<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1998
---------------------------------------------
[ ] 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
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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 OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 Pike Street; Cincinnati, Ohio 45202
--------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code 513-721-4000
--------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
WHICH REGISTERED
------------------------------- ------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
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(TITLE OF CLASS)
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. [X]
STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT. (THE AGGREGATE MARKET VALUE SHALL BE
COMPUTED BY REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE
AVERAGE BID AND ASKED PRICES OF SUCH STOCK, AS OF A SPECIFIED DATE
WITHIN 60 DAYS PRIOR TO THE DATE OF FILING.)
Not Applicable
-----------------------------------------------------------------------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE (APPLICABLE
ONLY TO CORPORATE REGISTRANTS).
March 8, 1999 - 15-1/2 Shares
-----------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE: LIST THE FOLLOWING DOCUMENTS IF
INCORPORATED BY REFERENCE AND THE PART OF THE FORM 10-K INTO WHICH THE
DOCUMENT IS INCORPORATED: (1) ANY ANNUAL REPORT TO SECURITY HOLDERS;
(2) ANY PROXY OR INFORMATION STATEMENT; AND (3) ANY PROSPECTUS FILED
PURSUANT TO RULE 424(b) OR (c) UNDER THE SECURITIES ACT OF 1933. (THE
LISTED DOCUMENTS SHOULD BE CLEARLY DESCRIBED FOR IDENTIFICATION
PURPOSES.)
The Registrant meets the conditions set forth in General Instruction J
(1) (a) and (b) of Form 10-K and is therefore filing this Form 10-K
with the reduced disclosure format.
<PAGE> 2
PART I
ITEM 1. BUSINESS
(a) GENERAL
Midland Enterprises Inc. (the "Registrant"), incorporated under the laws of the
State of Delaware in 1961, is a wholly-owned subsidiary of Eastern Enterprises
("Eastern") of Weston, Massachusetts. The Registrant is primarily engaged,
through wholly-owned subsidiaries, in the operation of a fleet of towboats,
tugboats and barges, principally on the Ohio and Mississippi Rivers and their
tributaries, the Gulf Intracoastal Waterway and in the Gulf of Mexico. The
Registrant's barge line subsidiaries transport bulk commodities, a major portion
of which is coal. The Registrant, through other subsidiaries, also performs
repair work on marine equipment, operates coal dumping terminals and a phosphate
rock and phosphate chemical fertilizer terminal, and provides refueling and
barge fleeting services.
Substantially all of the barges, towboats and tugboats operated by the
Registrant's barge line subsidiaries are owned by and chartered from the
Registrant. Approximately half of the Registrant's barges are mortgaged or
leased and the payments under related charter agreements with its subsidiaries
are pledged to secure associated long-term debt.
The Registrant's barge line subsidiaries are The Ohio River Company ("ORCO"),
Orgulf Transport Co. ("Orgulf"), Red Circle Transport Co. ("Red Circle"), and
Orsouth Transport Co.("Orsouth"). The Registrant's other principal subsidiaries,
all of whose outstanding stock is owned by the Registrant, are Eastern
Associated Terminals Company ("EATCO"), Hartley Marine Corp. ("Hartley"), The
Ohio River Terminals Company ("ORTCO") and Capital Marine Supply, Inc. ("Capital
Marine").
(b) INDUSTRY SEGMENTS
The Registrant's only reportable industry segment is barge transportation.
(c) (1) (i) PRINCIPAL SERVICES AND MARKETS
ORCO is the largest of the Registrant's subsidiaries, accounting for 58% of the
Registrant's total 1998 tonnage transported. ORCO operates principally on the
Ohio River and certain of its tributaries. The principal commodity transported
by ORCO is coal, primarily for electric utilities. Grain, stone, sand, gravel,
iron, steel, scrap, and coke are the other groups of commodities that ORCO
carries in significant amounts. ORCO leases office facilities in Cincinnati,
Ohio.
Orgulf operates principally on the Mississippi and Ohio Rivers, and the Illinois
Waterway, transporting principally coal, primarily for electric utilities, and
grain. Stone, gravel, scrap, steel, coke and ores constitute the other
significant commodities transported.
Orsouth operates principally on the Tennessee-Tombigbee and Gulf Intracoastal
Waterways, and on the Black Warrior and Mississippi Rivers, transporting
principally coal and ores.
Red Circle is engaged primarily in the offshore transportation of phosphate rock
in the Gulf of Mexico and grain from Louisiana to Puerto Rico. EATCO operates a
terminal on leased land at Tampa, Florida. Hartley operates shipyard facilities
at Paducah, Kentucky, sells fuel at Point Pleasant, West Virginia, and provides
towing services principally on the Ohio River and its tributaries. ORTCO owns
and operates a coal dumping facility in Huntington, West Virginia. Capital
Marine leases and operates several barge fleeting facilities near New Orleans,
Louisiana and provides various port services on the Mississippi River.
1
<PAGE> 3
Tonnage transported by the Registrant's subsidiaries was 59.9 million in 1998,
57.0 million in 1997 and 65.5 million in 1996. Tonnage in 1998 was 5% over 1997
as a result of increased shipments by contract coal customers and new aggregate
business acquired in 1998, partly offset by lower grain and export coal demand.
Tonnage in 1997 declined 13% from 1996 primarily as a result of the non-renewal
of several multi-year utility coal contracts, unplanned plant outages for
several customer accounts, and lower demand from export coal and grain markets.
The following table summarizes the ton miles of cargo transported by the
Registrant's subsidiaries for the period 1996 - 1998:
<TABLE>
<CAPTION>
Ton miles Transported (in billions)
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Coal............................. 13.2 13.6 15.7
Grain............................ 3.7 4.5 4.8
Other*........................... 15.2 15.0 15.6
---- ---- ----
Total Ton miles.................. 32.1 33.1 36.1
==== ==== ====
</TABLE>
* Other includes sand, stone, gravel, iron, scrap, steel, coke, phosphate,
towing for others, and other dry cargo.
Ton miles are the product of tons and distance transported. In 1998, ton miles
declined 3% primarily due to an 8% decline in the average length of haul,
resulting from lower demand for coal and grain exports. In 1997, ton miles
declined 8% due to the lower tonnage, as discussed above, partially offset by
longer average hauls, particularly for coal. In addition to changes in ton miles
transported, Registrant's revenues and net earnings are affected by other
factors such as competitive conditions, weather, and the segment of the river
system traveled. In 1997 and again in 1998, river navigation was significantly
affected by weather conditions. In 1998, multiple tropical storms, flooding, and
lock delays affected operations while record flooding, ice and lock repairs
slowed production and reduced tonnage levels in 1997. See "Seasonality and
Competition".
(c) (1) (ii) STATUS OF PRODUCT OR SEGMENT
No significant new product, service or segment requiring a material amount of
assets was developed.
(c) (1) (iii) RAW MATERIALS
The only significant raw material required by the Registrant is the diesel fuel
to operate towboats. Diesel fuel is purchased from a variety of sources and the
Registrant regards the availability of diesel fuel as adequate for presently
planned operations.
(c) (1) (v) SEASONALITY
Due to the freezing of some northern rivers and waterways during winter months,
increased coal consumption by electric utilities during the summer months, and
the fall harvest of grain, winter month revenues tend to be lower than revenues
for the remainder of the year.
