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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 March 31, 1998
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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.
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(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
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(000 OMITTED)
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FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
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<S> <C> <C>
REVENUES $ 62,658 $ 64,382
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OPERATING COSTS AND EXPENSES:
Operating expenses $ 43,159 $ 46,526
Depreciation and amortization 5,816 5,656
Selling, general & administrative expenses 3,134 2,506
Overhead allocation from Parent 750 725
Taxes, other than income 3,712 3,541
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$ 56,571 $ 58,954
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OPERATING EARNINGS $ 6,087 $ 5,428
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OTHER INCOME (EXPENSE):
Interest income from Parent $ 904 $ 1,017
Interest income other 20 10
Gain (Loss) on sale of assets
and other, net 95 (53)
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$ 1,019 $ 974
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INTEREST EXPENSE:
Long-term debt $ 3,302 $ 3,413
Other, including amortization of
debt expense 47 44
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$ 3,349 $ 3,457
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Earnings before income taxes $ 3,757 $ 2,945
Provision for Income taxes 1,369 819
-------- --------
Earnings before extraordinary item $ 2,388 $ 2,126
Extraordinary item, net of tax (1,465) -
-------- --------
NET EARNINGS $ 923 $ 2,126
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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2
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(000 OMITTED)
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MARCH 31, DEC. 31, MARCH 31,
1998 1997 1997
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<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,059 $ 88 $ 960
Receivables-
Trade, net 16,201 18,207 15,068
Parent - 66,945 73,663
Other 760 565 1,059
Materials, supplies & fuel 8,412 8,738 8,328
Prepaid expenses 1,302 1,722 1,086
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TOTAL CURRENT ASSETS $ 51,734 $ 96,265 $ 100,164
-------- -------- ---------
PROPERTY AND EQUIPMENT, AT COST $657,154 $640,966 $ 625,132
Less-accumulated depreciation 338,314 333,489 324,101
-------- -------- ---------
NET PROPERTY AND EQUIPMENT $318,840 $307,477 $ 301,031
-------- -------- ---------
OTHER ASSETS:
Deferred pension charges $ 14,520 $ 14,520 $ 13,845
Other 4,845 5,033 4,069
-------- -------- ---------
TOTAL OTHER ASSETS $ 19,365 $ 19,553 $ 17,914
-------- -------- ---------
TOTAL ASSETS $389,939 $423,295 $ 419,109
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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3
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(000 OMITTED)
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MARCH 31, DEC. 31, MARCH 31,
1998 1997 1997
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<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long - term debt $ 4,451 $ 4,351 $ 4,079
Accounts payable Parent 11,277 - -
Accounts payable trade 21,132 18,199 9,626
Reserve for insurance claims 11,990 11,980 13,289
Interest payable 4,238 3,944 6,839
Taxes payable 3,773 4,176 4,404
Accrued expenses 3,977 4,495 5,048
Other current liabilities 10,092 9,119 9,419
-------- -------- --------
TOTAL CURRENT LIABILITIES $ 70,930 $ 56,264 $ 52,704
-------- -------- --------
LONG-TERM DEBT $ 82,787 $132,142 $136,081
-------- -------- --------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes $ 58,915 $ 57,940 $ 56,099
Unamortized investment tax credits 2,407 2,515 2,870
Post-retirement health care 8,740 8,569 8,789
Coal miners retiree health care 3,250 3,300 3,450
Other reserves 2,171 2,057 2,298
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TOTAL RESERVES AND DEFERRED CREDITS $ 75,483 $ 74,381 $ 73,506
-------- -------- --------
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 108,219 107,988 104,298
-------- -------- --------
TOTAL STOCKHOLDER'S EQUITY $ 160,739 $160,508 $156,818
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 389,939 $423,295 $419,109
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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4
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(000 OMITTED)
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FOR THE THREE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 923 $ 2,126
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Extraordinary charge for early
retirement of debt, net of tax 1,465 -
Depreciation and amortization 5,816 5,656
Deferred and current income taxes 1,036 738
Net (gain) loss on sale of assets - 4
Other changes in assets and liabilities:
Trade and other receivables 2,006 2,165
Materials, supplies & fuel 326 (152)
Accounts payable 2,933 (1,598)
Accrued expenses and other current liabilities 1,084 3,063
Other 27 1,585
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 15,616 $ 13,587
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $(17,608) $ (907)
(Increase) decrease in Parent receivable 78,222 (9,800)
Proceeds from asset dispositions 566 722
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 61,180 $ (9,985)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt $(51,133) $ (1,139)
Cash dividends paid to Parent (692) (1,594)
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NET CASH USED BY FINANCING ACTIVITIES $(51,825) $ (2,733)
-------- ---------
Net increase in cash and cash equivalents $ 24,971 $ 869
Cash and cash equivalents at beginning of period 88 91
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Cash and cash equivalents at end of year period $ 25,059 $ 960
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 2,997 $ 620
Income taxes $ 332 $ 80
</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
MARCH 31, 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. 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) DEBT
In March 1998, the Company utilized the receivable from Parent to call $50
million of 9.9% 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.
