --------
Total 13,150 12,586
-------- --------
Commitment and Contingencies
Deferred Credits 4,487 4,513
-------- --------
Deferred Federal Income Taxes 12,776 12,593
-------- --------
$100,766 $ 98,481
======== ========
The accompanying Notes are an integral part of these statements.
5
VALLEY RESOURCES, INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited)
For the 9 Months
Ended
May 31, May 31,
1999 1998
------- -------
(in thousands)
Cash Flows from Operating Activities:
Net Income $ 4,976 $ 4,299
Adjustments to Reconcile Net Income to Net Cash used in
Operating Activities:
Depreciation and Amortization 2,563 2,476
Provision for Uncollectibles 937 1,553
Deferred Federal Income Taxes 183 404
Amortization of ITC (36) (36)
Change in Assets and Liabilities:
Accounts Receivable (3,743) (2,783)
Deferred Fuel Costs 2,086 (135)
Unbilled Gas Costs (87) (85)
Fuel and Other Inventories 1,194 1,254
Other Current Assets (527) (427)
Accounts Payable, Accrued Expenses and Current Liabilities 2,251 1,931
Other - Net 40 685
------- -------
Net Cash Provided by Operating Activities 9,837 9,136
------- -------
Cash Flows from Investing Activities:
Utility Capital Expenditures (2,624) (2,519)
Nonutility Capital Expenditures (512) (825)
Other Investments (31) (24)
------- -------
Net Cash Used by Investing Activities (3,167) (3,368)
------- -------
Cash Flows from Financing Activities:
Dividends Paid (2,790) (2,786)
Capital Stock Transactions (70) 877
Issuance of Long Term Debt -0- 100
Retirement of Long-Term Debt (2,262) (172)
Decrease in Notes Payable (1,400) (1,900)
-------- -------
Net Cash Used in Financing Activities (6,522) (3,881)
-------- -------
Net Increase in Cash 148 1,887
Cash - Beginning 813 820
------- -------
Cash - Ending $ 961 $ 2,707
======= =======
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Period for:
Interest $ 2,026 $ 1,744
======= =======
Federal Income Taxes $ 750 $ -0-
======= =======
Capital Lease Obligations Incurred $ 30 $ 224
======= =======
The accompanying Notes are an integral part of these statements.
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1
- ------
In the opinion of the Corporation, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring accruals and matters discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations") necessary to present
fairly the financial position at May 31, 1999, the results of operations for the
three- and nine-months ended May 31, 1999 and 1998 and Statement of Cash Flows
for the nine-months ended May 31, 1999 and 1998.
The results of operations for the three- and nine-month periods ended May
31, 1999 and 1998 are not necessarily indicative of the results to be expected
for the full year.
Note 2
- ------
The Corporation computes basic and diluted earnings per average common
share in accordance with SFAS 128, based on the weighted average number of
shares outstanding during the period.
(Unaudited) (Unaudited)
3 Months Ended 9 Months Ended
May 31, May 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net Income $2,320,303 $1,828,521 $4,975,811 $4,298,973
Weighted average shares outstanding 4,975,467 4,976,848 4,978,924 4,962,375
Basic and diluted earnings per share $0.47 $0.37 $1.00 $0.87
Note 3
- ------
Inventories - Fuel and Other Inventories:
(in Thousands)
(Unaudited)
May 31, August 31,
1999 1998
---------- ----------
Fuels (at average cost) $2,038 $3,543
Merchandise and Other (at average cost) 1,139 1,241
Merchandise (at LIFO) 1,447 1,035
------ ------
$4,624 $5,819
====== ======
Note 4
- ------
Pursuant to the dividend reinvestment plan, stockholders can reinvest
dividends and make limited additional investments in shares of Common Stock.
Shares issued through dividend reinvestment can be acquired on the open market
or original issue.
7
I - ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
- ---------------------
For the three months ended May 31, 1999 compared to the three months ended
May 31, 1998
The consolidated net income of Valley Resources for the third quarter of
fiscal 1999 was $2,320,300 or $0.47 per share compared to net income of
$1,828,500 or $0.37 per share for the year earlier third quarter. Net income
from utility operations totaled $2,135,800 as compared to $1,642,700 in fiscal
1998's third quarter. Nonutility operations provided net income of $184,500 in
the third quarter of fiscal 1999 as compared to $185,800 in the prior year's
third quarter.
Utility gas revenues and volumes for the third quarter of fiscal 1999 and
fiscal 1998 were comprised of the following:
Revenues Volumes (Mcf's)
-------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Base Firm Sales Service $16,792,900 $15,709,700 2,326,400 2,164,800
Base Firm Transportation 173,700 120,500 143,100 102,500
----------- ----------- --------- ---------
Firm Gas Sales 16,966,600 15,830,200 2,469,500 2,267,300
Interruptible Service 581,200 643,000 1,096,300 1,295,300
PGPA Revenues 662,000 646,100 ---- ----
Other Revenues 92,900 87,700 ---- ----
----------- ----------- --------- ---------
Total Utility Gas Revenues $18,302,700 $17,207,000 3,565,800 3,562,600
----------- ----------- --------- ---------
Base firm sales service are traditional bundled sales to utility customers.