(c) (1) (vi) WORKING CAPITAL
No unusual working capital requirements are normally encountered.
2
<PAGE> 4
(c) (1) (vii) CUSTOMERS
In 1998, the Cincinnati Gas and Electric Company., a subsidiary of Cinergy Corp.
and the combined revenues from Gulf Power Company and Mississippi Power Company,
subsidiaries of The Southern Company, each accounted for more than 10% of the
Registrant's consolidated revenues under multi-year coal transportation
agreements. In 1997, only one customer, The Cincinnati Gas and Electric
Company., accounted for approximately 10% of the Registrant's consolidated
revenues. No other customer, or group of customers under common control,
accounted for more than 10% of revenues in 1998, 1997 or 1996. On the basis of
past experience and its competitive position, the Registrant considers that the
loss of several of its subsidiaries' largest customers simultaneously, while
possible, is unlikely to happen. The Registrant's subsidiaries have multi-year
transportation and terminalling contracts that expire at various dates from
March 2000 through December 2007. During 1998, approximately 48% of the
Registrant's consolidated revenues resulted from these contracts. A substantial
portion of the contracts provide for rate adjustments based on changes in
various costs, including diesel fuel costs, and, additionally, contain "force
majeure" clauses which excuse performance by the parties to the contracts when
performance is prevented by circumstances beyond their reasonable control. Some
of these contracts have provisions for termination for specified causes, such as
material breach of the contract, environmental restrictions on the burning of
coal, or loss by the customer of an underlying commodity supply contract.
Penalties for termination for such causes are not generally specified. However,
some contracts provide that in the event of an uncured material breach by
Registrant's subsidiary, which results in termination of the contract,
Registrant's subsidiary would be responsible for reimbursing its customer for
the differential between the contract price and the cost of substituted
performance.
(c) (1) (viii) BACKLOG
The backlog of transportation and terminalling business under multi-year
contracts is summarized in the next table:
<TABLE>
<CAPTION>
December 31, 1998 1997
------ ------
<S> <C> <C>
Tons (in millions) 128.4 123.2
Revenues (in millions) $496.6 $412.1
Portions of revenue backlog not expected to be filled
within the current fiscal year 74% 66%
</TABLE>
The 1998 revenue backlog (which is based on contracts that extend beyond
December 31, 1999) is shown at prices current as of December 31, 1998, which are
subject to escalation/de-escalation provisions. Since services under many of the
multi-year contracts are based on customer requirements, Registrant has
estimated its backlog based on its forecast of the requirements of these
contract customers. The 4% increase in tonnage backlog from 1997 mainly reflects
new multi-year agreements entered into by the Registrant's subsidiaries, in
addition to extended terms on current multi-year contracts. Partially offsetting
these increases are declines reflecting the elapsing terms of other current
contracts as they draw closer to maturity, including those excluded from the
calculation as they enter their final year. The 21% increase in revenue backlog
is mainly due to the mix change of the forecasted backlog tonnage, as longer
haul commodities generally are higher rated. The increased backlog tonnage was
also a factor. Electric utilities, which traditionally have entered into
multi-year transportation and coal supply agreements, have shortened the term of
some agreements for a variety of reasons including the Clean Air Act
requirements and the trend towards deregulation of the electric power industry.
These factors have also led to changes in the sourcing of coal by utilities,
leading to changes in traffic patterns.
(c) (1) (ix) GOVERNMENT CONTRACTS
The Registrant has no material portion of business subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
Government.
3
<PAGE> 5
(c) (1) (x) COMPETITION
The Registrant's inland marine transportation business competes on the basis of
price, service and equipment availability. The Registrant's primary competitors
include other barge lines and railroads. There are a number of companies
offering barge transportation services on the waterways served by the
Registrant. Competition between barge lines intensifies as barge supply exceeds
demand. During the past few years, barge supply has increased as the barge
industry has built more barges than it has retired. Partially offsetting has
been the poor operating conditions due to weather and lock delays which consume
barge days and have offset some the additional capacity. In addition, the
strength of the U.S. dollar and weak foreign economies have reduced demand for
U.S. exports of coal and grain in 1997 and 1998. As a result of these factors
and lower fuel costs in 1998, market rates have fallen as competition has
intensified.
Improvements in operating efficiencies have permitted barge operators to
maintain relatively low rate structures. Consequently, the barge industry has
generally been able to retain its competitive position with alternative methods
of transportation for bulk commodities when the origin and destination of such
movements are contiguous to navigable waterways.
Many railroads operating in areas served by the inland waterways compete for
cargoes carried by river barges. In many cases, these railroads offer unit train
service (pursuant to which an entire train is committed to the customer) and
dedicated equipment service (pursuant to which equipment is set aside for the
exclusive use of a particular customer) for coal, grain and other bulk
commodities. In addition, rates charged by both railroads and river barge
operators are sometimes designed to reflect special circumstances and
requirements of the individual shippers. As a result, it is difficult to compare
rates charged for movements of the various commodities between specific points.
Towboats, such as those which comprise the Registrant's fleet, are capable of
moving in one tow (barge configuration) approximately 22,500 tons of cargo
(equivalent to 225 one hundred-ton capacity railroad cars) on the Ohio River and
on the upper Mississippi River and approximately 60,000 tons (equivalent to 600
one hundred-ton capacity railroad cars) on the lower Mississippi River, where
there are no locks to transit. Barge costs per ton mile are generally below
those of railroads.
(c) (1) (xi) RESEARCH
No significant amount was spent during the last fiscal year on research to
improve existing services or develop new services. The task of improving and
developing services is a continuing assignment of various operating departments
of Registrant's subsidiaries, but such efforts are not segregated and would not
generally be regarded as research activities.
(c) (1) (xii) COMPLIANCE WITH ENVIRONMENTAL STATUTES
The Registrant and/or its subsidiaries are subject to the provisions of the
Federal Water Pollution Control Act, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, the Superfund Amendment and
Reauthorization Act, the Resource Conservation and Recovery Act of 1976, and the
Oil Pollution Act of 1990, which permit the Coast Guard and the Environmental
Protection Agency to assess penalties and clean-up costs for oil, hazardous
substance, and hazardous waste discharges. Some of these acts also allow third
parties to seek damages for losses caused by such discharges. Compliance with
these acts has had no material effect on the Registrant's capital expenditures,
earnings, or competitive position; and no such effect is anticipated.
(c) (1) (xiii) EMPLOYEES
As of December 31, 1998, the Registrant and its subsidiaries employed
approximately 1,300 persons, of whom approximately 29% are represented by labor
unions. One of the Registrant's collective bargaining agreements, covering
approximately 100 employees, expires in 1999.
4
<PAGE> 6
(d) FOREIGN OPERATIONS
The Registrant does not engage in material operations in foreign countries, and
no material portion of Registrant's revenues is derived from customers in
foreign countries.
ITEM 2. PROPERTIES
(a) As of December 31, 1998, the Registrant's floating equipment consisted
of 2,414 barges and 87 boats. See "Principal Services and Markets" for
other owned or leased properties.
Capital expenditures for the Registrant in 1998 totaled approximately
$47 million. These expenditures were made principally for the purchase
of new barges and for renewal of equipment.
(b) Not applicable.
