-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LsD6yii4MLodjcyHz5wE6Vbei10RavWk+coQ+W1yAJ9p5q6irsmWisvljet7l2// i13LPuA8ekh6UVWuBg9vyQ== 0000102710-99-000042.txt : 19991129 0000102710-99-000042.hdr.sgml : 19991129 ACCESSION NUMBER: 0000102710-99-000042 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991126 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALLEY RESOURCES INC /RI/ CENTRAL INDEX KEY: 0000102710 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 050384723 STATE OF INCORPORATION: RI FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07924 FILM NUMBER: 99764878 BUSINESS ADDRESS: STREET 1: 1595 MENDON RD CITY: CUMBERLAND STATE: RI ZIP: 02864 BUSINESS PHONE: 4013341188 MAIL ADDRESS: STREET 1: PO BOX 7900 CITY: CUMBERLAND STATE: RI ZIP: 02864-7900 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (MARK ONE) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended August 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____________________ to _____________________ Commission File number 1-7924 VALLEY RESOURCES, INC. (Exact name of Registrant as specified in its charter) Rhode Island 05-0384723 (State of Incorporation or Organization) (IRS Employer Identification No.) 1595 Mendon Road, Cumberland, Rhode Island 02864 (Address of principal executive offices) Registrant's Telephone Number, Including Area Code (401) 334-1188 Securities Registered Pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ----------------------- Common Stock American Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [__] The aggregate market value of the common stock held by non-affiliates, computed on the basis of $18.375 per share (the closing price of such stock on November 15, 1999 on the American Stock Exchange) was $91,746,889.50. As of November 15, 1999 there were 4,993,028 shares of Valley Resources, Inc. Common Stock, $1 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Report of Independent Certified Public Accountants, Management's Discussion and Analysis, Summary of Consolidated Operations, Dividends, and the Market Data appearing on pages 1 and 6 of the Registrant's Annual Report to Stockholders for the fiscal year ended August 31, 1999 are incorporated by reference in Parts I, II and IV. The Directors and Executive Officers of the registrant, Executive Compensation and Security Ownership and Certain Beneficial Owners and Management appearing in the Proxy Statement dated November 9, 1999 as filed with the Securities and Exchange Commission are incorporated by reference in Part III. 2 PART I Item 1 Business -------- Valley Resources, Inc. (the "Corporation") is a holding company organized in 1979 and incorporated in the State of Rhode Island. The Corporation has five wholly-owned active subsidiaries: Valley Gas Company ("Valley Gas") and Bristol & Warren Gas Company ("Bristol & Warren" and collectively with Valley Gas, the "Utilities")--regulated natural gas distribution companies; Valley Appliance and Merchandising Company ("VAMCO")--a merchandising and appliance rental company; Valley Propane, Inc. ("Valley Propane")--a wholesale and retail propane company; and Morris Merchants, Inc., d/b/a the Walter Morris Company ("Morris Merchants")--a wholesale distributor of franchised lines in plumbing and heating contractor supply and other energy-related business. The Corporation also owned an 80% interest in Alternate Energy Corporation ("AEC") during fiscal 1999. The Corporation acquired an additional 10% interest from AEC's current management on September 1, 1999 and has the obligation to acquire the remaining 10% in 2001. AEC sells, installs and designs natural gas conversion systems and facilities, is an authorized representative of the ONSI fuel cell, holds a patent for a natural gas/diesel co-firing system and has a patent pending for a device to control the flow of fuel on dual-fuel equipment. Utility Operations - ------------------ Gas Sales and Transportation The Corporation's utility operations are conducted through the Utilities. The Utilities had an average of 63,172 customers during the fiscal year ended August 31, 1999, of which approximately 91% were residential and 9% were commercial and industrial. For the fiscal year ended August 31, 1999, 52% of gas sales were to residential customers and 48% were to commercial and industrial customers. The Utilities provide natural gas service to residential, commercial and industrial customers and transportation services to industrial customers. Valley Gas' 92 square mile service territory is located in the Blackstone Valley region in northeastern Rhode Island with a population of approximately 250,000. Bristol & Warren's 15 square mile service territory is located in eastern Rhode Island with a population of approximately 35,000. Since November 1995, the Utilities have operated under a single rate structure. The following table shows the distribution of gas sold and transported since fiscal 1995 in millions of cubic feet ("MMcf"):
For the Fiscal Year Ended August 31, --------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- 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 ..................... 12,920 13,307 14,147 12,575 13,086 ====== ====== ====== ====== ======
Firm customers of the Utilities use gas for cooking, heating, water heating, drying and commercial/industrial processing. Certain industrial customers use additional gas in the summer months, when it is available at lower prices. These customers are subject to having their service interrupted at the discretion of the Utilities with very little notice. This use is classified as seasonal use. As discussed below, the margin on seasonal use is passed through the Purchased Gas Price Adjustment ("PGPA") to lower the cost of gas to all categories of firm customers. Bristol & Warren retained the margin on seasonal sales prior to November 1995. 3 The primary source of utility revenues is firm use customers under tariffs which are designed to recover a base cost of gas, administrative and operating expenses and provide sufficient return to cover interest and profit. The Utilities also service dual fuel, interruptible and transportation customers under rates approved by the Rhode Island Public Utilities Commission ("RIPUC"). Additionally, Valley Gas services cogeneration customers under separate contract rates that were individually approved by the RIPUC. The Utilities' sales tariffs include a PGPA which allows an adjustment of rates charged to customers in order to recover all changes in gas costs from stipulated base gas costs. The PGPA provides for an annual reconciliation of total gas costs billed with the actual cost of gas incurred. Any excess or deficiency in amounts collected as compared to costs incurred is deferred and either reduces the PGPA or is billed to customers over subsequent periods. The PGPA does not impact operating income as it effectuates a dollar for dollar recovery of gas costs. All margins from interruptible customers are returned to firm customers through the workings of the PGPA. Utility revenues include a surcharge on firm gas throughput to collect a portion of the costs to fund postretirement medical and life insurance benefits above the pay-as-you-go costs included in base tariffs. The surcharge was authorized by the RIPUC in a generic rate proceeding and is being phased in over a ten-year period which commenced September 1, 1993. Effective November 1995, the current year funding of postretirement medical and life insurance benefits is included in base tariffs. In September 1996, the RIPUC authorized the funding shortages from the first two years of the phase-in to be recovered through a surcharge over the next three fiscal years. The prices of alternative sources of energy impact the interruptible and dual fuel markets. The Utilities serve these customers in the nonpeak periods of the year or when competitively priced gas supplies are available. These customers are subject to service discontinuance on short notice as system firm requirements may demand. Prices for these customers are based on the price of the customers' alternative fuel. In order to mitigate the volatility of earnings from interruptible and dual fuel sales, the Utilities roll into the PGPA the margin earned on these interruptible sales and all margins in excess of $1 per thousand cubic feet ("Mcf") of gas sold to dual fuel customers. This margin credit reduces rates to firm customers. This margin treatment alleviates the negative impact that swings in sales can have on earnings in the highly competitive industrial interruptible market. Seasonality The Utilities business is seasonal. The bulk of firm distribution and sales are made during the months of November through March. As a result, the highest levels of earnings and cash flow are generated from the quarters ending in February and May. The bulk of the capital expenditure programs are undertaken during the months of May through October, causing cash flow to be at its lowest during the quarters ending in November and August. Short-term borrowing requirements vary according to the seasonal nature of sales and expense activities of the Utilities. As a result, there is a greater need for short-term borrowings during periods when internally generated funds are not sufficient to cover all capital and operating requirements, particularly in the summer and fall. Short-term borrowings utilized for construction expenditures generally are replaced by permanent financing when it becomes economical and practical to do so and where appropriate to maintain an acceptable relationship between borrowed and equity resources. Rates and Regulation The Utilities are subject to regulation by the RIPUC with respect to rates, adequacy of service, issuance of securities, accounting and other matters. 4 Gas Supply and Storage Tennessee Gas Pipeline Company is the major natural gas transporter for Valley Gas under long-term contracts. Bristol & Warren's principal gas transporters are Algonquin Gas Transmission Company and Texas Eastern Transmission Corporation. The Utilities purchase natural gas from several suppliers on a long-term firm basis, as well as on the spot market whenever available. Year-Round Wellhead Firm Supply - Valley Gas is a charter member of the Mansfield Consortium, a group of five local distribution companies that joined together to use their combined market power to secure favorable terms for long-term gas supply. In addition, Valley Gas is an investor in Boundary Gas, Inc. and a customer of Alberta Northeast, LTD, both of which were founded by groups of gas distribution companies in the Northeast to import natural gas from Canada. Valley Gas and Bristol & Warren together have 17,367 dekatherms per day ("Dth/day") of year-round firm supply under long-term contracts with two domestic and two Canadian suppliers. Of these contracts, 15,300 Dth/day are due to expire on June 30, 2002, 1,067 Dth on December 1, 2002 and the remainder extends through 2012. All of the Utilities' gas supply contracts are spot-indexed based. The Utilities have flexible take requirements, with no gas categorized as "baseload" supply which must be taken every day. Winter-Only Firm Supply - The Utilities believe they are well-positioned with respect to winter-only firm supply. Their actual and prospective long-term contracts are with major participants in this market, and contract prices are at competitively favorable terms. Liquefied Natural Gas ("LNG") - Valley Gas is entitled to 5,300 Dth/day of firm supply from Distrigas, which re-vaporizes LNG at its Everett, Massachusetts facility for delivery during the winter months to Valley Gas by Tennessee Gas Pipeline or to Bristol & Warren via Algonquin Gas Transmission. As an option, Valley Gas may take this gas in its liquefied state for transportation by truck to and storage at Valley Gas' on-site LNG tank. A further option allows Valley Gas to increase its maximum daily quantity from 5,300 to 7,550 dekatherms ("Dth"). There are no minimum takes, and the contract runs through October 31, 2005. Valley Gas also has a multi-year contract with Distrigas for 250,000 Dth of LNG. Maritimes & Northeast Pipeline - Valley Gas has a one year contract for 180,000 Dth of firm winter-only gas supply which is delivered from Canada by Maritimes & Northeast Pipeline and then to Valley's city gate by Tennessee Gas Pipeline. Pawtucket Power Co-Generation Plant - Valley Gas is entitled under long-term contract to utilize up to 540 Dth per hour, with a maximum annual quantity of 333,000 Dth, of natural gas used by Pawtucket Power in its generation of electricity and steam. This firm gas supply originates in Alberta, Canada. Underground Storage - The Utilities have 1,544,258 Dth of underground storage capacity with Tennessee Gas Pipeline, Texas Eastern Gas Transmission, CNG Transmission and National Fuel Gas Supply Corporation, with a total maximum daily withdrawal quantity of 20,589 Dth. The Utilities' inject underground storage gas during the non-winter months into fields located in Pennsylvania and New York for subsequent withdrawal during the winter when customer demand is greatest. Interstate Pipeline Capacity - The Utilities utilize firm pipeline capacity for two basic purposes: 1) daily transportation of firm and spot market gas supply throughout the year from the Gulf Coast to their city gates, and 2) winter-only transportation of underground storage gas to their city gates. Gas Supply Pipeline Capacity - Total year-round firm capacity is 24,912 Dth/day. Of this total, 82% expires by November 1, 2002, and the remainder extends through 2012. Storage Pipeline Capacity - The Utilities' storage-related pipeline capacity totals 12,738 Dth/day. About 85% of this capacity expires November 1, 2002, and the remainder extends through 2012. 