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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Quarter Ended June 30, 1998
-------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to _____________________
Commission File Number 2-39895
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MIDLAND ENTERPRISES INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2284434
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 PIKE STREET, CINCINNATI, OHIO 45202
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 513-721-4000
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- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
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
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The number of shares of common stock of Midland Enterprises Inc. outstanding as
of the date of this report was 15 1/2, all held by Eastern Enterprises.
Registrant meets the conditions set forth in general instructions H(1) (a) and
(b) of Form 10-Q and is therefore filing this form with the reduced disclosure
format.
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1
<TABLE>
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MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(000 OMITTED)
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FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
---------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
REVENUES $ 65,163 $ 68,113 $ 127,821 $ 132,495
---------------- ----------------- ----------------- ------------------
OPERATING COSTS AND EXPENSES:
Operating expenses $ 44,156 $ 46,323 $ 87,315 $ 92,849
Depreciation and amortization 5,921 5,667 11,737 11,323
Selling, general & administrative 3,030 2,880 6,164 5,386
Overhead allocation from Parent 750 725 1,500 1,450
Taxes, other than income 3,585 3,415 7,297 6,956
---------------- ----------------- ----------------- ------------------
$ 57,442 $ 59,010 $ 114,013 $ 117,964
---------------- ----------------- ----------------- ------------------
OPERATING EARNINGS $ 7,721 $ 9,103 $ 13,808 $ 14,531
---------------- ----------------- ----------------- ------------------
OTHER INCOME (EXPENSE):
Interest income from Parent $ 86 $ 1,034 $ 990 $ 2,051
Interest income other 37 4 57 14
Gain (Loss) on sale of assets
and other, net 89 (44) 184 (97)
---------------- ----------------- ----------------- ------------------
$ 212 $ 994 $ 1,231 $ 1,968
---------------- ----------------- ----------------- ------------------
INTEREST EXPENSE:
Long-term debt $ 2,044 $ 3,406 $ 5,346 $ 6,819
Other, including amortization
of debt expense 39 51 86 95
---------------- ----------------- ----------------- ------------------
$ 2,083 $ 3,457 $ 5,432 $ 6,914
---------------- ----------------- ----------------- ------------------
EARNINGS BEFORE INCOME TAXES $ 5,850 $ 6,640 $ 9,607 $ 9,585
PROVISION FOR INCOME TAXES 2,106 2,365 3,475 3,184
---------------- ----------------- ----------------- ------------------
EARNINGS BEFORE EXTRAORDINARY ITEMS $ 3,744 $ 4,275 $ 6,132 $ 6,401
---------------- ----------------- ----------------- ------------------
EXTRAORDINARY ITEMS, NET OF TAX:
Credit for coal miners retiree
health care (Note 2) $ 2,827 $ - $ 2,827 $ -
Loss on early retirement of
debt (Note 3) - - (1,465) -
---------------- ----------------- ----------------- ------------------
NET EARNINGS $ 6,571 $ 4,275 $ 7,494 $ 6,401
================ ================= ================= ==================
</TABLE>
The accompanying notes are an integral
part of these financial statements
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<TABLE>
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2
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000 OMITTED)
------------------------------------------------------------
JUNE 30, DEC. 31, JUNE 30,
1998 1997 1997
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ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 65 $ 88 $ 58
Receivables
Trade, net 16,556 18,207 17,016
Parent -- 66,945 73,576
Other 1,273 565 1,325
Materials, supplies & fuel 7,497 8,738 7,992
Prepaid expenses 2,926 1,722 1,081
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TOTAL CURRENT ASSETS $ 28,317 $ 96,265 $101,048
-------- -------- --------
PROPERTY AND EQUIPMENT, AT COST $664,262 $640,966 $623,720
Less-accumulated depreciation 342,831 333,489 327,255
-------- -------- --------
NET PROPERTY AND EQUIPMENT $321,431 $307,477 $296,465
-------- -------- --------
OTHER ASSETS:
Deferred pension charges $ 14,520 $ 14,520 $ 13,845
Other 4,999 5,033 3,857
-------- -------- --------
TOTAL OTHER ASSETS $ 19,519 $ 19,553 $ 17,702
-------- -------- --------
TOTAL ASSETS $369,267 $423,295 $415,215
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements
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<TABLE>
<CAPTION>
3
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000 OMITTED)
--------------------------------------------------
JUNE 30, DEC. 31, JUNE 30,
1998 1997 1997
----------- ----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current portion of long - term debt $ 4,545 $ 4,351 $ 4,183
Accounts payable Parent 2,436 -- --
Accounts payable trade 10,465 18,199 10,043
Reserve for insurance claims 11,918 11,980 13,326
Interest payable 2,649 3,944 4,009
Taxes payable 3,175 4,176 1,518
Accrued expenses 3,923 4,495 4,888
Other current liabilities 9,841 9,119 9,707
-------- -------- --------
TOTAL CURRENT LIABILITIES $ 48,952 $ 56,264 $ 47,674
-------- -------- --------
LONG-TERM DEBT $ 81,461 $132,142 $135,084
-------- -------- --------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes $ 61,063 $ 57,940 $ 57,552
Unamortized investment tax credits 2,306 2,515 2,747
Post-retirement health care 8,873 8,569 8,763
Coal miners retiree health care -- 3,300 3,400
Other reserves 2,110 2,057 2,108
-------- -------- --------