Subsequent to March 31, 1998 the Company has entered into a treasury rate
lock in order to hedge the interest rate on long-term debt anticipated to be
issued in late 1998. The treasury rate lock is for $20 million at a 10-year
treasury rate of 5.617%. Upon issuance of the debt, any gain or loss realized
on the treasury rate lock will be amortized to interest expense over the term
of the related debt.
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6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Weak export grain and coal markets continued to place downward pressure on spot
and contract renewal rates, negatively affecting revenues as compared to a year
ago. In addition, most of the Company's multi-year contracts contain fuel price
adjustment mechanisms that, due to the decline in fuel prices since 1997,
lowered rates accordingly. These factors combined to reduce first quarter
revenues by 3% as compared to 1997. Offsetting the declines in revenues, were
reduced operating costs mostly from improved river conditions, as compared to
1997, and the lower fuel prices. As a result, first quarter operating earnings
increased 12% from 1997.
Thirty-year record flood levels in March of 1997 severely impacted operations on
the Ohio River and its tributaries and significantly increased operating costs.
Operating conditions in 1998 have been more seasonal in these areas. However, El
Nino related weather patterns have caused delays and flooding in the Company's
southeastern and gulf operations, impacting operating efficiencies and costs,
while also reducing winter heating related coal demand throughout the Midwest.
The Company's first quarter tonnage increased 9% over 1997, while related ton
miles declined 5%. Coal tonnage increased 19%, reflecting increased utility
demand from existing customers as well as new multi-year industrial coal
contracts. Weaker demand for export coal was partially offsetting. Coal ton
miles however, were unchanged from 1997 reflecting shorter average trip lengths.
Non-coal tonnage and ton miles declined 6% and 9%, respectively, as compared
with 1997, primarily reflecting market softness for grain exports and reduced
towing for other carriers.
As a result of the market and operating issues discussed above, earnings before
extraordinary item for the first quarter increased 12% over 1997.
In March 1998, the Company recognized an extraordinary loss of $2.3 million
pretax or $1.5 million net, on the early extinguishment of $50 million of First
Preferred Ship Mortgage Bonds due 2008. This resulted in first quarter net
earnings after the extraordinary item of $.9 million. (See Note 2 of Notes to
Financial Statements).
In March 1998, a newly formed labor union called "Pilots Agree" called for a
work stoppage for captains and pilots of all river towboats throughout the
industry. The pilots and captains employed by the Company's subsidiaries are
members of management and are not represented by any labor organization. The
called industry work stoppage has had little impact on the Company's vessel
operations thus far and management does not expect it to interfere materially
with future operations.
OTHER
In March 1998, the United States Supreme Court heard oral arguments by Midland's
parent, Eastern Enterprises in its challenge to the constitutionality of the
Coal Industry Retiree Health Benefit Act of 1992. The Supreme Court's ruling is
expected by June 30, 1998.
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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, regulatory and court decisions, and developments with respect
to the Company's previously-disclosed Coal Act liabilities. All of these factors
are difficult to predict and are generally beyond the control of the Company.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Note 2, in March 1998, the Company utilized the receivable from
Parent to call the $50 million First Preferred Ship Mortgage Bonds, due 2008.
The increases in cash and cash equivalents and the accounts payable-parent
reflect short term balances in highly liquid investment instruments at March 31,
1998 which will be advanced to parent in the second quarter. Increases in
accounts payable trade mainly reflects in process payments and liabilities owed
to vendors for barges delivered or under construction as compared to first
quarter 1997 which had no such activity.
Capital expenditures and dividends paid in the first quarter of 1998 were funded
from cash provided by operating activities and the utilization of receivable
from Parent. Planned 1998 capital expenditures are estimated at $48 million, the
majority of which pertains to purchase commitments for new dry cargo barges.
These purchases will be funded with cash provided from operating activities, as
well as from new long-term debt financing. In this regard, the Company currently
expects to borrow up to $75 million later in 1998 and has entered into a
treasury rate lock in order to hedge the interest rate for $20 million of the
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 first quarter of 1998.
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SIGNATURE
It is Midland's opinion that the financial information contained in this
report reflects all normal, recurring adjustments necessary for a fair
statement of results for the period 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
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R. FAILLO
VICE PRESIDENT
FINANCE AND TREASURER;
PRINCIPAL FINANCIAL OFFICER
DATE: APRIL 24, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 59
<SECURITIES> 25,000
<RECEIVABLES> 17,626
<ALLOWANCES> 665
<INVENTORY> 0
<CURRENT-ASSETS> 51,734
<PP&E> 657,154
<DEPRECIATION> 338,314
<TOTAL-ASSETS> 389,939
<CURRENT-LIABILITIES> 70,930
<BONDS> 82,787
0
0
<COMMON> 1
<OTHER-SE> 160,738
<TOTAL-LIABILITY-AND-EQUITY> 389,939
<SALES> 0
<TOTAL-REVENUES> 62,658
<CGS> 0
<TOTAL-COSTS> 52,503
<OTHER-EXPENSES> 3,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,349
<INCOME-PRETAX> 3,757
<INCOME-TAX> 1,369
<INCOME-CONTINUING> 2,388
<DISCONTINUED> 0
<EXTRAORDINARY> (1,465)
<CHANGES> 0
<NET-INCOME> 923
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