5 On-Site LNG and Propane Storage - In addition to the gas delivered by the interstate pipeline, the Utilities have on-site storage facilities for liquid propane gas ("LPG"), with Valley Gas having about 857,000 gallons and Bristol & Warren having about 117,000 gallons of LPG storage. Valley Gas also has on-site storage facilities for 968,320 gallons (about 85,000 Dth) of LNG. Both LPG and LNG are vaporized into the Utilities' distribution systems during periods of peak demand and utilized as backup in the event of failure of an upstream pipeline to deliver needed gas supplies. Competition and Marketing The primary competition faced by the Utilities is from other energy sources, primarily heating oil. The principal considerations affecting a customer's selection among competing energy sources include price, equipment cost, reliability, ease of delivery and service. In addition, the type of equipment already installed in businesses and residences significantly affects the customer's choice of energy. However, where previously installed equipment is not an issue, households in recent years have consistently preferred the installation of gas heat. Valley Gas' statistics indicate that approximately 90% of the new homes built on or near Valley Gas' service mains in recent years have selected gas as their energy source. The Utilities are pursuing new markets believed to have the potential to provide both growth and/or lessen sales sensitivity to weather: industrial processing, cogeneration, natural gas vehicles and conversions from oil or electricity to gas. In recent utility rate decisions, the RIPUC approved rates which will retain and attract industrial customers. Additionally, the Utilities have two rates which promote economic development in its service territory. These rates provide incentives for companies that add industrial processing load, make a substantial investment in new natural gas equipment and hire additional employees. The cogeneration market is addressed through sales contacts with customers who have applications suitable to use waste heat through the cogeneration process. There are established rate tariffs to specifically address the requirements of the cogeneration market. In addition, Valley Gas has a 50 kilowatt demonstration facility at its Cumberland location which provides electricity for computer facilities and hot water requirements. Valley Gas has a compressed natural gas ("CNG ") fueling station at its Cumberland, Rhode Island headquarters. The use of natural gas in vehicles is promoted through conversions of its own fleet and the CNG rate approved by the RIPUC. The Utilities' residential marketing department seeks to increase conversions from oil to natural gas through installations of conversion burners and conversions to natural gas of housing developments that initially chose alternate energy sources. Additional efforts are made to convert homes with inactive natural gas service and to replace electric heating systems with natural gas systems. The distribution company unbundling process will add competition from a new source-- natural gas suppliers. The Utilities have received approval from the RIPUC for transportation rates which allow large commercial and industrial customers the choice to purchase gas from the Utilities or from natural gas marketers. Gas purchased by users within the Utilities' territories is transported to the users by the Utilities. Since the Utilities' profits are derived from distribution of natural gas and not natural gas sales, this process is not expected to significantly impact the profitability of the Utilities. 6 Gas Distribution System Valley Gas' distribution system consists of approximately 900 miles of gas mains and service lines. Bristol & Warren's gas distribution system consists of approximately 100 miles of gas mains and service lines. The aggregate maximum daily quantity of gas that may be distributed through the Utilities from their own facilities and under existing supply and transportation contracts is approximately 100 MMcf, and the maximum daily gas sendouts for all sales customers of the Utilities during the last five fiscal years were 71 MMcf in 1999, 70 MMcf in 1998, 73 MMcf in 1997, 71 MMcf in 1996 and 66 MMcf in 1995. Gas Marketing - ------------ The Utilities filed to unbundle their firm commercial and industrial tariffs with the RIPUC in September 1996. Effective June 1, 1997, the Utilities were authorized to offer transportation rates to large commercial and industrial customers and redesign the rates for other customers. Appliance Contract Sales and Rentals - ------------------------------------ The Corporation conducts appliance sales, service contract sales and appliance rentals through its subsidiaries VAMCO and Morris Merchants. VAMCO's revenues are generated through retail appliance sales, service contract sales and the rental of gas-fired appliances. Morris Merchants has contracts for the distribution of certain lines that it wholesales. At this time the Corporation has no reason to believe it will lose any of its existing lines. The merchandising subsidiaries are in competitive businesses with competition based on many factors, including price, quality of product and service. Propane Operations - ------------------ The propane operations are conducted through Valley Propane, which sells, at retail, liquid propane gas to residential and commercial customers in Rhode Island and nearby Massachusetts. At August 31, 1999, Valley Propane had 2,508 customers. Valley Propane also supplies propane to holding customers of the Utilities. These customers are serviced by Valley Propane until the Utilities can connect mains and service lines. Valley Propane is also impacted by weather, as a large percentage of its customers use propane as a primary source of heat. Valley Propane increases and decreases the selling price of its gas depending upon supply and competition. Natural Gas Conversions - ----------------------- The Corporation conducts natural gas conversions through AEC. AEC generates its revenues through the engineering and installation of compressed natural gas refueling stations, the conversion of gasoline and diesel-powered vehicles to natural gas and through the implementation of its patented process to co-fire natural gas and diesel fuel in engines, primarily generators. In fiscal 1998, AEC opened a public natural gas vehicle ("NGV") refueling station located at the Valley Resources corporate headquarters. AEC buys gas from Valley Gas and retails it to a number of different customers. The Corporation acquired an 80% interest in AEC in May 1996. It acquired an additional 10% interest from AEC's management on September 1, 1999. The Corporation is required to acquire the remaining 10%, which is currently held by the management of AEC, in 2001. Environmental Proceedings - ------------------------- For information regarding the Corporation's potential environmental liabilities, see "Management's Discussion and Analysis of the Results of Operations and Financial Condition - Liquidity and Capital Resources", pages 36 and 37, and Note H, page 27, in the 1999 Annual Report to Stockholders which is incorporated by reference herein. 7 Item 2 Properties 1595 Mendon Road, Cumberland, Rhode Island Office, Sales, and Service Center This location comprises the headquarters, sales and service operation of the Corporation, Valley Gas, VAMCO and Valley Propane. It includes accounting, billing, credit, engineering, garage, maintenance, service, storeroom and construction. The headquarters and sales office for AEC are also located at this facility. The Corporation considers these facilities to be suitable and adequate to meet its needs. 425 Turnpike Street Canton, Massachusetts Office and Warehouse Facilities Morris Merchants conducts its business at this leased warehouse and office building in Canton, MA. Since its business does not require any special facilities, its leased facilities are not significant to its operation. The total lease payments are less than 1 percent of all corporate assets of the Corporation. 106-B Federal Way Johnston, Rhode Island Service Center AEC conducts its servicing business at this leased garage in Johnston, RI. The leased facility is not significant to its operations and the total lease payments are less than 1 percent of all corporate assets of the Corporation. Scott Road, Cumberland, Rhode Island LNG Storage Plant Propane Storage Plant This facility is used for the storage of LNG and propane used in the peak-shaving operations of Valley Gas. Its daily delivery capacity of LNG and LPG is 25,000 Mcf's and 12,000 Mcf's, respectively. 100 Broad Common Road Bristol, Rhode Island Office, Sales and Service Center This location comprises the office, sales and service operation of Bristol & Warren and includes construction, credit, engineering, garage, maintenance, service, and storeroom. Brown Street Warren, Rhode Island Propane Storage This facility is used for the storage of propane used in peak-shaving operations of Bristol & Warren. Its daily delivery capacity of LPG is 1,600 Mcf's. The Corporation believes its storage facilities are adequate to meet the needs of the Utilities for the foreseeable future. All of the storage facilities are owned. All Valley Gas properties, except leased property, are held in fee. See Item 1 for discussion of gas supply. 8 Item 3 Legal Proceedings ----------------- There were no material legal proceedings pending to which the Corporation or any of its subsidiaries is a party, or of which any of their property is the subject, except two environmental claims that were asserted against Valley Gas as referred to in Note H, page 27, in the 1999 Annual Report to Stockholders which is incorporated by reference herein. Item 4 Submission of Matters to a Vote of Security Holders None 9 Executive Officers of the Registrant - ------------------------------------ The names, ages, and position of all the executive officers of the Corporation on October 15, 1999 are listed below, together with their business experience during the past five years. All officers of the Corporation are elected or appointed annually by the board of directors at the directors' first meeting following the Annual Meeting of Stockholders. Business Experience Name Age Position During Last Five Years Alfred P. Degen 52 Chairman, President and Chairman since December 1997; Chief Executive Chief Executive Officer of Officer Valley Resources, Inc. since March 1995; President, Valley Resources, Inc. from July 1994; Executive Vice Presi- dent, Philadelphia Gas Works for more than 5 years prior to July 1994. Charles K. Meunier 57 Vice President, Vice President Operations since Operations December 1994; Assistant Vice President Operations and Human Resources prior to December 1994. Richard G. Drolet 51 Vice President, Vice President Information Information Systems Systems and Corporate Planning and Corporate since December 1994; Assistant Planning Vice President Information Systems and Corporate Planning prior to December 1994. Sharon Partridge 43 Vice President, Vice President, Chief Financial Chief Financial Officer and Secretary since Officer, Secretary June 1999; Assistant Vice and Treasurer President Finance and Treasurer since December 1994; Assistant Treasurer prior to December 1994. Jeffrey P. Polucha 44 Vice President, Vice President Marketing and Marketing and Development since December Development 1994; Manager Residential and Propane Sales prior to December 1994. 