TOTAL RESERVES AND DEFERRED CREDITS $ 74,352 $ 74,381 $ 74,570
-------- -------- --------
STOCKHOLDER'S EQUITY:
Common stock, $100 par value -
Authorized shares - 1,000
Issued shares - 15 1/2 $ 1 $ 1 $ 1
Capital in excess of par value 52,519 52,519 52,519
Retained earnings 111,982 107,988 105,367
-------- -------- --------
TOTAL STOCKHOLDER'S EQUITY $164,502 $160,508 $157,887
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $369,267 $423,295 $415,215
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements
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4
<TABLE>
<CAPTION>
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 OMITTED)
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FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 7,494 $ 6,401
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Extraordinary items, net (1,362) --
Depreciation and amortization 11,737 11,323
Deferred and current income taxes 949 (730)
Net loss on sale of assets 2 40
Other changes in assets and liabilities:
Trade receivables 1,651 (288)
Materials, supplies & fuel 1,241 184
Accounts payable (7,734) (1,181)
Accrued expenses and other current liabilities 332 484
Other (1,850) 1,537
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 12,460 $ 17,770
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $(26,540) $ (2,363)
Decrease (increase) in Parent receivable 69,381 (9,713)
Proceeds from asset dispositions 725 1,106
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 43,566 $(10,970)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt $(52,549) $ (2,032)
Cash dividends paid to Parent (3,500) (4,801)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES $(56,049) $ (6,833)
-------- --------
Net decrease in cash and cash equivalents $ (23) $ (33)
Cash and cash equivalents at beginning of period 88 91
-------- --------
Cash and cash equivalents at end of period $ 65 $ 58
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 6,631 $ 6,839
Income taxes $ 2,468 $ 3,575
</TABLE>
The accompanying notes are an integral
part of these financial statements
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5
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
(1) ACCOUNTING POLICIES
It is Midland's opinion that the financial information contained in this report
reflects all adjustments necessary to present a fair statement of the results
for the periods reported, but such results are not necessarily indicative of
results to be expected for the year, due to the somewhat seasonal nature of
Midland's operations. All such adjustments were of a normal, recurring nature.
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, the disclosures 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.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission. However, the disclosures
herein when read with the annual report for 1997 filed on Form 10-K are adequate
to make the information presented not misleading.
(2) COAL MINERS RETIREE HEALTH CARE
On June 25, 1998 the U.S. Supreme Court ruled that the Coal Industry Retiree
Health Benefit Act of 1992 ("Coal Act") is unconstitutional as applied to
Midland's parent, Eastern Enterprises.
In 1995, the Company had established a reserve of $4.6 million to fund its
portion of Eastern's liability under the Coal Act. As a result of the Supreme
Court's decision, the Company reversed this reserve, less associated expenses,
resulting in an extraordinary gain of $4.3 million pre-tax or $2.8 million net
in the second quarter of 1998.
(3) DEBT
In March 1998, the Company utilized the receivable from Parent to redeem $50
million of 9.90% First Preferred Ship Mortgage Bonds, due 2008. In extinguishing
this debt, the Company recognized an extraordinary charge of $2.3 million pretax
or $1.5 million net.
The Company has entered into forward treasury rate lock agreements in order to
hedge the interest rate on long-term debt anticipated to be issued in late 1998.
The treasury rate locks are for $75 million at a 10-year treasury rate of 5.68%
with a final determination date of September 29, 1998. Upon issuance of the
debt, any gain or loss associated with the treasury rate lock agreements will be
amortized to interest expense over the term of the related debt.
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2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
River transportation markets in the second quarter were nearly unchanged from
those experienced in the first quarter of 1998. Weak demand for export coal and
grain continued during the quarter, resulting in an over supply of barges and
placing downward pressure on spot and contract renewal rates compared to 1997.
The strengthening of the U.S. dollar and the economic problems in Southeast Asia
have contributed to the export market weakness. Increased demand for domestic
coal by electric utility and industrial customers offset much of the reduction
in export volume. However, fuel prices, which continued to decline in the
quarter, lowered rates in multi-year contracts that contain fuel price
adjustment clauses. As a result of these factors, second quarter and year to
date revenues declined by 4% compared to 1997.
El Nino-related storms in 1998, particularly in the Southeast and Gulf regions,
continued to cause high water conditions and intermittent traffic delays. This
resulted in increased vessel costs similar to the level caused by the record
flooding on the Ohio River in the comparable period in 1997. In addition, fleet
efficiency was negatively impacted by the lack of southbound export tonnage to
the Gulf, as replacement tonnage did not produce equivalent pattern efficiency.
Lower fuel costs partially offset the higher operating costs. As a result of
these operational factors and the lower revenues discussed above, operating
earnings declined 15% and 5% in the second quarter and year to date,
respectively, compared to last year.