ITEM 3. LEGAL PROCEEDINGS
Information with respect to certain legal proceedings may be found in Note 10 of
Notes to Consolidated Financial Statements. Such information is incorporated
herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The Registrant's common stock is held solely by Eastern and is not traded in any
market. Dividends were declared in the amount of $7,391,409 in 1998 and
$12,467,373 in 1997.
The payment of dividends is subject to the restrictions described in Note 3 of
Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
Not required. Reference Management Narrative Analysis following Item 7. The
Registrant meets the conditions set forth in General Instruction J (1) (a) and
(b) of Form 10-K and is therefore filing this Form with the reduced disclosure
format.
5
<PAGE> 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
1998 COMPARED TO 1997
As a result of slightly lower ton mile production and a weaker rate environment,
revenues in 1998 declined $8.1 million or 3%. A strong U.S. dollar and economic
problems in Asia combined to significantly reduce export grain and coal demand
while a slowing steel sector in the U.S. placed additional downward pressure on
spot and renewing contract rates. Declining fuel prices decreased rates on
multi-year contracts containing fuel price adjustment clauses, although
partially compensating was the favorable impact on operating costs. Despite the
warm winter in 1998, significantly higher shipments of coal under multi-year
contracts for utility and industrial accounts offset much of these revenue
reductions.
Tonnage transported in 1998 increased 5% over 1997, while ton miles declined 3%,
reflecting the reduced long haul import/export tonnage. Consequently, the
average length of haul declined 8% in 1998. Total coal tonnage increased 8%,
with coal tonnage shipped under multi-year contracts to utility customers
increasing 12%. Coal ton miles declined 3%, however, due to the decline in long
haul export and spot coal shipments. Non-coal tonnage increased 1%, while
related ton miles were off 4% from 1997, as reduced export grain, scrap and
steel shipments were offset with more local movements of aggregates and coke.
For the second straight year, extreme weather conditions significantly increased
operating costs and negatively impacted productivity. While 1997 experienced
record spring flooding on the Ohio River, multiple tropical storms and
hurricanes in the southeastern U.S. continually disrupted nearby inland and Gulf
of Mexico operations in 1998. In addition, the Ohio Valley experienced extended
periods of low water conditions, resulting in prolonged lock delays and mandated
traffic restrictions. These operating difficulties, in addition to changes in
traffic patterns from the reduced export demand, lowered fleet productivity and
materially increased operating expenses. Lower fuel prices, which dropped 23% in
1998, were partially offset by rising labor costs and higher vessel maintenance
expense. Increased depreciation and taxes mainly reflect new barge purchases,
while increased compensation and technology costs resulted in higher
administrative expenses. Reflecting the above operating and market issues,
operating earnings declined $8.0 million as compared to 1997. Earnings before
extraordinary items declined $5.3 million from 1997 reflecting the lower
operating earnings discussed above, partly offset by lower net interest expense.
In March 1998, the Registrant 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 Benefit Act of 1992 ("Coal Act") as applied to Eastern.
Consequently, as discussed in Note 10 to Financial Statements, the Registrant
reversed its Coal Act reserve resulting in an extraordinary gain of $4.3 million
pre-tax or $2.8 million net of tax, in the second quarter of 1998.
Net earnings as a result of the extraordinary items and the operating and market
issues as discussed above, declined $3.9 million as compared to 1997.
1997 COMPARED TO 1996
Revenues in 1997 decreased 11% due to weak demand from export coal and grain,
lower contractual requirements for utility and industrial coal customers, and
fewer barges. Weak demand depressed spot rates on nearly all commodities and
traffic patterns were disrupted, reducing operational efficiency. Operating
conditions in 1997 were worse than those experienced in 1996, as navigation was
negatively impacted by record flooding on the Ohio River early in the year, and
later by long traffic delays related to repairs to various key locks throughout
the river system. These uncontrollable events resulted in higher operating costs
and lower fleet productivity than in 1996. Also, as a result of the weaker
markets, the Registrant slowed its fleet replacement program and did not renew
expiring charters of outside barges. These decisions, in addition to production
delays which postponed the delivery of new barges expected in the latter part of
1997, reduced the size of the Registrant's barge fleet.
6
<PAGE> 8
Tonnage and ton miles decreased 13% and 8%, respectively, reflecting the weak
market and operational issues discussed previously, although a change in
business mix and customer sourcing resulted in 5% longer average hauls. Coal
tonnage and ton miles declined 17% and 14%, respectively, from the record levels
of 1996, while non-coal tonnage decreased 5% with related ton miles down 4% from
1996. Domestic coal volume, primarily for electric utilities, declined due to
the non-renewal of several multi-year contracts, unplanned plant outages and
milder temperatures. Export coal demand weakened as the strong U.S. dollar
effectively raised the prices of domestic supplies higher than those of foreign
competitors. Despite an ample grain harvest, the anticipated surge in
transportation volume and pricing for grain exports was short lived, as much of
the harvest was put in storage due to weak demand and the relative strength of
the U.S. dollar.
Ongoing improvement programs to lower vessel operating costs and administrative
expenses partially offset the higher operating costs discussed above. Operating
levels at the Registrant's terminals were also lower, reflecting the reduced
demand for coal transportation. As a result of the adverse market and
operational issues discussed above, operating earnings decreased by $23.8
million from 1996.
In 1997, net interest expense decreased by $.8 million due mainly to lower
long-term debt balances and reduced debt premiums.
The combination of the items as discussed above decreased net earnings by $14.0
million as compared to 1996.
YEAR 2000 ISSUES
STATE OF READINESS
The Registrant has assessed the impact of the year 2000 issue with respect to
its Information Technology ("IT") systems and non-IT (embedded chip technology)
issues as well as the Registrant's exposure to significant third party risks.
Accordingly, the Registrant has completed substantial elements of an
enterprise-wide project plan to replace or modify existing systems and
technology as required. To help assure itself that its major customers and
critical vendors are also addressing these issues, the Registrant is actively
seeking written confirmation of third party readiness.
With respect to IT systems, the Registrant has accomplished a significant
portion of its project plan. The Registrant has purchased and is operating a
year 2000 compliant mainframe computer and has since tested, modified or
replaced where appropriate, substantially all mainframe-based "mission critical"
programs including the Registrant's core applications for traffic & dispatch,
customer information and most financial systems. The Registrant has also
identified all server and personal computer based programs and hardware possibly
impacted. Replacement or modifications have been completed for substantially all
of these systems except Accounts Receivable and several administrative systems,
which are scheduled for completion by mid-1999.
With respect to non-IT systems, the Registrant's major operating assets and
their sub-systems were reviewed for embedded chip technology. Based on this
review and actions taken, management believes year 2000 issues in regard to
internal chip technology will not impair its operating assets.
COST OF YEAR 2000 ISSUES
The Registrant expects that the cost of year 2000 compliance will approximate
$2.1 million as detailed in the following chart. This includes the cost of
purchased software and hardware, consulting, as well as internal staff deployed
to this project. Based on management's current estimates, the future costs are
expected to be substantially complete by the end of the second quarter of 1999.