10 PART II Item 5 Market for the Registrant's Securities and Related Stockholder Matters -------------------------------------- The common stock market prices, dividends declared and dividend restrictions appearing on pages 1, 6 and 25 of the Annual Report to Stockholders for the fiscal year ended August 31, 1999 are incorporated herein by reference. The common stock of Valley Resources, Inc. is listed on the American Stock Exchange under the symbol VR. There were 2,062 shareholders of record at August 31, 1999. Item 6 Selected Financial Data ----------------------- The selected financial data (Summary of Consolidated Operations) appearing on page 38 of the Annual Report to Stockholders for the fiscal year ended August 31, 1999 is incorporated herein by reference. Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------------------- Management's discussion and analysis of the results of operations, liquidity and capital resources appearing on pages 33 through 37 of the Annual Report to Stockholders for the fiscal year ended August 31, 1999 are incorporated herein by reference. Item 7A Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Not applicable Item 8 Financial Statements and Supplementary Data ------------------------------------------- The following consolidated financial statements of the registrant and its subsidiaries appearing on pages 18 through 32 in the Annual Report to Stockholders for the fiscal year ended August 31, 1999 are incorporated herein by reference: Consolidated Statements of Earnings for each of the three years in the period ended August 31, 1999 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1999 Consolidated Balance Sheets - August 31, 1999 and 1998 Consolidated Statements of Changes in Common Stock Equity for each of the three years in the period ended August 31, 1999 Consolidated Statements of Capitalization - August 31, 1999 and 1998 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure --------------------------------------------- None. 11 PART III Item 10 Directors and Executive Officers of the Registrant -------------------------------------------------- For information with respect to the executive officers of the registrant, see "Executive Officers of the Registrant" at the end of Part I of this report. Information regarding the directors of the registrant appearing on pages 2 through 5 of the Proxy Statement filed with the Securities and Exchange Commission on November 9, 1999 is incorporated herein by reference. Section 16 (a) Beneficial Ownership Reporting Compliance - --------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's executive officers and directors and persons who own more than 10% of a registered class of the Corporation's equity securities ("insiders") to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Insiders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms furnished to the Corporation, the Form 4 for the month of May 1999 for Alfred P. Degen was filed one date late for the purchase of 1,000 shares of Common Stock. Due to a clerical error, dividend reinvestment plan acquisitions on Form 5 for Messrs. DeAngelis, Farnum, Davison and Guthrie were filed 16 days late. Item 11 Executive Compensation ---------------------- Information regarding management compensation appearing on pages 6 through 9 of the Proxy Statement filed with the Securities and Exchange Commission on November 9, 1999 is incorporated herein by reference. Item 12 Security Ownership of Certain Beneficial Owners and Management -------------------------------- Information regarding the beneficial owners of more than 5 percent of the outstanding Common Stock of the Corporation, the only class of equity security issued and outstanding, and the security ownership of management appearing on pages 1 and 2 of the Proxy Statement filed with the Securities and Exchange Commission on November 9, 1999 is incorporated herein by reference. Item 13 Certain Relationships and Related Transactions ---------------------------------------------- None. 12 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------- (a) 1. The following consolidated financial statements of Valley Resources, Inc. and subsidiaries appearing on pages 18 through 32 in the Annual Report to Stockholders for the year ended August 31, 1999 are incorpo- rated by reference in Item 8: Consolidated Statements of Earnings for each of the three years in the period ended August 31, 1999 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 1999 Consolidated Balance Sheets - August 31, 1999 and 1998 Consolidated Statements of Changes in Common Stock Equity for each of the three years in the period ended August 31, 1999 Consolidated Statements of Capitalization - August 31, 1999 and 1998 Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants (a) 2. Consolidated Financial Schedule Schedule VIII - Valuation and Qualifying Accounts Report of Independent Certified Public Accountants on Consolidated Financial Schedule Schedules I, II, III, IV, V, VI, VII, IX, X, XI, XII, XIII and XIV are either inapplicable or not required or the required information is shown in the financial statements or notes thereto under the instructions and have been omitted. (a) 3. Exhibits 3. (a) Articles of Incorporation, as amended (Exhibit 3 to the Corpo- ration's Annual Report on Form 10-K for the year ended August 31, 1988 is hereby incorporated by reference.) 3. (b) Bylaws of the Corporation (Exhibit 3 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1988 is hereby incorporated by reference.) 4. (a) Shareholder Rights Plan dated as of June 18, 1991 (Filed on Form 8-K dated June 28, 1991 is hereby incorporated by reference.) 13 4. (b) Indenture between Valley Resources, Inc. and Mellon Bank, N.A., Trustee dated as of September 1, 1997. (Exhibit 4 to the Corporation's Registration Statement on Form S-2 (File No. 333-30113) is hereby incorporated by reference.) 4. (c) Indenture of First Mortgage dated as of December 15, 1992 between Valley Gas Company, Valley Resources, Inc. as guarantor and State Street Bank and Trust Company, Trustee (Exhibit 4 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1993 is hereby incorporated by reference.) 4. (d) Loan Agreement between Valley Resources, Inc. and Fleet National Bank dated June 30, 1997 (Exhibit 10 to the Corpo- ration's Quarterly Report on Form 10-Q for the quarter ended May 31, 1997 is incorporated herein by reference.) 10. Compensation Contracts or Arrangements 10. (a) Valley Gas Company Supplemental Retirement Plan (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1989 is hereby incorporated by reference.) 10. (b) Valley Resources, Inc. Directors Retirement Plan (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is hereby incorporated by reference.) 10. (c) Valley Resources, Inc. 1999 Executive Incentive Plan dated September 1, 1998. 10. (d) Change in Control agreement dated April 1, 1999 between Valley Resources, Inc. and Alfred P. Degen. 10. (e) Change in Control agreement dated June 15, 1999 between Valley Resources, Inc. and Sharon Partridge, as amended June 15, 1999. 10. (f) Change in Control agreement dated April 1, 1999 between Valley Resources, Inc. and Charles K. Meunier. 10. (g) Change in Control agreement dated April 1, 1999 between Valley Resources, Inc. and Richard G. Drolet. 10. (h) Change in Control agreement dated April 1, 1999 between Valley Resources, Inc. and Jeffrey P. Polucha. Other Material Contracts or Agreements 10. (i) Firm Storage Service Transportation contract between Valley Gas and Tennessee Gas Pipeline Company, dated December 15, 1985 (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1986 is hereby incorpo- rated by reference.) 10. (j) Storage Service Agreement dated July 3, 1985 between Valley Gas and Consolidated Gas Transmission Corporation (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 10. (k) Underground Storage Service Agreement dated October 3, 1984 between Valley Gas and Penn-York Energy Corporation (Exhibit 10 to the Corporation's Registration Statement on Form S-2 (File No. 2-99315) is hereby incorporated by reference.) 14 10. (l) Underground Storage Service Agreement dated August 19, 1983 between Valley Gas and Penn-York Energy Corporation (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1983 is hereby incorporated by reference.) 10. (m) Service agreement for storage of LNG dated June 30, 1982 between Valley Gas and Algonquin LNG, Inc. (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1982 is hereby incorporated by reference.) 10. (n) Contract for the purchase of natural gas dated March 1, 1981, between Valley Gas and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (o) Storage Service Transportation contract dated May 15, 1981, between Valley Gas and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (p) Storage Service Transportation contract dated May 26, 1981, between Valley Gas and Tennessee Gas Pipeline Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (q) Storage Service Agreement dated February 18, 1980, between Valley Gas and Consolidated Gas Supply Corporation (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1981 is hereby incorporated by reference.) 10. (r) Precedent Agreement for Firm Services on Maritimes and Northeast Pipeline Project Phase II dated September 21, 1996, between Valley Gas and Maritimes and Northeast Pipeline L.L.C. (Exhibit 10 to the Corporation's Regis- tration Statement on Form S-2 (File No. 333-30113) is hereby incorporated by reference.) 10. (s) Gas Sales Agreement dated June 15, 1992 between Aquila Energy Marketing Corporation and Valley Gas (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is incorporated herein by reference.) 10. (t) Gas Sales Agreement dated June 8, 1992 between Natural Gas Clearinghouse and Valley Gas Company (Exhibit 10 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1992 is incorporated herein by reference). 13. Annual Report to Stockholders. 21. Subsidiaries of the Registrant (Exhibit 21 to the Corporation's Annual Report on Form 10-K for the year ended August 31, 1996 is incorpo- rated herein by reference.) 23. Consent of Grant Thornton LLP. 27. Financial Data Schedule. (b) No Form 8-K was required to be filed for the last quarter of the period covered by this report. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VALLEY RESOURCES, INC. AND SUBSIDIARIES Date: November 26, 1999 By s/S. Partridge --------------------------------------- Sharon Partridge Vice President, Chief Financial Officer, Secretary & Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: November 26, 1999 s/A. P. Degen ---------------------------------------- Alfred P. Degen, Chairman, President and Chief Executive Officer Date: November 26, 1999 s/S. Partridge ---------------------------------------- Sharon Partridge, Vice President, Chief Financial Officer, Secretary & Treasurer Date: November 26, 1999 s/E. N. Agresti ---------------------------------------- Ernest N. Agresti, Director Date: November 26, 1999 ---------------------------------------- Melvin G. Alperin, Director Date: November 26, 1999 ---------------------------------------- C. Hamilton Davison, Director Date: November 26, 1999 s/D. A. DeAngelis ---------------------------------------- Don A. DeAngelis, Director Date: November 26, 1999 ---------------------------------------- James M. Dillon, Director Date: November 26, 1999 s/J. K. Farnum ---------------------------------------- Jonathan K. Farnum, Director Date: November 26, 1999 s/J. F. Guthrie ---------------------------------------- John F. Guthrie, Jr., Director Date: November 26, 1999 ---------------------------------------- Eleanor M. McMahon, Director 16 Item 14(a) 2 VALLEY RESOURCES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS SCHEDULE VIII Fiscal Years Ended August 31, 1999, 1998 and 1997
Column A Column B Column C Column D Column E -------- -------- --------------------------------- -------- -------- Additions --------------------------------- Balance at (1) (2) Deductions Balance at Beginning of Charged to Costs Charged to from End of Description Period and Expenses Other Accounts Reserves Period ----------- ------------ ---------------- -------------- ---------- ---------- 1999 - ---- Allowance for doubtful accounts $928,279 $1,247,842 $123,891 (a) $ 990,602 (b) $1,309,410 1998 - ---- Allowance for doubtful accounts $840,433 $1,912,813 $126,610 (a) $1,951,577 (b) $ 928,279 1997 - ---- Allowance for doubtful accounts $719,721 $1,603,597 $183,220 (a) $1,666,105 (b) $ 840,433 Notes: (a) Collections on accounts previously charged off. (b) Accounts charged off.
