Cover Page

satisfaction
customer needs
initiative
teamwork
performance

(Photo appears here)

Valley Resources, Inc. Annual Report 1999




                               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)


                       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.



Financial Highlights


For the year ended August 31 (in thousands)              1999         1998         1997
- -------------------------------------------              ----         ----         ----
                                                                     
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


(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



                            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



                            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



                            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



                            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




                                   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.



Dividends and Market Data


                          Cash       Market Price
1999                    Dividend    High        Low
                                     
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




                                       6



(Charts appear here)


Book Value/
Market Price

                               Book Value          Market Price
                                                
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





Weather Variance
from Normal
                          Actual Sales
                          Effective           Normal
                          Degree Days         Degree Days       % Change

                                                         
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%






Net Income
                                Utility              Nonutility

                                               
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




MMcf Sales
Mcf Transported
Natural Gas Volumes

                               Firm              Interruptible

                                               
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






                                       7


(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



                               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



(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



                               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



(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




                               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



(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



                               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



                               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




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




                       Consolidated Statements of Earnings


For the year ended August 31                      1999          1998          1997
- ----------------------------                      ----          ----          ----
                                                                 
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.




                                       18




                      Consolidated Statements of Cash Flows

For the year ended August 31                                1999            1998           1997
- ----------------------------                                ----            ----           ----
                                                                             
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.



                                       19




                           Consolidated Balance Sheets


August 31                                                                 1999          1998
- ---------                                                                 ----          ----
                                                                              
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.


                                       20




                           Consolidated Balance Sheets



August 31                                          1999            1998
- ---------                                          ----            ----
                                                          
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.


                                       21






                       Consolidated Statements of Changes
                             in Common Stock Equity


                                        Common Shares Issued       Paid in       Retained
                                           & Outstanding           Capital       Earnings
                                       ----------------------      -------       --------
                                        Number         Amount
                                        ------         ------
                                                                   
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.




                    Consolidated Statements of Capitalization


August 31                                                             1999          1998
- ---------                                                             ----          ----
                                                                            
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.



                                       22



                   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



                   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:



                                                            1999         1998
                                                            ----         ----
                                                                
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
                                                         ==========   ==========


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



                   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:



                                           1999           1998           1997
                                           ----           ----           ----
                                                           
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


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




                   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:



                                              1999           1998           1997
                                              ----           ----           ----
                                                               
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
                                          ==========     ==========     ==========


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:



                                                       1999    1998    1997
                                                       ----    ----    ----
                                                               
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%
                                                        ===     ===     ===


                                       26


                   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:



                                               1999                    1998
                                               ----                    ----
                                                             
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)
                                           ============            ============


     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:



For the year ended August 31                           1999            1998           1997
- ----------------------------                           ----            ----           ----

                                                                        
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)
                                                   ===========    ===========    ===========


Assumptions used in actuarial calculations were as follows:



For the year ended August 31                           1999    1998    1997
- ----------------------------                           ----    ----    ----

                                                              
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


                                       27



                   Notes to Consolidated Financial Statements

The  following  tables  set  forth  the  reconciliation  of the  plans'  benefit
obligation and fair value of assets as follows:



For the year ended August 31                                             1999            1998
- ----------------------------                                             ----            ----
                                                                              
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
                                                                    ============    ============


The funded status of the plans is as follows:



August 31                                                                1999            1998
- ---------                                                                ----            ----

                                                                              
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
                                                                    ============    ============


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



                   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:



For the year ended August 31                           1999            1998
- ----------------------------                           ----            ----
                                                            
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
                                                   ===========    ===========


The  following  table sets forth the plan's funded  status  reconciled  with the
amounts recognized in the company's financial statements is as follows:



August 31                                                                      1999           1998
- ---------                                                                      ----           ----
                                                                                    
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)
                                                                           ===========    ===========


Net periodic postretirement benefit cost consisted of the following:



For the year ended August 31                                              1999         1998         1997
- ----------------------------                                              ----         ----         ----

                                                                                        
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
                                                                       =========    =========    =========


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



                   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



                   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.



                                                         1999             1998             1997
                                                         ----             ----             ----
                                                                              
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


     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



                   Notes to Consolidated Financial Statements


Note J:  Summarized Quarterly Financial Data (Unaudited)



Three months ended
(in thousands, except as to basic and
diluted earnings (loss) per share)                November      February       May       August
- -------------------------------------            --------      --------       ---       ------
                                                                            
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)



                              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



              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



              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



              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



              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



              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



                       Summary of Consolidated Operations


August 31 (in thousands)                      1999          1998         1997         1996         1995
- ------------------------                      ----          ----         ----         ----         ----
                                                                                  
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
                                            ========      =======      =======      =======      =======





For the year ended August 31
(in thousands, except as to share
and per share data)                           1999          1998         1997         1996         1995
- ---------------------------------             ----          ----         ----         ----         ----
                                                                                  
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


                                       38




                            Gas Operating Statistics


For the year ended August 31                1999      1998      1997      1996      1995
- ----------------------------                ----      ----      ----      ----      ----
                                                                   
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



                                       39



                             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: Shareowner-svc@bankofny.com

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



                               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.







                                   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