<TABLE>
<CAPTION>
($ Millions) Cost to Date Expected Future Cost
- ------------------------------------------------------------------------
<S> <C> <C>
Capital $0.9 $0.3
Expense $0.7 $0.2
</TABLE>
7
<PAGE> 9
RISK OF YEAR 2000 ISSUES
The Registrant has assessed the most reasonable likely worst case year 2000
scenario. Given the Registrant's efforts to minimize the risk of internal year
2000 issues, the Registrant believes its most reasonably likely worst case
scenario would involve infrastructure disruption through failure of third party
services. These could include, without limit: lock and dam operations, rail
services for river served docks and terminals, telecommunications, electricity
and banking services. Major delays to river traffic and customers could result
in the loss of Registrant revenues dependent on their duration. In such
instances, the Registrant would have to enact disaster recovery plans, use
alternate service providers and seek other routes of navigation to the extent
possible.
REGISTRANT'S CONTINGENCY PLAN
The Registrant is in the process of preparing a contingency plan, which it
expects to complete by June 30, 1999. Toward this effort, the Registrant has
assessed third party risk with a plan intended to assure critical suppliers,
services and customers are actively working on or have achieved year 2000
compliance. The Registrant has identified its critical areas of third party risk
to include providers of telecommunications and electricity services, rail
services to river served docks, diesel fuel to power towboats, banking services
to execute business transactions and river navigation through the operation of
locks and dams. The Registrant is actively seeking written confirmation from
these service providers and others as to their year 2000 readiness. Most written
and verbal responses received thus far describe programs in place that are near
completion or ongoing with projected completion dates by the first half of 1999.
Many third parties, while confident of their programs, do not make 100%
guarantees or assurances.
To the extent the Registrant believes that any supplier of its critical goods or
services poses significant risk of year 2000 failure, the Registrant expects to
locate backup providers by the end of the third quarter 1999 to help assure
continuity of supply.
Management is continuing its pursuit of these issues and assessing risk and
alternatives as required and believes its actions and planning efforts are
appropriate to address its year 2000 concerns. However, management cannot
guarantee that such actions will prevent all or any year 2000 issue disruptions
to the business, its customers or suppliers. The Registrant cautions that
forward looking statements contained in the year 2000 discussion should be read
in conjunction with the Registrant's disclosure statement regarding such
information.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was impacted by lower cash operating
earnings and reduced accounts payable reflecting settlement of barge purchase
liabilities at December 31, 1997, partly offset by lower material and supplies
inventories.
Capital expenditures of $47 million, debt payments, and dividends paid to Parent
were funded from cash provided from operating activities, the receivable from
parent and the issuance of new debt in 1998. The majority of capital
expenditures pertain to the purchase of new dry cargo barges.
Capital expenditures for 1999 are budgeted at approximately $42 million, the
majority of which pertain to purchase commitments for new hopper barges for
delivery during 1999.
In the first quarter of 1998, the Company utilized the receivable from parent to
redeem the $50 million of 9.9% First Preferred Ship Mortgage Bonds due October
1, 2008. As discussed in Note 3 of Notes to Financial Statements, the proceeds
from the bonds, net of a .69% discount and payment of interest rate hedge costs,
were $68.5 million. The proceeds were advanced to Parent, and will be used to
fund current and future capital expenditures for barges and other water
transportation equipment.
8
<PAGE> 10
FORWARD-LOOKING INFORMATION
This report and other Registrant 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
Registrant 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, the timetable
for and cost to complete the Registrant's year 2000 plans, the impact of third
parties' year 2000 issues, changes in economic conditions including interest
rates and the value of the dollar versus other currencies, changes in fuel
prices, and regulatory and court decisions. All of these factors are difficult
to predict and are generally beyond the control of the Registrant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item appears on page F-1 of this report. Such
information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Not required.
ITEM 11. EXECUTIVE COMPENSATION
Not required.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not required.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not required.
9
<PAGE> 11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) List of Financial Statements and Financial Statement
Schedules.
Information with respect to these items appears on page F-1 of this report. Such
information is incorporated herein by reference.
(3) LIST OF EXHIBITS
3.1 Certificate of Incorporation of Midland Enterprises Inc.
(filed as Exhibit 3.1 to Registration Statement of Midland
Enterprises Inc. on Form S-1 Registration No. 2-39895, as
filed May 5, 1971).(1)
3.2 By-Laws of Midland Enterprises Inc. (filed as Exhibit 3.2 to
Annual Report of Midland Enterprises Inc. on Form 10-K for the
year ended December 31, 1984).(1)
4.1 Indenture between Midland Enterprises Inc. and State Street
Bank and Trust Company dated as of April 2, 1990 (filed as
Exhibit 4.2 to Registration Statement No. 33-32120).(1)
4.2 Indenture between Midland Enterprises Inc. and The Chase
Manhattan Bank dated as of September 29, 1998 (filed as
Exhibit 4.2 to Registration Statement No. 333-61137).(1)
(NOTE: The Registrant agrees to furnish to the Securities and
Exchange Commission upon request a copy of any instrument with
respect to any long-term debt of the Registrant.)
- ------------------
(1) Not filed herewith. In accordance with Rule 12-b-32 of the General Rules and
Regulations under the Securities Act of 1934, reference is made to the document
previously filed with the Commission.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed in the fourth quarter of 1998.
10
<PAGE> 12
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.
MIDLAND ENTERPRISES INC.
(Registrant)
By: R. Faillo
---------------
R. Faillo
Vice President, Finance and Treasurer
(Principal Financial and Accounting Officer)
Date March 8, 1999
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 indicated on the 8th day of March, 1999.
<TABLE>
<CAPTION>
<S> <C>
By: J. M. Cook By: R. L. Doettling
------------------- ------------------------
J. M. Cook R. L. Doettling
President; Director Senior Vice President, Transportation Services ;
(Principal Executive Officer) Director
By: P. E. Hubbard By: S. A. Frasher
------------------- ------------------------
P. E. Hubbard S. A. Frasher
Senior Vice President, Sales Senior Vice President, Operations;
and Marketing; Director Director
By: W. J. Flaherty
-------------------
W. J. Flaherty
Senior Vice President and Chief
Financial Officer - Eastern Enterprises, Inc.;
Director
</TABLE>
Supplemental information to be furnished with reports filed pursuant to Section
15 (3) of the Act by Registrants Which Have Not Registered Securities Pursuant
to Section 12 of the Act.
No annual reports to security holders covering the Registrant's last fiscal year
nor any proxy materials have been sent to the Registrant's security holders.
11
<PAGE> 13
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
(Information Required by Items 8 and 14 (a) (1) and (2) of Form 10-K)
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS:
Consolidated Statements of Earnings for the years
ended December 31, 1998, 1997 and 1996 F-3
Consolidated Balance Sheets -- December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholder's Equity for
the years ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
SCHEDULE:
II Valuation and Qualifying Accounts and Reserves F-19
</TABLE>
Schedules other than that listed above have been omitted as the information has
been included in the consolidated financial statements and related notes, or is
not applicable or not required.