Base firm revenues increased as a result of colder weather when compared to the
prior year third quarter, which caused base firm Mcf volumes to increase 7.5
percent. Weather during the third quarter of fiscal 1999 was 10.3 percent colder
than the prior year.
Firm transportation revenues and volumes increased over the prior year
third quarter due to eligible commercial and industrial customers electing to
purchase unbundled service under the firm transportation service option. Also,
throughput volumes increased as a result of existing customers switching from
interruptible service to firm transportation service.
Interruptible service, seasonal and dual-fuel is provided on a bundled
basis as well as transportation only service. Interruptible sales service
revenues declined $39,400 from the year-earlier quarter level. Interruptible
sales volumes remained flat when compared to the prior year third quarter.
Revenues from interruptible customers are benchmarked to competitive fuel prices
and gas supply availability. The decline in interruptible revenues is directly
related to the falling price of the benchmark competitive fuels, primarily fuel
oil. Interruptible transportation revenues declined as a result of customers
choosing to move to firm transportation and, in certain instances, electing an
alternate fuel to meet their energy needs. The margin on interruptible bundled
sales is passed through to firm customers through the PGPA ("Purchased Gas Price
Adjustment") and has no impact on operating income.
Nonutility revenues totaled $5,278,200 for the three months ended May 31,
1999, a decrease of 1.9 percent from the third quarter in fiscal 1998. Slight
declines in wholesale, propane and AEC sales were responsible for the decrease
from the prior year third quarter. Retail sales and the remaining revenues
associated with the weather insurance product (see "Liquidity and Capital
Resources") slightly offset the decline in nonutility revenues.
8
Wholesale unit sales declines and decreased sales by AEC negatively impacted
nonutility revenues. Propane revenues decreased slightly, despite increased
volumes sold more, as a result of lower retail prices due to competition, when
compared to the prior year third quarter. Retail merchandise sales increased due
to commercial installation projects being completed and increased retail unit
sales.
The average cost of gas distributed to firm customers was $3.61 per Mcf
during the third quarter of fiscal 1999 compared to $3.92 per Mcf during the
third quarter of fiscal 1998. Changes in gas costs are recovered from customers
through the PGPA.
The decline in nonutility sales in the third fiscal quarter of 1999 as
compared to 1998, was responsible for the 5.2 percent decrease in cost of
sales-nonutility. Other operation and maintenance expenses remained flat when
compared to the prior fiscal year third quarter.
For the three months ended May 31, 1999, interest expense decreased 3.2
percent when compared to the same quarter last year. Long-term interest expense
declined due to the retirement of the 9% notes payable due March 1999, offset
slightly by increased short-term borrowings.
For the nine months ended May 31, 1999 compared to the nine months ended May 31,
1998
For the nine months ended May 31, 1999, the consolidated net income for
Valley Resources was $4,975,800 or $1.00 per share compared to net income of
$4,299,000 or $0.87 per share for the comparable period in the prior fiscal
year. The utility operations provided net income of $4,189,600 compared to
$3,597,000 in the comparable period in the prior fiscal year. Nonutility
operations provided net income of $786,200 for the nine month period of fiscal
1999 comparable to $702,000 in the prior year's nine month period. Net income
for the nine months ended May 31, 1999 was positively impacted by the
Corporation's weather insurance product.
Utility gas revenues and volumes for the nine months ended fiscal 1999 and
fiscal 1998 were comprised of the following:
Revenues Volumes (Mcf's)
-------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Base Firm Sales Service $47,134,200 $47,715,000 6,523,100 6,655,000
Base Firm Transportation 509,600 277,900 428,900 244,600
----------- ----------- ---------- ----------
Firm Gas Sales 47,643,800 47,992,900 6,952,000 6,899,600
Interruptible Service 1,637,900 1,871,800 3,684,400 4,126,700
PGPA Revenues 1,871,400 1,986,700 ---- ----
Other Revenues 318,300 268,800 ---- ----
------------ ----------- ---------- ----------
Total Utility Gas Revenues $51,471,400 $52,120,200 10,636,400 11,026,300
----------- ----------- ---------- ----------
Base firm sales service revenues and volumes, sold through regulated
tariffs, remained flat for the nine month period of fiscal 1999 when compared to
the prior nine month period, primarily as a result of weather, which was 0.3
percent warmer than the prior year period. For the nine-month period weather was
8.5 percent warmer than normal. The slight decline was also due to customers
switching to base firm transportation service as mentioned above.
Firm transportation revenues and volumes increased over the prior year nine
month period, as mentioned above, due to existing customers switching from
interruptible service to firm transportation service and eligible commercial and
industrial customers electing to purchase unbundled service under the firm
transportation service option.