17 Report of Independent Certified Public Accountants on Consolidated Financial Schedule To the Shareholders of Valley Resources, Inc. In connection with our audit of the consolidated financial statements of Valley Resources, Inc. and subsidiaries referred to in our report dated September 27, 1999, which is included in the Annual Report to Stockholders and incorporated by reference in Part II of this form, we have also examined the schedule listed in the index at Part IV, Item 14(a)2. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Boston, Massachusetts September 27, 1999 18 EX-10 2 Exhibit 10.(c) VALLEY RESOURCES, INC. Executive Incentive Compensation Plan 1. Purpose. The purpose of this plan is to advance the interests of Valley Resources, Inc. (the "company") by providing financial incentives to selected key employees of the company and its subsidiaries for achieving specified objectives. The plan is designed to recognize and reward success relative to plan objectives and permit participants to acquire common shares of the company ("shares"). By encouraging such share ownership, the company seeks to attract, retain and motivate employees of training, experience and ability. 2. Plan term. This plan became effective on September 1, 1998 (the "effective date"), the date it was adopted by the Board of Directors of the company. The plan will operate on a fiscal year basis beginning September 1 and concluding August 31. Awards under the plan may be granted through September 1, 2008. 3. Administration. The plan shall be administered by the Compensation Committee of the Board of Directors of the company (the "committee") who may not participate in the plan. Subject to the provisions of this plan, the committee shall have full power to construe and interpret the plan and to establish, amend and rescind rules and regulations for its administration. The interpretation and construction by the committee of any provisions of the plan or an award ("incentive award") granted pursuant to the plan and any determination by the committee pursuant to any provision of the plan or any such incentive award shall be final and conclusive, and binding on both the participant and the company. The committee shall hold meetings at such times and places as it may determine. A majority of members of the committee shall constitute a quorum and actions approved by a majority of the members of the committee at a meeting at which a quorum is present or available by telephone, or actions reduced to or approved in writing by a majority of the members of the committee, shall be valid actions of the committee. 4. Eligible employees. Incentive awards may be granted to such key employees of the company (including members of the Board of Directors who are also employees of the company) as are selected by the committee (any such selected employee, a "participant"). 5. Shares subject to the plan. The maximum number of shares in respect for which incentive awards may be cumulatively granted under the plan, subject to adjustment as provided in paragraph 12 of the plan, during the term in which the plan is effective shall be seventy-five thousand (75,000) shares of the common stock of the company. Shares that are forfeited under the provisions specified in paragraph 10 (f) (1) may again be subjected to an incentive award under the Plan. 6. Incentive award potential. Participants will be assigned threshold, target, and maximum incentive award potentials, each expressed as a percentage of the participant's base salary range control point at the beginning of the plan year. Incentive award potential percentages shall be established by the committee from time to time, at its sole discretion. For the 1999 plan year (fiscal 1999) the plan incentive award potentials are in accordance with Table 1 following: TABLE 1 1999 Incentive Award Potential
PERCENT OF CONTROL POINT ------------------------ Level Eligible Employees Threshold Target Maximum - ----- ------------------ --------- ------ ------- 1 President & CEO ......................... 12.5% 25% 37.5% 2 Senior Vice President ................... 10.0% 20% 30.0% 3 Vice Presidents/Assistant VPs ........... 7.5% 15% 22.5%
Each participant's actual incentive award will depend upon the company's achievements during the plan year and a discretionary assessment of the participant's contribution relative to specific key results as made by either the committee (for the president and CEO) or the president and CEO for other plan participants as set forth in paragraph 7 and subject to the satisfaction of the provisions in paragraph 8. 7. Performance evaluation. The committee shall establish whether any incentive award shall be granted under the plan during the plan year based on company results and a discretionary assessment as shown in these three success categories: - Ratepayer interests - Shareholder interests - Discretion Ratepayer interests shall consist of one or more company performance objectives directed at promoting the achievement of such considerations as enhancing the efficiency of the company's operations, lowering the company's cost of service, improving the company's cost standing against peer companies, or other such company operational factors as approved by the committee. The committee shall establish the plan year performance standards for threshold, target and maximum levels of achievement and the proportionate weight given to each of the operational performance criteria. For the 1999 plan year the plan shall utilize one ratepayer criterion: cost of service. Cost of service is defined as the company's 3-year average operating expense per firm Mcf as a ratio to company base revenue per Mcf. The ratepayer category shall constitute twenty percent (20%) of a participant's target incentive award potential. Shareholder interests shall consist of two company performance criteria directed at achieving the company's net income objective and promoting a level of total shareholder return which aligns with the company's stated objective, or other such company criteria as established annually by the committee. The committee shall establish the plan year performance standards for threshold, target and maximum levels of achievement and the proportionate weight given to each of the financial performance criteria. For the 1999 plan year the plan shall utilize two performance criteria: the company's actual net income versus budgeted net income (un-weather normalized) and annual company total shareholder return versus the average total shareholder return of a peer group representing 11 investor-owned gas utilities (Appendix I). Each shareholder performance criterion will be weighted as a percent of a participant's target Incentive Award Potential. For the 1999 plan year the net income criterion will be weighted thirty-five (35%) percent and the total shareholder return criterion twenty-five (25%) percent of the participant's target award. Discretion shall represent twenty (20%) percent of a participant's incentive award potential during the plan year as established annually by the committee. The committee shall exercise its discretion in determining what portion, if any, of the discretionary component shall be awarded to the president and CEO at the close of the plan year. The discretion component shall consist of 3-5 key results specified for the participant for the plan year. The president and CEO, subject to committee approval, shall establish what portion, if any, of the discretionary component shall be awarded to other plan participants at the close of the plan year. For the 1999 plan year Table 2 displays the performance categories and their weightings. TABLE 2 1999 Plan Performance Categories
CATEGORY WEIGHT CRITERIA Ratepayer 20% Cost of Service Shareholder 35 Net Income 25 Total Shareholder Return Discretion 20 Key Results --- TOTAL 100%
For plan year 1999 the threshold, target and maximum incentive percentages are shown by level of participant (Appendix 2). 8. Shareholder protection. The grant of an incentive award under the plan for the plan year shall be subject to the committee's determination that company earnings available for common stock equal or exceed dividends declared on common stock for the plan year. The committee will have discretion to make awards outside the plan should the company's plan year earnings fall below the dividend level. 9. Incentive award grants. Each participant's actual incentive award, if any, will depend on the company's results relative to stated plan year ratepayer and shareholder performance objectives and the discretionary rating. The committee shall determine any earned awards relative to the company's actual results for the plan year against the ratepayer and shareholder threshold, target and maximum standards and discretionary component. Results occurring between performance standards for the ratepayer and shareholder criteria will be found using interpolation. (a) Incentive awards shall be payable in cash, or a combination of cash and restricted common shares ("grant shares"), as the committee in its sole discretion shall determine, provided however that no more than two-thirds (67%) of any earned incentive award shall be payable in cash unless modified by the committee. The proportion, if any, of a participant's incentive award payable in cash shall be paid in a lump-sum as soon as practical following the close of the plan year. Grant shares will constitute up to one-third of a participants earned award. 10. Terms and conditions of grant shares. Grant shares issued under this plan shall be issued according to the terms and conditions which follow: (a) Price. Grant shares shall be issued for no consideration. (b) Number of shares. The number of grant shares issued to each participant, if any, shall be determined by dividing the amount of a participant's earned incentive award to be paid in grant shares by the average closing price of the company's common stock during the last five business days in September of the new fiscal year. (c) Forfeiture of grant shares. Grant shares issued under this plan shall be subject to vesting provisions specified in paragraph 10(f)(1). (d) Non-Transferability. Any grant shares which are subject to the vesting provisions in paragraph 10(f)(1) shall be non-transferable by the participant, and may not be pledged, hypothecated or otherwise encumbered. Notwithstanding the preceding sentence, grant shares may with the consent of the committee, be registered in the name of a personal, irrevocable trust established by such participant; provided, however, that all of the terms of the plan, including without limitation, the forfeiture provisions shall be binding upon the trustee of any such trust. (e) Withholding Taxes. Whenever payments under an incentive award are made in cash, the company will withhold therefrom an amount sufficient to satisfy all taxes required to be withheld by the company. At the time of the issuance of grant shares to a participant, and as a condition of the company's obligation to deliver a certificate for such grant shares to the participant, the participant shall pay to the company an amount equal to all taxes required to be withheld by the company for the account of the participant as a result of such issuance; or, in lieu of such payment, the company may, at its sole option, accept the written authorization of the participant to withhold such taxes from compensation thereafter becoming payable to the participant by the company. If the participant shall elect under Section 83 of the Internal Revenue Code of 1986, as amended to accelerate the recognition of income attributable to the receipt of grant shares, the participant shall furnish the company with a copy of such election concurrently with its filing with the Internal Revenue Service and shall pay to the company the amount of taxes required to be withheld for the account of the participant by reason of such election. (f) Vesting. (1) The interest of a participant in grant shares shall vest on the date three (3) years from the date such grant shares were issued to the participant, except as provided in subparagraph (2) below, provided, that the participant shall have remained employed by the company and/or one of its subsidiaries during the three-year period immediately following the date the grant shares were issued to such participant. If the participant fails to complete such three-year employment requirement and his or her interest in grant shares is not otherwise vested under subparagraph (2), below, the participant shall forfeit to the company all un-vested grant shares theretofore issued to such participant and the participant shall thereafter have no further rights with respect to such grant shares. (2) Notwithstanding the foregoing, a participant's interest in grant shares may become vested at a date earlier than three years from their date of issue for such good reason as may be specified by the committee, in its sole discretion, at the time of or subsequent to the award of such grant shares, and such interest shall become immediately vested upon any of the following occurrences: (aa) The participant's employment by the company or any of its subsidiaries terminated by reason of such participant's death, disability (as defined in Section 72(m)(7) of the Internal Revenue Code of 1986, as amended), or a reorganization that eliminates the participant's position and results in the participant's termination of employment; or (bb) There is a "change in control" of the company. A "change in control" shall mean the occurrence of any of the following: (i) the acquisition by any individual, entity or group (within the meaning of Section 13 (d) (3) or 14 (d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty (20%) percent or more of the combined voting power of the then outstanding voting securities of the company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (i), the following acquisitions shall not constitute a change of control: (A) any acquisition directly from the company, (B) any acquisition by the company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the company or any company controlled by the company or (D) any acquisition by any company pursuant to a transaction that complies with clauses (A), (B) and (C) of subsection (iii) below; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii)the approval by the shareholders of the company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the company ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than sixty (60%) percent of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the company resulting from such resulting from such Business Combination (including, without limitation, a company that as a result of such transaction owns the company or all or substantially all of the company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of the company or such company resulting from such Business Combination) beneficially owns, directly or indirectly twenty (20%) percent or more of, respectively, the then outstanding shares of common stock of the company resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such company except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the Board of Directors of company resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the company of a complete liquidation or dissolution of the company. (3) If a participant's employment by the company or one of its subsidiaries terminates during the three-year employment period described in paragraph 10(f)(1) by reason of his or her retirement, and participant retires on or after attaining age 62, the interest of the participant in any grant shares then subject to forfeiture shall become fully vested at the time of retirement. If the participant retires, as determined by the committee, prior to attaining age 62, there shall be deemed vested in his account an additional number of grant shares determined by multiplying the number of shares subject to forfeiture for each year in which grant shares were awarded during the three-year employment period by a fraction the numerator of which shall be the number of full months preceding participant's retirement that shall have elapsed since the date of the award of such shares and the denominator of which shall be 36. The committee may, in its discretion, specify that the interest of the participant in any remaining grant shares then subject to forfeiture shall become vested at that time, at a future date, or upon the completion of such conditions as the committee may provide. 11. Rights as a shareholder. Except as otherwise provided in paragraphs 10 and 14, a participant shall have all of the rights of a shareholder of the company with respect to grant shares registered in his or her name, including the right to vote such grant shares and receive dividends and other distributions paid or made with respect to such grant shares. 