F-1
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Midland Enterprises Inc.:
We have audited the accompanying consolidated balance sheets of MIDLAND
ENTERPRISES INC. (a Delaware corporation and a wholly-owned subsidiary of
Eastern Enterprises) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, stockholder's equity and cash flows
for each of the three years in the period ended December 31, 1998. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Midland Enterprises Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a required part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
January 20, 1999
F-2
<PAGE> 15
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(000 Omitted)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
REVENUES (NOTE 1) $261,061 $269,259 $301,880
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Operating expenses $180,851 $183,929 $189,357
Depreciation and amortization (Note 5) 23,838 22,675 22,554
Selling, general and administrative
expenses 12,311 11,337 12,329
Overhead allocation from Parent (Note 1) 3,000 2,900 2,549
Taxes, other than income 14,427 13,805 16,676
-------- -------- --------
$234,427 $234,646 $243,465
-------- -------- --------
OPERATING EARNINGS $ 26,634 $ 34,613 $ 58,415
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income from Parent, net (Note 1) $ 1,688 $ 4,242 $ 3,483
Interest income other 63 73 978
Gain (loss) on sale of assets and
other, net 271 (84) 2
-------- -------- --------
$ 2,022 $ 4,231 $ 4,463
-------- -------- --------
INTEREST EXPENSE:
Long-term debt (Note 3) $ 10,612 $ 13,530 $ 14,043
Other, including amortization of
debt expense 189 227 672
-------- -------- --------
$ 10,801 $ 13,757 $ 14,715
-------- -------- --------
EARNINGS BEFORE INCOME TAXES $ 17,855 $ 25,087 $ 48,163
Provision for income taxes (Note 4) 6,534 8,464 17,566
-------- -------- --------
EARNINGS BEFORE EXTRAORDINARY ITEMS $ 11,321 $ 16,623 $ 30,597
EXTRAORDINARY ITEMS, NET OF TAX:
Credit for coal miners retiree
health care (Note 10) $ 2,827 $ - $ -
Loss on early retirement of debt (Note 3) (1,465) - -
-------- -------- --------
Net earnings $ 12,683 $ 16,623 $ 30,597
======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE> 16
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
(000 Omitted)
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 86 $ 88
Receivables:
Trade, less allowance of $669,000
in 1998 and $665,000 in 1997 17,765 17,735
Parent (Notes 1 and 3) 56,572 66,945
Other 2,965 1,037
Materials, supplies and fuel (Note 1) 6,940 8,738
Prepaid expenses 1,866 1,722
-------- --------
TOTAL CURRENT ASSETS $ 86,194 $ 96,265
-------- --------
PROPERTY AND EQUIPMENT, AT COST (NOTES 3 AND 5):
Towboats and barges $628,939 $590,100
Terminals and other facilities 45,344 46,139
Land 4,731 4,727
-------- --------
Total property and equipment, at cost $679,014 $640,966
Less - accumulated depreciation 350,015 333,489
-------- --------
NET PROPERTY AND EQUIPMENT $328,999 $307,477
-------- --------
OTHER ASSETS:
Deferred pension charges (Note 7) $ 15,198 $ 14,520
Unamortized debt expense, deferred
maintenance and other (Notes 1 and 5) 5,857 5,033
-------- --------
TOTAL OTHER ASSETS $ 21,055 $ 19,553
-------- --------
TOTAL ASSETS $436,248 $423,295
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE> 17
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
(000 Omitted)
1998 1997
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3) $ 4,742 $ 4,351
Accounts payable 11,204 18,199
Reserve for insurance claims (Note 1) 10,739 11,980
Accrued expenses 4,080 4,495
Interest payable 3,755 3,944
Other taxes payable 3,431 3,221
Income taxes payable (Note 4) 232 955
Other current liabilities 7,448 9,119
-------- --------
TOTAL CURRENT LIABILITIES $ 45,631 $ 56,264
LONG-TERM DEBT (NOTE 3) $147,448 $132,142
-------- --------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes (Note 4) $ 64,012 $ 57,940
Unamortized investment tax credits (Note 4) 2,116 2,515
Postretirement health care (Note 7) 9,058 8,569
Coal miners retiree health care (Note 10) 0 3,300
Other reserves 1,981 2,057
-------- --------
Total reserves and deferred credits $ 77,167 $ 74,381
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 10)
STOCKHOLDER'S EQUITY (NOTE 3):
Common stock, $100 par value -
Authorized shares - 1,000
Issued shares -15 1/2 $ 1 $ 1
Capital in excess of par value 52,519 52,519
Retained earnings 113,482 107,785
Accumulated other comprehensive earnings 0 203
-------- --------
TOTAL STOCKHOLDER'S EQUITY $166,002 $160,508
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $436,248 $423,295
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE> 18
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(000 OMITTED EXCEPT SHARES OUTSTANDING)
<TABLE>
<CAPTION>
Capital in Accumulated Other Total
Common Stock Excess of Retained Comprehensive Stockholder's
Outstanding Par Value Earnings Income Equity
--------------------- ----------- -------- ---------------- ------------
Shares Amount
--------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995: 15.5 $ 1 $ 52,519 $ 96,386 $ - $148,906
Net earnings 30,597
Pension liability adjustment, net (268)
Total comprehensive income 30,329
Dividends to Parent (22,948) (22,948)
--------- -------- ----------- -------- ------ ---------
BALANCE DECEMBER 31, 1996: 15.5 $ 1 $ 52,519 $104,035 $(268) $156,287
Net earnings 16,623
Pension liability adjustment, net 65
Total comprehensive income 16,688
Dividends to Parent (12,467) (12,467)
--------- -------- ----------- -------- ------ ---------
BALANCE DECEMBER 31, 1997: 15.5 $ 1 $ 52,519 $108,191 $(203) $160,508
Net earnings 12,683
Pension liability adjustment, net 203
Total comprehensive income 12,886
Dividends to Parent (7,392) (7,392)
--------- -------- ----------- -------- ------ --------
BALANCE DECEMBER 31, 1998: 15.5 $ 1 $ 52,519 $113,482 $ - $166,002
========= ======== =========== ======== ====== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE> 19
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(000 Omitted)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 12,683 $ 16,623 $ 30,597
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary items, net (1,362) - -
Depreciation and amortization 23,838 22,675 22,554
Deferred and current income taxes 4,615 3,178 (2)
Net (gain) loss on sale of assets 2 42 (35)
Other changes in assets and liabilities:
Trade and other receivables (30) 19 6,804
Materials, supplies and fuel 1,798 (562) (199)
Accounts payable (6,995) 6,975 (6,292)
Accrued expenses and other current liabilities (2,206) (2,771) (2,473)
Other (3,742) (2,330) 3,721
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 28,601 $ 43,849 $ 54,675
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $(46,622) $(25,700) $(47,851)
(Increase) decrease in Parent receivable 10,373 (3,082) (3,505)
Proceeds from other asset dispositions 1,004 2,138 1,548
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES $(35,245) $(26,644) $(49,808)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt $(54,688) $ (4,806) $ (7,288)
Issuance of long-term debt 68,519 - -
Cash dividends paid to Parent (7,392) (12,467) (22,948)
Other 203 65 (268)
-------- -------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ 6,642 $(17,208) $(30,504)
-------- -------- --------
Net decrease in cash and cash equivalents $ (2) $ (3) $(25,637)
Cash and cash equivalents at beginning of year 88 91 25,728
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 86 $ 88 $ 91
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized $ 10,677 $ 13,582 $ 14,167
Income taxes $ 2,582 $ 5,293 $ 17,450
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
<PAGE> 20
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SIGNIFICANT ACCOUNTING POLICIES
Midland Enterprises Inc. (the "Registrant") is a wholly-owned subsidiary of
Eastern Enterprises ("Eastern") of Weston, Massachusetts. The Registrant's
principal business is barge transportation of bulk commodities on the Ohio and
Mississippi Rivers and their tributaries. The major commodity transported is
coal, which accounts for nearly two thirds of the Registrant's tonnage, the
majority of which is transported to various electric utilities in the eastern
half of the United States. The Registrant also provides bulk terminalling,
shipyard repair and barge fleeting services, none of which account for more than
10% of consolidated revenues. A substantial amount of the Registrant's revenues
relate to spot or annual contracts for transportation and terminalling.