Second quarter and year to date tonnage increased 6% and 8%, respectively, while
related ton miles declined 2% for the quarter and 4% year to date compared to
1997. The increased tonnage, with lower ton miles, reflects the Company's
efforts to replace reductions in long-haul export tonnage with shorter haul
domestic movements. Coal tonnage increased 10% and 14% for the quarter and first
half, respectively, with coal tonnage under multi-year contracts to utility and
industrial customers increasing over 20% in the quarter and 28% year to date.
The reduced spot and export coal tonnage was partially offsetting. Non-coal
tonnage was flat for the second quarter and 3% lower than for 1997 year to date,
due to significantly lower grain shipments partially offset by increased
aggregate tonnage and towing for others.
As a result of the lower operating earnings discussed above, partially offset by
lower net interest expense, earnings before extraordinary items declined by $.5
million in the second quarter and $.3 million year to date compared to 1997.
In March 1998, the Company recognized an extraordinary loss of $2.3 million
pretax or $1.5 million net of tax, on the early retirement of $50 million of
First Preferred Ship Mortgage Bonds due 2008. In June of 1998, the U.S. Supreme
Court upheld Eastern Enterprises' challenge to the constitutionality of the Coal
Industry Retiree Health Benefit Act of 1992 ("Coal Act") as applied to Eastern.
Consequently, as discussed in Note 3 of Notes to Financial Statements, the
Company reversed its Coal Act reserve resulting in an extraordinary gain of $4.3
million pre-tax or $2.8 million net in the second quarter of 1998.
As a result of the extraordinary items and other operating issues discussed
above, net earnings improved by $2.3 million and $1.1 million, compared to 1997,
for the quarter and year to date, respectively.
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7
FORWARD-LOOKING INFORMATION
This report and other Company reports and statements issued or made from time to
time contain certain "forward-looking statements" concerning projected future
financial performance or concerning expected plans or future operations. The
Company cautions that actual results and developments may differ materially from
such projections or expectations.
Investors should be aware of important factors that could cause actual results
to differ materially from the forward-looking projections or expectations. These
factors include, but are not limited to: the effects of strategic initiatives on
earnings and cash flow, changes in market conditions for barge transportation,
adverse weather and operating conditions on the inland waterways, changes in
economic conditions including interest rates and the value of the dollar versus
other currencies, and regulatory and court decisions. All of these factors are
difficult to predict and are generally beyond the control of the Company.
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 1998 the Company utilized the receivable from Parent to
redeem the $50 million First Preferred Ship Mortgage Bonds, due 2008. Capital
expenditures and dividends paid in the first half of 1998 were funded from cash
provided by operating activities and the receivable from Parent. The decline in
accounts payable from year-end 1997 reflects the absence of barge construction
payments as the next order for new barges will not commence until the third
quarter.
Total planned 1998 capital expenditures are estimated at $47 million, the
majority of which pertains to purchase commitments for new dry cargo barges.
Second half 1998 expenditures will be funded with cash provided from operating
activities and short-term borrowings from Parent, as well as cash provided by
expected new long-term debt financing. The Company currently expects to borrow
$75 million later in 1998 to refinance the called debt and to fund capital
expenditures for barges and other water transportation equipment during 1998 and
1999. The Company entered into treasury rate locks in order to hedge the
interest rate for the anticipated debt, as discussed in Note 2 of Notes to
Financial Statements.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed in the second quarter of 1998.
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SIGNATURE
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It is Midland's opinion that the financial information contained in this report
reflects all normal, recurring adjustments necessary to present a fair statement
of results for the periods reported; but such results are not necessarily
indicative of results to be expected for the year, due to the seasonal nature of
Midland's operations. All accounting policies have been applied in a manner
consistent with prior periods. Such financial information is subject to year end
adjustments and annual audit by independent public accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934, Midland has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MIDLAND ENTERPRISES INC.
BY: R. FAILLO
--------------------------
R. FAILLO
VICE PRESIDENT
FINANCE AND ADMINISTRATION;
PRINCIPAL FINANCIAL OFFICER
AND DULY AUTHORIZED OFFICER
DATE: JULY 24, 1998
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS AND THE CONSOLIDATED BALANCE SHEETS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 65
<SECURITIES> 0
<RECEIVABLES> 18,494
<ALLOWANCES> 665
<INVENTORY> 7,497
<CURRENT-ASSETS> 28,317
<PP&E> 664,262
<DEPRECIATION> 342,831
<TOTAL-ASSETS> 369,267
<CURRENT-LIABILITIES> 48,952
<BONDS> 81,461
0
0
<COMMON> 1
<OTHER-SE> 164,502
<TOTAL-LIABILITY-AND-EQUITY> 369,267
<SALES> 0
<TOTAL-REVENUES> 127,821
<CGS> 0
<TOTAL-COSTS> 99,052
<OTHER-EXPENSES> 13,730
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,432
<INCOME-PRETAX> 9,607
<INCOME-TAX> 3,475
<INCOME-CONTINUING> 6,132
<DISCONTINUED> 0
<EXTRAORDINARY> 1,362
<CHANGES> 0
<NET-INCOME> 7,494
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