9
Interruptible service revenues to seasonal and dual-fuel customers declined
$230,600, when compared to the prior year nine month period, as a result of
decreased demand for natural gas. Sales to interruptible customers are dependent
upon the availability of natural gas and the price of alternate fuels. Margins
earned from interruptible bundled sales are returned to firm customers through
the PGPA and do not impact the profitability of the Corporation.
Nonutility revenues for the nine months ended May 31, 1999 totaled
$16,580,500, a decrease of less than one percent from the fiscal 1998 period.
Nonutility revenues continue to be impacted by decreased retail commercial
sales, lower propane revenues, despite an increase in gallons sold, and a
decline in AEC revenues. Retail commercial sales and installations declined from
the prior year due to the timing of projects being completed. Propane revenues
declined due to the warmer than normal weather impact on product pricing.
Offering fixed price contracts to customers positively impacted the volume of
propane sold. Nonutility revenue declines were mitigated by revenue recorded
from the weather insurance product mentioned above and an increase in wholesale
sales margins as a result of expanding product line sales and a stronger
regional economy.
Operating expenses for the 1999 nine month period were impacted by
decreases in the cost of gas sold and nonutility cost of sales. Decreases in the
demand for natural gas and a decline in the cost of gas contributed to the
decrease in gas costs. The average cost of gas distributed to firm customers was
$3.52 per Mcf for the nine months ended May 31,1999 compared to $3.90 per Mcf in
the prior year period. Nonutility cost of sales decreased due to the decrease in
sales mentioned above.
Other operation expenses decreased 3.0 percent for the nine months ended
May 31,1999 when compared to the period in the prior fiscal year. Operation
expenses continue to be positively impacted by a decline in uncollectible and
general and administrative expenses. Maintenance expenses remained flat when
compared to the prior fiscal year.
Interest expense decreased less than one percent for the 1999 nine month
period when compared to the prior year. The interest expense decline was the
result of the decrease in long-term debt related to the 9% notes payable
mentioned above.
Liquidity and Capital Resources
- -------------------------------
During the third quarter of fiscal 1999 the liquidity position of the
Corporation improved over the second quarter as a result of the collection of
accounts receivable and the timing of tax payments. Management believes the
available financing arrangements are sufficient to meet cash requirements for
the foreseeable future. The funds available under lines of credit at May 31,
1999, were $28,100,000 and there were $900,000 of short-term borrowings
outstanding.
Cash flows were favorably impacted during the third quarter of fiscal 1999
due to the collection of accounts receivable from winter heating sales. Sales
during the third quarter were less than anticipated due to warmer than normal
weather which negatively impacted liquidity. Additionally, the warmer weather
resulted in the holding of supplemental fuel inventories which were anticipated
to be sold.
Construction expenditures increased during the third quarter of fiscal
1999, due to more favorable weather, thereby adversely affecting liquidity.
The liquidity position of the Corporation will be seasonally affected
during the fourth quarter when revenues decline as a result of the lack of
heat-sensitive sales in the utility companies. Planned cash expenditures on the
construction program will increase during the fourth fiscal quarter and will
also negatively impact cash flow.
In the first fiscal quarter, the Corporation purchased a weather insurance
product which applied to the winter heating season from November 1998 through
March 1999. This product provided insurance against unfavorable weather
conditions. The insurance coverage pays the Corporation cash when degree days
for the measurement period fall outside the predetermined variance from normal
and payments are due the insurer when
10
weather conditions positively impact revenues above a predetermined limit. The
Corporation received a payment from the policy during the third fiscal quarter,
thereby favorably impacting liquidity.
Year 2000 Issues
- ----------------
The Corporation believes substantially all of the 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 made plans to modify, replace or upgrade the remainder
of the software applications which are not Year 2000 compliant before August 1,
1999. The Corporation has compiled cost estimates of the effort involved to
perform those modifications, replacements and upgrades. Currently, management
believes that the cost to bring all of its software applications into Year 2000
compliance will not have a material adverse effect on the Corporation's results
of operations, and involves a remaining capital outlay of approximately $50,000
to $100,000. There can be no 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 has been in contact with its primary third party
service providers. These companies, including telephone and electric providers,
have indicated that their Year 2000 remediation efforts were in progress and on
schedule.
The costs of the project and the date on which the Corporation plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved; actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer programs and microprocessors, and
similar uncertainties. The company has and maintains contingency plans,
schedules, functions and responsibilities to insure and maintain services and
minimize interruptions. These responsibilities are active continuously. These
activities are under review to identify changes that may be appropriate. These
discussions and actions are being taken as a precautionary measure.
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.
PART II: OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Financial Data Schedule.
(b) None.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY RESOURCES, INC. AND SUBSIDIARIES
S/S.Partridge
---------------------------------------
S. Partridge
Vice President, Chief Financial Officer,
Secretary and Treasurer
July 14, 1999
12