Approximately 48% of the Registrant's revenues are derived from multi-year
transportation and terminalling contracts.
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.
The consolidated financial statements include the accounts of the Registrant and
its subsidiaries. All material intercompany balances and transactions have been
eliminated. The significant accounting policies followed by the Registrant and
its subsidiaries are described below:
(a) Cash equivalents - Cash equivalents are comprised of highly
liquid investment instruments with original maturities of
three months or less. Such short-term investments are
classified as investments available for sale and are valued at
market in accordance with SFAS No. 115. Unrealized
gains/losses on investments available for sale are immaterial.
(b) Transactions with Parent - Parent receivables represent
advances to Eastern which bear interest at the applicable
Federal rate as defined in the Internal Revenue Code: 5.60% in
1998, 5.90% in 1997, and 5.75% in 1996. The Registrant was
also charged a corporate overhead allocation from its Parent
computed on several factors including direct corporate
management time, revenues, capitalization and employees, which
management believes is a reasonable method of allocation.
(c) Materials, supplies and fuel - Materials, supplies and fuel
are stated at the lower of cost (first-in, first-out or
average) or market.
(d) Unamortized debt expense - Unamortized debt expense represents
fees and discounts incurred in obtaining long-term debt. Such
costs are being amortized over the terms of the respective
bond issues.
(e) Accounting for income on tows in progress - The Registrant
generally recognizes income on tows in progress on the
percentage of completion method by relating the number of
miles completed to date to the total miles to be traveled.
(f) Reserve for insurance claims - The Registrant is self-insured
for personal injury and property claims, which are insured
above a deductible amount of $600,000 per occurrence. The
Registrant's estimate of liability for the self-insured claims
is included in the reserve for insurance claims in the
Consolidated Balance Sheets. Payments made for losses incurred
are netted against the related liability for the loss.
(g) Reclassifications - Certain reclassifications of previously
reported amounts have been made to conform with current
classifications.
F-8
<PAGE> 21
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) Environmental matters - Accruals for environmental matters are
recorded in operating expenses when it is probable that a
liability has been incurred and the amount of the liability
can be reasonably estimated. Accrued liabilities are exclusive
of claims against third parties and are not discounted.
(i) Impairment of long-lived assets - The recoverability of
long-lived assets is evaluated by the Registrant on a
continuing basis. In the event that facts and circumstances
indicate that the cost of an asset may be impaired, an
evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is required. Based on such
evaluations, there were no impairment charges in 1998.
(j) Deferred maintenance - The Registrant defers the cost of
engine overhauls on certain towboats and amortizes these costs
over the estimated life of the repair, which generally range
from 2 to 4 years.
(k) Comprehensive income - In 1998, the Registrant adopted
Financial Accounting Standards Board (FASB) Statement No. 130,
"Reporting Comprehensive Income," which requires companies to
report all changes in equity during a period, in a financial
statement for the period in which they are recognized. The
Registrant has chosen to disclose Comprehensive Income, which
encompasses net income and pension liability adjustments, in
the consolidated statements of stockholder's equity.
(l) Segment reporting - In 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This
Statement, which is based on the management approach to
segment reporting, requires that public business enterprises
disclose information about their products and services,
operating segments, the geographic area in which they operate,
and their major customers. The Registrant adopted the
provisions of this Statement in 1998. The Registrant operates
predominantly in one business segment. Substantially all
revenues are derived from the barge transportation of bulk
commodities. Additionally, the Registrant does not engage in
material operations in foreign countries and no material
portion of its revenues are derived from customers in foreign
countries.
(m) Derivatives and hedging activities - In June 1998, the FASB
issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires companies
to recognize all derivative contracts at their fair values, as
either assets or liabilities on the balance sheet. Changes in
the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on
whether a derivative is designed as part of a hedge
transaction and, if it is, the type of hedge transaction. The
Registrant does not expect the adoption of SFAS No. 133 will
have a material impact on the consolidated financial
statements because the Registrant does not currently hold any
derivative instruments.
(2) SIGNIFICANT CUSTOMERS
In 1998, the Cincinnati Gas and Electric Company., a subsidiary of Cinergy Corp.
and the combined revenues from Gulf Power Company and Mississippi Power Company,
subsidiaries of The Southern Company, each accounted for more than 10% of the
Registrant's consolidated revenues under multi-year coal transportation
agreements. In addition, amounts due from these customers comprised
approximately 10% of the Registrant's trade receivables as of December 31, 1998.
In 1997, only one customer, The Cincinnati Gas and Electric Co., accounted for
approximately 10% of the consolidated revenues and 11% of trade receivables as
of December 31, 1997. No other customer, or group of customers under common
control, accounted for more than 10% of revenues in 1998, 1997 or 1996.
F-9
<PAGE> 22
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) LONG-TERM OBLIGATIONS AND CREDIT AGREEMENTS
(a) Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------
1998 1997
-------- --------
(000 Omitted)
<S> <C> <C>
First Preferred Ship Mortgage Bonds -
9.9% Series $ - $ 50,000
8.1% - 9.85% Medium Term Notes, Series A,
Due 2002-2012 68,000 68,000
6.25% Series, due 2008 75,000 -
-------- --------
Total Mortgage Bonds $143,000 $118,000
-------- --------
Obligations under Capital Leases and Other -
Atel Leasing Corporation (Successor to Wells Fargo Leasing
Corporation and Security Pacific Leasing Inc.) $ 3,794 $ 4,750
BA Leasing & Capital Corporation (Successor
to Wells Fargo Leasing Corporation) 1,774 2,448
Security Pacific Equipment Leasing, Inc. 5,853 7,418
Westinghouse Credit Corporation 4,727 6,086
Other (including unamortized debt discount and interest rate hedge) (6,381) (679)
-------- --------
$ 9,767 $ 20,023
-------- --------
Less:
Current portion of long-term debt included above $ 4,742 $ 4,351
Monies on deposit (d) 577 1,530
-------- --------
$ 5,319 $ 5,881
-------- --------
Total Long-Term Debt $147,448 $132,142
======== ========
</TABLE>
In March 1998, the Registrant utilized the receivable from Parent to redeem the
$50 million of 9.9% First Preferred Ship Mortgage Bonds, due 2008. In
extinguishing this debt, the Registrant recognized an extraordinary charge of
$2.3 million pretax or $1.5 million net of tax.
On September 29, 1998, the Registrant issued $75 million of 6.25% First
Preferred Ship Mortgage Bonds at a discount of .69%, maturing October 1, 2008.
The Registrant entered into Forward Treasury Lock Agreements in order to hedge
the interest rate of the new debt issue during the second and third quarters of
1998. These agreements resulted in hedging costs of approximately $6.0 million,
which will be amortized over the life of the debt, along with the bond discount,
as interest expense and resulted in an effective annual interest rate on the
debt of approximately 7.50%. After payment of the hedge cost, the net proceeds
of the debt were approximately $68.5 million. Debt proceeds were advanced to
Parent and will be used to fund current and future capital expenditures for
barges and other water transportation equipment.