12. Share dividends; share splits; share combinations; re-capitalizations. The Board of Directors of the company may make appropriate adjustment in the maximum number of shares subject to the plan to adjust for any share dividends, share splits, share combinations, re-capitalizations and other similar changes in the capital structure of the company. The provisions contained in the plan shall apply to any other shares of capital stock of the company or other securities which may be acquired by the participant as a result of a share dividend, share split, share combination, or exchange for other securities resulting from any recapitalization, reorganization or any other transaction affecting the grant shares. 13. No employment commitment. Nothing herein contained shall be deemed to be or constitute an agreement or commitment by the company to continue the participant in its employ or the employ of any subsidiary of the company. 14. Custody of grant shares. The grant shares shall be held in certificated or uncertificated form as determined by the committee, by an escrow agent designated by the committee. At the time all forfeiture provisions relating to such grant shares shall terminate, the company will, upon the making of arrangements under paragraph 10(e), deliver such certificate to the participant, together with the assignment referred to above, without restrictions except for such restrictions as may be required to ensure compliance with federal and state securities laws. Any such restrictions may at the company's discretion be noted or referred to conspicuously on such certificate prior to its delivery to the participant. 15. Termination or amendment of plan. (a) Except as provided in subparagraph (b), the Board of Directors may at any time suspend, amend or terminate the plan, provided; (1) that no such suspension, amendment or termination shall adversely affect or impair the rights of a participant to any then issued and outstanding grant shares without the consent of such participant. (b) In the event of a change in control (as defined in paragraph 10(f)(2)(bb), the Board of Directors may neither terminate the plan nor reduce benefits under the plan with respect to those individuals who are participants as of the date of the change in control. 16. Governing law. This plan shall be subject to and construed in accordance with the laws of the state of Rhode Island. 17. Indemnification of committee. In addition to such other rights of indemnification as they may have as members of the Board of Directors of the company or as members of the committee, each member of the committee shall be indemnified by the company against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which he or she may be a party by reason of any action taken or any failure to act under or in connection with the plan, or any incentive award granted thereunder, and against all amounts paid by him or her in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Board of Directors), or paid by him or her in satisfaction of a judgment in any such action, suit or proceeding in which such committee member has been determined to be liable for misconduct in his/her duties; provided that within fifteen (15) days after receipt of service or process in connection with any such action, suit or proceeding the committee member shall in writing offer the company the opportunity, at the company's expense, to defend the same on behalf of the committee member. Appendix I Gas Utility Peer Group Bay State Gas Company Berkshire Gas Company Connecticut Energy Corporation CTG Resources, Inc. Delta Natural Gas EnergyNorth, Inc. Mobile Gas Service Corporation Providence Energy Corporation Roanoke Gas Corporation Southeastern Michigan Energy Enterprises Yankee Gas Services N = 11 companies i Appendix II
Position Factor Weight Percent Control Point Threshold Plan Excess President and CEO Net Income 35% 4.375 8.75 13.125 Total Shareholder Return 25% 3.125 6.25 9.375 Cost of Service 20% 2.50 5.00 7.50 Board of Discretion 20% 2.50 5.00 7.50 ------ ----- ------ TOTALS 12.50 25.00 37.50 ====== ===== ====== Senior Vice President Net Income 35% 3.50 7.00 10.50 Total Shareholder Return 25% 2.50 5.00 7.50 Cost of Service 20% 2.00 4.00 6.00 Board Discretion 20% 2.00 4.00 6.00 ------ ----- ------ TOTALS 10.0 20.00 30.00 ====== ===== ====== Vice President Net Income 35% 2.625 5.25 7.875 Total Shareholder Return 25% 1.875 3.75 5.625 Cost of Service 20% 1.50 3.00 4.50 Board of Discretion 20% 1.50 3.00 4.50 ------ ----- ------ TOTALS 7.5 15.00 22.50 ====== ===== ====== Asst. Vice President Net Income 35% 2.625 5.25 7.875 Total Shareholder Return 25% 1.875 3.75 5.625 Cost of Service 20% 1.50 3.00 4.50 Board Discretion 20% 1.50 3.00 4.50 ------ ----- ------ TOTALS 7.5 15.0 22.50 ===== ===== ======
EX-10 3 Exhibit 10.(d) April 1, 1999 Mr. Alfred P. Degen Chairman, President & CEO Valley Resources, Inc. 1595 Mendon Road Cumberland, RI 02864 Dear Mr. Degen: Valley Resources, Inc. (which, together with its subsidiaries, is hereinafter called "the Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. The Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company and in consideration of your agreeing to remain in the employ of the Company subject to the terms and conditions set forth below, this letter agreement (the "Agreement") sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on January 1, 1999 and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless, not later than August 31 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; and provided further, however, that notwithstanding any such notice by the Company not to extend, if a change in control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months from the occurrence of such change in control. Notwithstanding the foregoing, the Company may terminate your employment at any time, whether before or after a change in control, subject to providing such benefits as shall be hereinafter specified. 2. Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (B) any person publicly announces (including an announcement by the Company) an intention to take actions which if consummated would constitute a change in control of the Company; (C) any person publicly announces (including an announcement by the Company) that it has become the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company for a period of six (6) months from the occurrence of such potential change in control of the Company. 3. Termination Following Change in Control. If any of the events described in Subsection 2(i) hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4(iii) hereof upon the subsequent termination of your employment during the term of this Agreement unless such termination is (A) because of your death, Retirement or Disability, (B) by the Company for Cause or (C) by you other than for Good Reason. (i) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, your employment may be terminated for "Disability." Termination of your employment based on "Retirement" shall mean termination in accordance with the Company's retirement policy generally applicable to its salaried employees or in accordance with any retirement arrangement established with your consent with respect to you. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the occurrence of circumstances giving rise to a Notice of Termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (B) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this Subsection and specifying the particulars thereof in detail. (iii)Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, any of the following: (A) the assignment to you of any duties inconsistent with your status as Chairman, President & CEO, or a substantial alteration in the nature or status of your responsibilities from those in effect immediately prior to a change in control of the Company; (B) a reduction by the Company in your annual base salary as in effect on the date of the occurrence of a change in control of the Company or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any person in control of the Company; or the failure of the Company to grant increases in salary in accordance with the Company's regular practices; (C) the relocation of the Company's principal executive offices to a location more than twenty-five (25) miles from your present office location or the Company's requiring you to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (D) the failure by the Company to continue in effect any compensation plan in which you participate, or any plan adopted prior to the change in control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the change in control of the Company, or the failure by the Company to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; (E) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which you were participating at the time of a change in control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the change in control of the Company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the change in control. (F) the failure by the Company without your consent to pay to you any portion of your current compensation or to pay to you any installment of deferred compensation at the time such installment is due under any deferred compensation program of the Company; (G) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (H) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, the requirements of Subsection (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. In addition to your right to terminate for Good Reason as stated above, and not in substitution therefor, you shall have the option at your discretion to terminate your employment at any time within fifteen (15) months after the later of (a) a change in control of the Company or (b) the expiration of the six (6) months period during which you agree to remain in the employ of the Company under paragraph 2(ii) of this Agreement. Such termination shall be conclusively deemed to be a termination for Good Reason, but shall not affect your right to terminate for Good Reason under any of the provisions of subsection (iii) above. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. (iv) Notice of Termination. Any purported termination by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you have not returned to the full-time performance of your duties during such period) (B) if your employment is terminated pursuant to Subsection (ii) or (iii) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement except as otherwise provided in paragraph (C) of Subsection 4 (iii). 4. Compensation Upon Termination. Following a change in control of the Company, as defined by Subsection 2(i), upon termination of your employment you shall be entitled to the following benefits: (i) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus any other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (ii) If your employment shall be terminated by the Company or by you for Retirement, or by reason of your death or for Disability, your benefits shall be determined in accordance with the Company's retirement and insurance program then in effect. (iii)If your employment by the Company shall be terminated (a) by the Company other than for Cause, Retirement or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus any other amounts to which you are entitled under any compensation plan of the Company, at the times such payments are due; (B) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as a severance payment to you, not later than the fifth day following the Date of Termination, a lump sum severance payment (the "Severance Payment") equal to 3.00 times your Covered Compensation. "Covered Compensation" is your annual salary as determined by your salary rate at the date of the change in control of the Company, plus the cash portion of your Executive Incentive Compensation Plan award for the Plan year in which the change in control of the Company occurs (provided, however, that in the case of a termination at your option under that portion of Section 3 (iii) giving you an option to terminate at your discretion, your salary rate shall be the greater of the rate in effect at the date of change in control of the Company or the rate immediately prior to the issuance of the Notice of Termination); (C) For a period after such termination equal to the period actually used in calculating severance pay due to you under Section 4(iii)(B), the Company shall provide you with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(iii)(C) shall be reduced to the extent comparable benefits are actually received by you during such period following your termination, and any such benefits actually received by you shall be reported to the Company; (D) In addition to the retirement benefits to which you are entitled under the Retirement Plan or any successor plan thereto, the Company shall pay you in one lump sum in cash on the fifth day following the Date of Termination, a sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age 65) which you would have accrued under the terms of the Retirement Plan (without regard to any amendment to the Retirement Plan made subsequent to a change in control of the Company and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if you were fully vested thereunder and had accumulated (after the Date of Termination) that number of additional months of service credit thereunder equal to the number of months for which severance pay shall be due to you under Section 4(iii)(B) hereof, at your highest annual rate of compensation during the twelve (12) months immediately preceding the Date of Termination (but in no event shall you be deemed to have accumulated additional months of service credit after your sixty-fifth (65th) birthday), and (y) the retirement pension (determined as a straight-life annuity commencing at age 65) which you had then accrued pursuant to the provisions of the Retirement Plan. For purposes of clause (x), the term "compensation" shall include amounts payable pursuant to Section 4(iii)(B) hereof. For purposes of this Subsection, "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the Retirement Plan immediately prior to the change in control of the Company; (iv) (A) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to you or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 4(iv)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (B) Subject to the provisions of Section 4(iv)(C) below, all determinations required to be made under this Section 4(iv), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent audit firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and to you within fifteen (15) business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, you shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 4(iv), shall be paid by the Company to you within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by you , it shall furnish you with a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Gross-Up Payment made by the Company is less than the payment which should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to this Section 4(iv) and you are thereafter required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit. (C) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order to effectively contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(iv), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (D) If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), you become entitled to receive any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of this Section 4(iv)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (v) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such right of benefit provided by this Agreement). (vi) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer except as expressly provided herein. (vii)In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under the Retirement Plan and any other plan or agreement relating to retirement benefits. 5. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisees, legatees, or other designee or if there is no such designee, to your estate. (iii)This Agreement supersedes your prior change in control agreement, which was effective January 1, 1995. 6. Notice. For the purposes of this Agreement, notices and all other communications shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Rhode Island. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. 8. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Providence, Rhode Island, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, VALLEY RESOURCES, INC. By s/Don A. Deangelis --------------------------------------- Name: Don A. DeAngelis Title: Chairman, Compensation Committee Agreed to this 29th day ---- of July, 1999 ---- s/Alfred P. Degen - ----------------- Alfred P. Degen EX-10 4 Exhibit 10.