The First Preferred Ship Mortgage Bonds and obligations under capital leases are
secured by approximately half of the Registrant's barge fleet and by assignment
of rentals for that equipment payable to the Registrant by its subsidiaries.
F-10
<PAGE> 23
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) LONG-TERM OBLIGATIONS AND CREDIT AGREEMENTS (Continued)
Under the most restrictive of the mortgage indentures, the Registrant, (a) may
not pay dividends, reacquire its common stock or make any advances or loans to
its stockholder or subsidiaries of its stockholder except to the extent of the
sum of (i) Consolidated Net Earnings after December 31, 1988, (ii) the net
proceeds of the sale of stock of the Registrant after December 31, 1988, and
(iii) the amount of $50,000,000 with respect to any advances or loans to its
stockholder or to subsidiaries of its stockholder, and (b) may not incur or
permit any of its subsidiaries to incur additional Senior Unsecured Funded Debt
except for refunding unless immediately thereafter Consolidated Net Tangible
Assets will aggregate at least 150% of (i) Consolidated Senior Unsecured Funded
Debt (excluding therefrom unsecured loans or advances to the Registrant from its
stockholder) plus (ii) Consolidated Senior Secured Funded Debt (all terms as
defined in the applicable indenture). Under these agreements, $34,342,000 of
retained earnings at December 31, 1998 are available for additional dividends to
Eastern.
Included in obligations under capital leases is $16,148,000 of barge lease
obligations having a weighted average interest rate of 10%. Minimum lease
payments under these agreements are due in installments through 2003; principal
payments due for the next five years amount to $4,742,000 in 1999, $5,216,000 in
2000, $4,167,000 in 2001, $1,668,000 in 2002, and $356,000 in 2003.
(b) CREDIT AGREEMENTS
Eastern maintains a credit agreement with a group of banks which provides for
the borrowing by Eastern and certain subsidiaries of up to $100,000,000 at any
time through December 31, 2001. The Registrant's maximum available borrowings
under the credit agreement are $50,000,000. The agreement requires a facility
fee of 9.5 basis points of the commitment. The Registrant had no borrowings
outstanding under this agreement in 1998 or 1997. The interest rate for
borrowings is the agent bank's prime rate or, at borrower's option, various
alternatives.
(c) CONSOLIDATED FIVE YEAR SINKING FUNDS AND MATURITIES
The aggregate annual sinking fund requirements and current maturities of
long-term debt, including capital leases, for the next five years amount to
$4,742,000 in 1999, $5,216,000 in 2000, and $4,167,000 in 2001, $4,668,000 in
2002, and $356,000 in 2003.
(d) DEPOSITED MONIES
Monies on deposit with trustee are netted against long-term debt. In accordance
with the provision of certain bond indentures, these amounts represent deposits
with the bond trustee for the equipment mortgaged under the bond indenture and
subsequently retired from service. It is the Registrant's intention to
repurchase its own bonds with these funds to be used for sinking fund
requirements.
(4) INCOME TAXES
The Registrant and its subsidiaries are members of an affiliated group of
companies which files a consolidated Federal Income Tax return with Eastern. The
Registrant follows the policy, established for the group, of providing for
Federal Income Taxes which would be payable on a separate company basis. For
financial reporting purposes, investment tax credits were deferred and are being
amortized to income over the book life of the related property and equipment.
F-11
<PAGE> 24
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) INCOME TAXES (Continued)
The following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997 1996
------ ------ -------
(000 Omitted)
<S> <C> <C> <C>
Current:
Federal $1,098 $5,564 $16,071
State 270 (227) 1,035
------ ------ -------
Total Current Provision $1,368 $5,337 $17,106
Deferred:
Federal $5,150 $3,301 $ 460
State 16 (174) -
------ ------ -------
Total Deferred Provision $5,166 $3,127 $ 460
------ ------ -------
Total Provision $6,534 $8,464 $17,566
====== ====== =======
</TABLE>
The following reconciles the statutory U.S. Federal Income Tax provision to the
recorded income tax provision:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997 1996
------ ------ -------
(000 Omitted)
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Computed provision for income taxes
at statutory Federal rate $6,249 $8,781 $16,857
Increase (decrease) from statutory
rate resulting principally from:
State taxes, net of Federal benefit 186 (261) 673
Nondeductible expenses 53 47 40
Non taxable interest - - (126)
Other, net 46 (103) 122
------ ------ -------
Provision for income taxes $6,534 $8,464 $17,566
====== ====== =======
</TABLE>
F-12
<PAGE> 25
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) INCOME TAXES (Continued)
Significant items making up deferred tax liabilities and deferred tax assets
including amounts classified as current, as of December 31, 1998 and 1997, are
as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(000 Omitted)
<S> <C> <C>
Assets:
Post-retirement benefits $ 3,149 $ 2,914
Other 5,703 6,758
-------- --------
Total Deferred Tax Assets $ 8,852 $ 9,672
Liabilities:
Accelerated depreciation $(65,770) $(61,014)
Other (7,122) (5,900)
-------- --------
Total Deferred Tax Liabilities $(72,892) $(66,914)
-------- --------
TOTAL DEFERRED TAXES $(64,040) $(57,242)
======== ========
</TABLE>
(5) PROPERTY AND EQUIPMENT
(a) Depreciation and Amortization - Depreciation and amortization
are provided using the straight-line method over the estimated
useful lives of property and equipment which range from 2 to
40 years. Depreciation and amortization as a percentage of
average depreciable assets was 3.6% in 1998 and 1997.
(b) Maintenance & Repairs - The costs of routine maintenance and
repairs are charged to expense as incurred. Major renovations
and renewals, which benefit future periods or extend the life
of the asset, are capitalized and amortized over their
estimated useful lives.
(c) Interest During Construction - The Registrant reflects as an
element of cost in all major construction projects the
estimated cost of borrowed funds employed during the period of
construction. Capitalized interest is amortized over the
estimated useful life of the property or equipment.
(d) The following is the property value of leased barges under
capitalized leases:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(000 Omitted)
<S> <C> <C>
Assets:
Leased Barges $ 55,512 $ 55,887
Less: Accumulated Depreciation (47,946) (45,624)
-------- --------
Total Leased Barges Under Capitalized Leases $ 7,566 $ 10,263
======== ========
</TABLE>
F-13
<PAGE> 26
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) COMMITMENTS
The Registrant has entered into commitments for the purchase and delivery of
diesel fuel for consumption by the Registrant's towboats over the first half of
1999 and for the purchase of new hopper barges scheduled for delivery over the
last nine months of 1999. These purchase commitments total approximately $38
million.