(e) June 15, 1999 Sharon Partridge Vice President, Chief Financial Officer, Secretary and Treasurer Valley Resources, Inc. 1595 Mendon Road Cumberland, RI 02864 Dear Ms. Partridge: Valley Resources, Inc. (which, together with its subsidiaries, is hereinafter called "the Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. The Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company and in consideration of your agreeing to remain in the employ of the Company subject to the terms and conditions set forth below, this letter agreement (the "Agreement") sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on June 15, 1999 and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless, not later than August 31 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; and provided further, however, that notwithstanding any such notice by the Company not to extend, if a change in control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months from the occurrence of such change in control. Notwithstanding the foregoing, the Company may terminate your employment at any time, whether before or after a change in control, subject to providing such benefits as shall be hereinafter specified. 2. Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (B) any person publicly announces (including an announcement by the Company) an intention to take actions which if consummated would constitute a change in control of the Company; (C) any person publicly announces (including an announcement by the Company) that it has become the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company for a period of six (6) months from the occurrence of such potential change in control of the Company. 3. Termination Following Change in Control. If any of the events described in Subsection 2(i) hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4 (iii) hereof upon the subsequent termination of your employment during the term of this Agreement unless such termination is (A) because of your death, Retirement or Disability, (B) by the Company for Cause or (C) by you other than for Good Reason. (i) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, your employment may be terminated for "Disability." Termination of your employment based on "Retirement" shall mean termination in accordance with the Company's retirement policy generally applicable to its salaried employees or in accordance with any retirement arrangement established with your consent with respect to you. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the occurrence of circumstances giving rise to a Notice of Termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (B) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this Subsection and specifying the particulars thereof in detail. (iii)Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, any of the following: (A) the assignment to you of any duties inconsistent with your status as Vice President, Chief Financial Officer, Secretary & Treasurer or a substantial alteration in the nature or status of your responsibilities from those in effect immediately prior to a change in control of the Company; (B) a reduction by the Company in your annual base salary as in effect on the date of the occurrence of a change in control of the Company or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any person in control of the Company; or the failure of the Company to grant increases in salary in accordance with the Company's regular practices; (C) the relocation of the Company's principal executive offices to a location more than twenty-five (25) miles from your present office location or the Company's requiring you to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (D) the failure by the Company to continue in effect any compensation plan in which you participate, or any plan adopted prior to the change in control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the change in control of the Company, or the failure by the Company to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; (E) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which you were participating at the time of a change in control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the change in control of the Company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the change in control. (F) the failure by the Company without your consent to pay to you any portion of your current compensation or to pay to you any installment of deferred compensation at the time such installment is due under any deferred compensation program of the Company; (G) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (H) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, the requirements of Subsection (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. In addition to your right to terminate for Good Reason as stated above, and not in substitution therefor, you shall have the option at your discretion to terminate your employment at any time within fifteen (15) months after the later of (a) a change in control of the Company or (b) the expiration of the six (6) months period during which you agree to remain in the employ of the Company under paragraph 2(ii) of this Agreement. Such termination shall be conclusively deemed to be a termination for Good Reason, but shall not affect your right to terminate for Good Reason under any of the provisions of subsection (iii) above. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. (iv) Notice of Termination. Any purported termination by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you have not returned to the full-time performance of your duties during such period) (B) if your employment is terminated pursuant to Subsection (ii) or (iii) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement except as otherwise provided in paragraph (C) of Subsection 4 (iii). 4. Compensation Upon Termination. Following a change in control of the Company, as defined by Subsection 2(i), upon termination of your employment you shall be entitled to the following benefits: (i) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus any other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (ii) If your employment shall be terminated by the Company or by you for Retirement, or by reason of your death or for Disability, your benefits shall be determined in accordance with the Company's retirement and insurance program then in effect. (iii)If your employment by the Company shall be terminated (a) by the Company other than for Cause, Retirement or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus any other amounts to which you are entitled under any compensation plan of the Company, at the times such payments are due; (B) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as a severance payment to you, not later than the fifth day following the Date of Termination, a lump sum severance payment (the "Severance Payment") equal to 2.00 times your Covered Compensation. "Covered Compensation" is your annual salary as determined by your salary rate at the date of the change in control of the Company, plus the cash portion of your Executive Incentive Compensation Plan award for the Plan year in which the change in control of the Company occurs (provided, however, that the case of a termination at your option under the portion of Section 3(iii) giving you an option to terminate at your discretion, your salary rate shall be greater of the rate in effect at the date of change in control of the Company or the rate immediately prior to the issuance of the Notice of Termination); (C) For a period after such termination equal to the period actually used in calculating severance pay due to you under Section 4(iii)(B), the Company shall provide you with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(iii) (C) shall be reduced to the extent comparable benefits are actually received by you during such period following your termination, and any such benefits actually received by you shall be reported to the Company; (D) In addition to the retirement benefits to which you are entitled under the Retirement Plan or any successor plan thereto, the Company shall pay you in one lump sum in cash on the fifth day following the Date of Termination, a sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age 65) which you would have accrued under the terms of the Retirement Plan (without regard to any amendment to the Retirement Plan made subsequent to a change in control of the Company and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if you were fully vested thereunder and had accumulated (after the Date of Termination) that number of additional months of service credit thereunder equal to the number of months for which severance pay shall be due to you under Section 4 (iii) (B) hereof, at your highest annual rate of compensation during the twelve (12) months immediately preceding the Date of Termination (but in no event shall you be deemed to have accumulated additional months of service credit after your sixty-fifth (65th) birthday), and (y) the retirement pension (determined as a straight-life annuity commencing at age 65) which you had then accrued pursuant to the provisions of the Retirement Plan. For purposes of clause (x), the term "compensation" shall include amounts payable pursuant to Section 4 (iii) (B) hereof. For purposes of this Subsection, "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the Retirement Plan immediately prior to the change in control of the Company; (iv) (A) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to you or for your benefit (whether paid or payable of distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 4(iv)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (B) Subject to the provisions of Section 4(iv)(C) below, all determinations required to be made under this Section 4(iv), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent audit firm (the "Accounting Firm" which shall provide detailed supporting calculations both to the Company and to you within fifteen (15) business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, you shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 4(iv), shall be paid by the Company to you within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by you, it shall furnish you with a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Gross-Up Payment made by the Company is less than the payment which should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to this Section 4(iv) and you are thereafter required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit. (C) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order to effectively contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(iv), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you on an interest-free basis, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (D) If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), you become entitled to receive any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of this Section 4(iv)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (v) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such right of benefit provided by this Agreement). (vi) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer except as expressly provided herein. (vii)In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under the Retirement Plan and any other plan or agreement relating to retirement benefits. 5. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisees, legatees, or other designee or if there is no such designee, to your estate. (iii)This Agreement supersedes your prior change in control agreement, which was effective January 1, 1999. 6. Notice. For the purposes of this Agreement, notices and all other communications shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Rhode Island. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. 8. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Providence, Rhode Island, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, VALLEY RESOURCES, INC. By s/Alfred P. Degen ------------------------------------------- Name: Alfred P. Degen Title: President & Chief Executive Officer Agreed to this 27th day ---- of August, 1999 ------ s/S. Partridge - ------------------------------ Sharon Partridge EX-10 5 Exhibit 10.(f) April 1, 1999 Mr. Charles K. Meunier Vice President Operations Valley Resources, Inc. 1595 Mendon Road Cumberland, RI 02864 Dear Mr. Meunier: Valley Resources, Inc. (which, together with its subsidiaries, is hereinafter called "the Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. The Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company and in consideration of your agreeing to remain in the employ of the Company subject to the terms and conditions set forth below, this letter agreement (the "Agreement") sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on January 1, 1999 and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless, not later than August 31 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; and provided further, however, that notwithstanding any such notice by the Company not to extend, if a change in control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months from the occurrence of such change in control. Notwithstanding the foregoing, the Company may terminate your employment at any time, whether before or after a change in control, subject to providing such benefits as shall be hereinafter specified. 2. Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (B) any person publicly announces (including an announcement by the Company) an intention to take actions which if consummated would constitute a change in control of the Company; (C) any person publicly announces (including an announcement by the Company) that it has become the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company for a period of six (6) months from the occurrence of such potential change in control of the Company. 3. Termination Following Change in Control. If any of the events described in Subsection 2(i) hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4(iii) hereof upon the subsequent termination of your employment during the term of this Agreement unless such termination is (A) because of your death, Retirement or Disability, (B) by the Company for Cause or (C) by you other than for Good Reason. (i) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, your employment may be terminated for "Disability." Termination of your employment based on "Retirement" shall mean termination in accordance with the Company's retirement policy generally applicable to its salaried employees or in accordance with any retirement arrangement established with your consent with respect to you. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the occurrence of circumstances giving rise to a Notice of Termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (B) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this Subsection and specifying the particulars thereof in detail. (iii)Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, any of the following: (A) the assignment to you of any duties inconsistent with your status as Vice President Operations, or a substantial alteration in the nature or status of your responsibilities from those in effect immediately prior to a change in control of the Company; (B) a reduction by the Company in your annual base salary as in effect on the date of the occurrence of a change in control of the Company or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any person in control of the Company; or the failure of the Company to grant increases in salary in accordance with the Company's regular practices; (C) the relocation of the Company's principal executive offices to a location more than twenty-five (25) miles from your present office location or the Company's requiring you to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (D) the failure by the Company to continue in effect any compensation plan in which you participate, or any plan adopted prior to the change in control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the change in control of the Company, or the failure by the Company to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; (E) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which you were participating at the time of a change in control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the change in control of the Company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the change in control. (F) the failure by the Company without your consent to pay to you any portion of your current compensation or to pay to you any installment of deferred compensation at the time such installment is due under any deferred compensation program of the Company; (G) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (H) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, the requirements of Subsection (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. In addition to your right to terminate for Good Reason as stated above, and not in substitution therefor, you shall have the option at your discretion to terminate your employment at any time within fifteen (15) months after the later of (a) a change in control of the Company or (b) the expiration of the six (6) months period during which you agree to remain in the employ of the Company under paragraph 2(ii) of this Agreement. Such termination shall be conclusively deemed to be a termination for Good Reason, but shall not affect your right to terminate for Good Reason under any of the provisions of subsection (iii) above. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. (iv) Notice of Termination. Any purported termination by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you have not returned to the full-time performance of your duties during such period) (B) if your employment is terminated pursuant to Subsection (ii) or (iii) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement except as otherwise provided in paragraph (C) of Subsection 4 (iii). 4. Compensation Upon Termination. Following a change in control of the Company, as defined by Subsection 2(i), upon termination of your employment you shall be entitled to the following benefits: (i) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus any other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (ii) If your employment shall be terminated by the Company or by you for Retirement, or by reason of your death or for Disability, your benefits shall be determined in accordance with the Company's retirement and insurance program then in effect. (iii)If your employment by the Company shall be terminated (a) by the Company other than for Cause, Retirement or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus any other amounts to which you are entitled under any compensation plan of the Company, at the times such payments are due; (B) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as a severance payment to you, not later than the fifth day following the Date of Termination, a lump sum severance payment (the "Severance Payment") equal to 2.00 times your Covered Compensation. "Covered Compensation" is your annual salary as determined by your salary rate at the date of the change in control of the Company, plus the cash portion of your Executive Incentive Compensation Plan award for the Plan year in which the change in control of the Company occurs (provided, however, that in the case of a termination at your option under that portion of Section 3 (iii) giving you an option to terminate at your discretion, your salary rate shall be the greater of the rate in effect at the date of change in control of the Company or the rate immediately prior to the issuance of the Notice of Termination); (C) For a period after such termination equal to the period actually used in calculating severance pay due to you under Section 4(iii)(B), the Company shall provide you with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(iii)(C) shall be reduced to the extent comparable benefits are actually received by you during such period following your termination, and any such benefits actually received by you shall be reported to the Company; (D) In addition to the retirement benefits to which you are entitled under the Retirement Plan or any successor plan thereto, the Company shall pay you in one lump sum in cash on the fifth day following the Date of Termination, a sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age 65) which you would have accrued under the terms of the Retirement Plan (without regard to any amendment to the Retirement Plan made subsequent to a change in control of the Company and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if you were fully vested thereunder and had accumulated (after the Date of Termination) that number of additional months of service credit thereunder equal to the number of months for which severance pay shall be due to you under Section 4(iii)(B) hereof, at your highest annual rate of compensation during the twelve (12) months immediately preceding the Date of Termination (but in no event shall you be deemed to have accumulated additional months of service credit after your sixty-fifth (65th) birthday), and (y) the retirement pension (determined as a straight-life annuity commencing at age 65) which you had then accrued pursuant to the provisions of the Retirement Plan. For purposes of clause (x), the term "compensation" shall include amounts payable pursuant to Section 4(iii)(B) hereof. For purposes of this Subsection, "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the Retirement Plan immediately prior to the change in control of the Company; (iv) (A) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to you or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 4(iv)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (B) Subject to the provisions of Section 4(iv)(C) below, all determinations required to be made under this Section 4(iv), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent audit firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and to you within fifteen (15) business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, you shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 4(iv), shall be paid by the Company to you within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by you , it shall furnish you with a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Gross-Up Payment made by the Company is less than the payment which should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to this Section 4(iv) and you are thereafter required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit. (C) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order to effectively contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(iv), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (D) If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), you become entitled to receive any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of this Section 4(iv)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (v) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such right of benefit provided by this Agreement). (vi) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer except as expressly provided herein. (vii)In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under the Retirement Plan and any other plan or agreement relating to retirement benefits. 5. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisees, legatees, or other designee or if there is no such designee, to your estate. (iii)This Agreement supersedes your prior change in control agreement, which was effective January 1, 1997. 6. Notice. For the purposes of this Agreement, notices and all other communications shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Rhode Island. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. 8. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Providence, Rhode Island, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, VALLEY RESOURCES, INC. By s/A. P. Degen ------------------------------------------ Name: Alfred P. Degen Title: President & Chief Executive Officer Agreed to this 5th day --- of April, 1999 ----- s/C. K. Meunier - ------------------ Charles K. Meunier EX-10 6 Exhibit 10.(g) April 1, 1999 Mr. Richard G. Drolet Vice President Information Systems & Corporate Planning Valley Resources, Inc. 1595 Mendon Road Cumberland, RI 02864 Dear Mr. Drolet: Valley Resources, Inc. (which, together with its subsidiaries, is hereinafter called "the Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. The Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company and in consideration of your agreeing to remain in the employ of the Company subject to the terms and conditions set forth below, this letter agreement (the "Agreement") sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on January 1, 1999 and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless, not later than August 31 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; and provided further, however, that notwithstanding any such notice by the Company not to extend, if a change in control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months from the occurrence of such change in control. Notwithstanding the foregoing, the Company may terminate your employment at any time, whether before or after a change in control, subject to providing such benefits as shall be hereinafter specified. 2. Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (B) any person publicly announces (including an announcement by the Company) an intention to take actions which if consummated would constitute a change in control of the Company; (C) any person publicly announces (including an announcement by the Company) that it has become the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company for a period of six (6) months from the occurrence of such potential change in control of the Company. 3. Termination Following Change in Control. If any of the events described in Subsection 2(i) hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4(iii) hereof upon the subsequent termination of your employment during the term of this Agreement unless such termination is (A) because of your death, Retirement or Disability, (B) by the Company for Cause or (C) by you other than for Good Reason. (i) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, your employment may be terminated for "Disability." Termination of your employment based on "Retirement" shall mean termination in accordance with the Company's retirement policy generally applicable to its salaried employees or in accordance with any retirement arrangement established with your consent with respect to you. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the occurrence of circumstances giving rise to a Notice of Termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (B) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this Subsection and specifying the particulars thereof in detail. (iii)Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, any of the following: (A) the assignment to you of any duties inconsistent with your status as Vice President Information Systems & Corporate Planning, or a substantial alteration in the nature or status of your responsibilities from those in effect immediately prior to a change in control of the Company; (B) a reduction by the Company in your annual base salary as in effect on the date of the occurrence of a change in control of the Company or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any person in control of the Company; or the failure of the Company to grant increases in salary in accordance with the Company's regular practices; (C) the relocation of the Company's principal executive offices to a location more than twenty-five (25) miles from your present office location or the Company's requiring you to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (D) the failure by the Company to continue in effect any compensation plan in which you participate, or any plan adopted prior to the change in control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the change in control of the Company, or the failure by the Company to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; (E) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which you were participating at the time of a change in control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the change in control of the Company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the change in control. (F) the failure by the Company without your consent to pay to you any portion of your current compensation or to pay to you any installment of deferred compensation at the time such installment is due under any deferred compensation program of the Company; (G) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (H) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, the requirements of Subsection (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. In addition to your right to terminate for Good Reason as stated above, and not in substitution therefor, you shall have the option at your discretion to terminate your employment at any time within fifteen (15) months after the later of (a) a change in control of the Company or (b) the expiration of the six (6) months period during which you agree to remain in the employ of the Company under paragraph 2(ii) of this Agreement. Such termination shall be conclusively deemed to be a termination for Good Reason, but shall not affect your right to terminate for Good Reason under any of the provisions of subsection (iii) above. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. (iv) Notice of Termination. Any purported termination by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you have not returned to the full-time performance of your duties during such period) (B) if your employment is terminated pursuant to Subsection (ii) or (iii) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement except as otherwise provided in paragraph (C) of Subsection 4 (iii). 4. Compensation Upon Termination. Following a change in control of the Company, as defined by Subsection 2(i), upon termination of your employment you shall be entitled to the following benefits: (i) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus any other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (ii) If your employment shall be terminated by the Company or by you for Retirement, or by reason of your death or for Disability, your benefits shall be determined in accordance with the Company's retirement and insurance program then in effect. (iii)If your employment by the Company shall be terminated (a) by the Company other than for Cause, Retirement or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus any other amounts to which you are entitled under any compensation plan of the Company, at the times such payments are due; (B) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as a severance payment to you, not later than the fifth day following the Date of Termination, a lump sum severance payment (the "Severance Payment") equal to 2.00 times your Covered Compensation. "Covered Compensation" is your annual salary as determined by your salary rate at the date of the change in control of the Company, plus the cash portion of your Executive Incentive Compensation Plan award for the Plan year in which the change in control of the Company occurs (provided, however, that in the case of a termination at your option under that portion of Section 3 (iii) giving you an option to terminate at your discretion, your salary rate shall be the greater of the rate in effect at the date of change in control of the Company or the rate immediately prior to the issuance of the Notice of Termination); (C) For a period after such termination equal to the period actually used in calculating severance pay due to you under Section 4(iii)(B), the Company shall provide you with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(iii)(C) shall be reduced to the extent comparable benefits are actually received by you during such period following your termination, and any such benefits actually received by you shall be reported to the Company; (D) In addition to the retirement benefits to which you are entitled under the Retirement Plan or any successor plan thereto, the Company shall pay you in one lump sum in cash on the fifth day following the Date of Termination, a sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age 65) which you would have accrued under the terms of the Retirement Plan (without regard to any amendment to the Retirement Plan made subsequent to a change in control of the Company and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if you were fully vested thereunder and had accumulated (after the Date of Termination) that number of additional months of service credit thereunder equal to the number of months for which severance pay shall be due to you under Section 4(iii)(B) hereof, at your highest annual rate of compensation during the twelve (12) months immediately preceding the Date of Termination (but in no event shall you be deemed to have accumulated additional months of service credit after your sixty-fifth (65th) birthday), and (y) the retirement pension (determined as a straight-life annuity commencing at age 65) which you had then accrued pursuant to the provisions of the Retirement Plan. For purposes of clause (x), the term "compensation" shall include amounts payable pursuant to Section 4(iii)(B) hereof. For purposes of this Subsection, "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the Retirement Plan immediately prior to the change in control of the Company; (iv) (A) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to you or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 4(iv)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (B) Subject to the provisions of Section 4(iv)(C) below, all determinations required to be made under this Section 4(iv), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent audit firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and to you within fifteen (15) business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, you shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 4(iv), shall be paid by the Company to you within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by you , it shall furnish you with a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Gross-Up Payment made by the Company is less than the payment which should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to this Section 4(iv) and you are thereafter required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit. (C) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order to effectively contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(iv), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (D) If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), you become entitled to receive any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of this Section 4(iv)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (v) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such right of benefit provided by this Agreement). (vi) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer except as expressly provided herein. (vii)In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under the Retirement Plan and any other plan or agreement relating to retirement benefits. 5. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisees, legatees, or other designee or if there is no such designee, to your estate. (iii)This Agreement supersedes your prior change in control agreement, which was effective January 1, 1997. 6. Notice. For the purposes of this Agreement, notices and all other communications shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Rhode Island. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. 8. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Providence, Rhode Island, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, VALLEY RESOURCES, INC. By s/Alfred P. Degen ----------------------------------------- Name: Alfred P. Degen Title: President & Chief Executive Officer Agreed to this 8th day --- of April, 1999 ----- s/R. G. Drolet - ----------------- Richard G. Drolet EX-10 7 Exhibit 10.(h) April 1, 1999 Mr. Jeffrey P. Polucha Vice President Marketing & Development Valley Resources, Inc. 1595 Mendon Road Cumberland, RI 02864 Dear Mr. Polucha: Valley Resources, Inc. (which, together with its subsidiaries, is hereinafter called "the Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. The Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. In order to induce you to remain in the employ of the Company and in consideration of your agreeing to remain in the employ of the Company subject to the terms and conditions set forth below, this letter agreement (the "Agreement") sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on January 1, 1999 and shall continue in effect through December 31, 1999; provided, however, that commencing on January 1, 2000 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one (1) additional year unless, not later than August 31 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement; and provided further, however, that notwithstanding any such notice by the Company not to extend, if a change in control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months from the occurrence of such change in control. Notwithstanding the foregoing, the Company may terminate your employment at any time, whether before or after a change in control, subject to providing such benefits as shall be hereinafter specified. 2. Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below, and your employment by the Company shall thereafter have been terminated in accordance with Section 3 below. For purposes of this Agreement, a "change in control of the Company" shall mean a change in control of a nature that would be required to be reported in response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (c) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (B) any person publicly announces (including an announcement by the Company) an intention to take actions which if consummated would constitute a change in control of the Company; (C) any person publicly announces (including an announcement by the Company) that it has become the beneficial owner, directly or indirectly, of securities of the Company representing 9.5% or more of the combined voting power of the Company's then outstanding securities; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company for a period of six (6) months from the occurrence of such potential change in control of the Company. 3. Termination Following Change in Control. If any of the events described in Subsection 2(i) hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4(iii) hereof upon the subsequent termination of your employment during the term of this Agreement unless such termination is (A) because of your death, Retirement or Disability, (B) by the Company for Cause or (C) by you other than for Good Reason. (i) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for six (6) consecutive months, your employment may be terminated for "Disability." Termination of your employment based on "Retirement" shall mean termination in accordance with the Company's retirement policy generally applicable to its salaried employees or in accordance with any retirement arrangement established with your consent with respect to you. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the occurrence of circumstances giving rise to a Notice of Termination by you for Good Reason) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (B) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this Subsection and specifying the particulars thereof in detail. (iii)Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, any of the following: (A) the assignment to you of any duties inconsistent with your status as Vice President Marketing & Development, or a substantial alteration in the nature or status of your responsibilities from those in effect immediately prior to a change in control of the Company; (B) a reduction by the Company in your annual base salary as in effect on the date of the occurrence of a change in control of the Company or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all executives of the Company and all executives of any person in control of the Company; or the failure of the Company to grant increases in salary in accordance with the Company's regular practices; (C) the relocation of the Company's principal executive offices to a location more than twenty-five (25) miles from your present office location or the Company's requiring you to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (D) the failure by the Company to continue in effect any compensation plan in which you participate, or any plan adopted prior to the change in control of the Company, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan in connection with the change in control of the Company, or the failure by the Company to continue your participation therein on substantially the same basis, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; (E) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which you were participating at the time of a change in control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the change in control of the Company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the change in control. (F) the failure by the Company without your consent to pay to you any portion of your current compensation or to pay to you any installment of deferred compensation at the time such installment is due under any deferred compensation program of the Company; (G) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (H) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, the requirements of Subsection (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. In addition to your right to terminate for Good Reason as stated above, and not in substitution therefor, you shall have the option at your discretion to terminate your employment at any time within fifteen (15) months after the later of (a) a change in control of the Company or (b) the expiration of the six (6) months period during which you agree to remain in the employ of the Company under paragraph 2(ii) of this Agreement. Such termination shall be conclusively deemed to be a termination for Good Reason, but shall not affect your right to terminate for Good Reason under any of the provisions of subsection (iii) above. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. (iv) Notice of Termination. Any purported termination by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you have not returned to the full-time performance of your duties during such period) (B) if your employment is terminated pursuant to Subsection (ii) or (iii) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (iii) above shall not be less than thirty (30) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or the time for appeal therefrom having expired and no appeal having been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement except as otherwise provided in paragraph (C) of Subsection 4 (iii). 4. Compensation Upon Termination. Following a change in control of the Company, as defined by Subsection 2(i), upon termination of your employment you shall be entitled to the following benefits: (i) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus any other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (ii) If your employment shall be terminated by the Company or by you for Retirement, or by reason of your death or for Disability, your benefits shall be determined in accordance with the Company's retirement and insurance program then in effect. (iii)If your employment by the Company shall be terminated (a) by the Company other than for Cause, Retirement or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) The Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus any other amounts to which you are entitled under any compensation plan of the Company, at the times such payments are due; (B) In lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as a severance payment to you, not later than the fifth day following the Date of Termination, a lump sum severance payment (the "Severance Payment") equal to 2.00 times your Covered Compensation. "Covered Compensation" is your annual salary as determined by your salary rate at the date of the change in control of the Company, plus the cash portion of your Executive Incentive Compensation Plan award for the Plan year in which the change in control of the Company occurs (provided, however, that in the case of a termination at your option under that portion of Section 3 (iii) giving you an option to terminate at your discretion, your salary rate shall be the greater of the rate in effect at the date of change in control of the Company or the rate immediately prior to the issuance of the Notice of Termination); (C) For a period after such termination equal to the period actually used in calculating severance pay due to you under Section 4(iii)(B), the Company shall provide you with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Section 4(iii)(C) shall be reduced to the extent comparable benefits are actually received by you during such period following your termination, and any such benefits actually received by you shall be reported to the Company; (D) In addition to the retirement benefits to which you are entitled under the Retirement Plan or any successor plan thereto, the Company shall pay you in one lump sum in cash on the fifth day following the Date of Termination, a sum equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at age 65) which you would have accrued under the terms of the Retirement Plan (without regard to any amendment to the Retirement Plan made subsequent to a change in control of the Company and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if you were fully vested thereunder and had accumulated (after the Date of Termination) that number of additional months of service credit thereunder equal to the number of months for which severance pay shall be due to you under Section 4(iii)(B) hereof, at your highest annual rate of compensation during the twelve (12) months immediately preceding the Date of Termination (but in no event shall you be deemed to have accumulated additional months of service credit after your sixty-fifth (65th) birthday), and (y) the retirement pension (determined as a straight-life annuity commencing at age 65) which you had then accrued pursuant to the provisions of the Retirement Plan. For purposes of clause (x), the term "compensation" shall include amounts payable pursuant to Section 4(iii)(B) hereof. For purposes of this Subsection, "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the Retirement Plan immediately prior to the change in control of the Company; (iv) (A) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to you or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 4(iv)) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (B) Subject to the provisions of Section 4(iv)(C) below, all determinations required to be made under this Section 4(iv), including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent audit firm (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and to you within fifteen (15) business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, you shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 4(iv), shall be paid by the Company to you within five (5) days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by you , it shall furnish you with a written opinion that failure to report the Excise Tax on your applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Gross-Up Payment made by the Company is less than the payment which should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to this Section 4(iv) and you are thereafter required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit. (C) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which you give such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order to effectively contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 4(iv), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agree to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis, and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for your taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (D) If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), you become entitled to receive any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of this Section 4(iv)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after your receipt of an amount advanced by the Company pursuant to this Section 4(iv), a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (v) The Company shall also pay to you all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such right of benefit provided by this Agreement). (vi) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer except as expressly provided herein. (vii)In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you under the Retirement Plan and any other plan or agreement relating to retirement benefits. 5. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminate your employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisees, legatees, or other designee or if there is no such designee, to your estate. (iii)This Agreement supersedes your prior change in control agreement, which was effective January 1, 1997. 6. Notice. For the purposes of this Agreement, notices and all other communications shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Rhode Island. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. 8. Validity. The invalidity or unenforceability or any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Providence, Rhode Island, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, VALLEY RESOURCES, INC. By s/A. P. Degen ------------------------------------------ Name: Alfred P. Degen Title: President & Chief Executive Officer Agreed to this 5th day --- of April, 1999 ----- s/J. P. Polucha - ------------------ Jeffrey P. Polucha EX-13 8 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 EX-23 9 Exhibit 23 Consent of Independent Certified Public Accountants We have issued our reports dated September 27, 1999, accompanying the consolidated financial statements and schedule incorporated by reference or included in the Annual Report of Valley Resources, Inc. and subsidiaries on Form 10-K for the year ended August 31, 1999. We hereby consent to the inclusion and incorporation by reference of said reports in the Registration Statements of Valley Resources, Inc. and subsidiaries on Form S-3 (File No. 333-41277) and Form S-8 (File No. 333-19259). GRANT THORNTON LLP Boston, Massachusetts November 26, 1999 EX-27 10
UT YEAR AUG-31-1999 AUG-31-1999 PER-BOOK 52,334,424 7,458,484 18,611,848 21,817,770 0 100,222,526 4,993,028 24,756,209 8,649,997 35,805,323 0 0 27,029,000 4,800,000 2,443,911 0 150,000 0 775,132 780,723 28,438,437 100,222,526 81,710,177 1,772,370 73,042,463 74,814,833 6,895,344 299,205 7,194,549 3,007,940 4,186,609 0 4,186,609 3,723,724 2,388,817 8,105,213 0.84 0.84
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