The Registrant and its subsidiaries lease certain facilities, vessels and
equipment under long-term operating leases which expire on various dates through
2079. The minimum rental commitment for noncancelable operating leases at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Minimum
Years Ending Annual Rental
------------ -------------
(000 Omitted)
<S> <C>
1999 $ 2,413
2000 2,153
2001 2,038
2002 1,254
2003 1,069
2004-2079 4,315
-------
Total $13,242
=======
</TABLE>
(7) RETIREE BENEFITS
The Registrant and its subsidiaries, through various Registrant-administered
plans and other union retirement and welfare plans, provide retirement benefits
for the majority of their employees, including pension and certain health care
and life insurance benefits. Normal retirement age ranges from 60 to 65, but
provision is made for earlier retirement. Pension benefits for non-union plans
are based on salary and years of service, while union retirement and welfare
plans are based on negotiated benefits and years of service. The funding of
retirement and employee benefit plans is in accordance with the requirements of
the plans and, where applicable, in sufficient amounts to satisfy the "Minimum
Funding Standards" of the Employee Retirement Income Security Act ("ERISA").
Effective January 1, 1998, the Registrant adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which revises
disclosure requirements. The information for 1997 and 1996 has been restated to
conform to the 1998 presentation. The net cost for these plans and agreements
charged to expense was as follows:
PENSIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997 1996
------- ------- -------
(000 Omitted)
<S> <C> <C> <C>
Service cost $ 1,619 $ 1,451 $ 1,318
Interest cost on projected benefit obligation 2,702 2,230 2,021
Expected return on plan assets (4,095) (3,631) (3,296)
Amortization of prior service cost 105 97 50
Amortization of transitional asset (71) (71) (71)
Recognized actuarial (gain) loss 13 (41) (18)
------- ------- -------
Total net pension cost of company administrated plans 273 35 4
Multi-employer union retirement and welfare plans 475 270 293
------- ------- -------
TOTAL NET PENSION COST $ 748 $ 305 $ 297
======= ======= =======
</TABLE>
F-14
<PAGE> 27
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) RETIREE BENEFITS (Continued)
HEALTH CARE
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996
------ ------ ------
(000 Omitted)
<S> <C> <C> <C>
Service cost $ 118 $ 106 $ 113
Interest cost on accumulated benefit obligation 1,104 876 852
Amortization of prior service costs (163) (163) (163)
Recognized actuarial loss 358 255 234
------ ------ ------
NET PERIODIC POSTRETIREMENT BENEFIT COSTS $1,417 $1,074 $1,036
====== ====== ======
</TABLE>
The following table sets forth the change in benefit obligation and plan assets,
reconciliation of funded status and amounts recognized in other comprehensive
income of Registrant-administered plans and amounts recorded in the Registrant's
consolidated balance sheet as of December 31, 1998 and 1997, respectively,
utilizing actuarial measurement dates as of October 1, 1998 and 1997:
<TABLE>
<CAPTION>
Pensions Health Care
1998 1997 1998 1997
------- -------- -------- --------
(000 Omitted) (000 Omitted)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $32,665 $ 26,584 $ 15,268 $ 12,273
Service cost 1,412 1,233 118 106
Interest cost 2,423 1,973 1,104 876
Plan amendments 248 146 - -
Settlement (gain) loss - (258) - -
Special termination benefits 20 - - -
Benefits paid (898) (771) (928) (1,302)
Settlement payments - (334) - -
Actuarial loss 789 4,092 2,904 3,316
------- -------- -------- --------
Benefit obligation at end of year $36,659 $ 32,665 $ 18,466 $ 15,269
======= ======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $57,123 $ 45,929 $ - $ -
Actual return on plan assets (875) 12,229 - -
Employer contributions 242 70 928 1,302
Benefits paid (898) (771) (928) (1,302)
Settlement payments - (334) - -
Administrative expenses (11) - - -
------- -------- -------- --------
Fair value of plan assets at end of year $55,581 $ 57,123 $ - $ -
======= ======== ======== ========
Reconciliation of funded status:
Funded status $18,922 $ 24,458 $(18,467) $(15,268)
Contributions for 4th quarter 3 48 155 281
Unrecognized actuarial (gain) loss (5,656) (11,576) 10,463 7,790
Unrecognized transition (asset) (83) (154) - -
Unrecognized prior service cost 1,661 1,529 (1,209) (1,372)
------- -------- -------- --------
Net amount recognized at year-end $14,847 $ 14,305 $ (9,058) $ (8,569)
======= ======== ======== ========
</TABLE>
F-15
<PAGE> 28
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) RETIREE BENEFITS (Continued)
<TABLE>
<CAPTION>
Pensions Health Care
1998 1997 1998 1997
------- ------- ------- -------
(000 Omitted) (000 Omitted)
<S> <C> <C> <C> <C>
Amounts recognized in balance sheet:
Prepaid benefit cost $15,277 $13,952 $ - $ -
Accrued benefit liability (430) (261) (9,058) (8,569)
Intangible asset - 302 - -
Accumulated other comprehensive income - 312 - -
------- ------- ------- -------
Net amount $14,847 $14,305 $(9,058) $(8,569)
------- ------- ------- -------
Other comprehensive income $ (312) $ (100) $ - $ -
======= ======= ======= =======
</TABLE>
Certain of the Registrant's subsidiaries participate in one or more
multi-employer pension plans, and contribute to such plans in amounts required
by the applicable union contracts. Contribution levels are negotiated between
the subsidiaries and the unions. A subsidiary would be required under the
Federal law to compute its liability for, and accelerate its funding of, its
proportionate share of a multi-employer plan's unfunded vested benefits (if any)
upon its withdrawal from, or the termination of, such a plan.
Following are the weighted-average assumptions used in developing the projected
benefit obligation for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- -----
<S> <C> <C> <C>
Discount rate 7.25% 7.50% 7.50%
Return on plan assets 8.50% 8.50% 8.50%
Increase in future compensation 4.50% 4.75% 4.75%
Health care inflation trend 8.00% 7.00% 7.00%
</TABLE>
The health care inflation trend is assumed to be 8% in 1999 and decrease
gradually to 5% for 2005. A one-percentage-point increase (decrease) in the
assumed health care cost trend rate for 1998 would have the following effects:
<TABLE>
<CAPTION>
One- One-
Percentage- Percentage-
Point Point
Increase Decrease
----------- -----------
(000 Omitted)
<S> <C> <C>
Total of service and interest cost components $ 110 $ (94)
Postretirement benefit obligation $1,520 $(1,300)
</TABLE>
F-16
<PAGE> 29
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments:
Cash, trade receivables and accounts payable: The carrying amounts approximate
fair value because of the short maturity of these instruments.
Long-term debt: The fair value of long-term debt is estimated using discounted
cash flow analyses based on the current incremental borrowing rates for similar
types of borrowing arrangements.
The carrying amounts and estimated fair values of the Registrant's financial
instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Long-term debt: (000 Omitted)
Carrying Amount $136,042 $115,791
Fair Value $146,678 $130,451
</TABLE>
(9) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table summarizes the Registrant's reported unaudited consolidated
quarterly results of operations for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- -------
(000 Omitted)
<S> <C> <C> <C> <C>
1998
Revenues $62,658 $65,163 $66,850 $66,390
Operating earnings $ 6,087 $ 7,720 $ 8,420 $ 4,407
Net earnings $ 923 $ 6,571 $ 4,124 $ 1,065
1997
Revenues $64,382 $68,113 $67,650 $69,114
Operating earnings $ 5,428 $ 9,104 $10,059 $10,022
Net earnings $ 2,126 $ 4,275 $ 5,125 $ 5,097
</TABLE>
F-17
<PAGE> 30
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) Extraordinary Item - Coal Miners Retiree Health Care
In 1993, Registrant's Parent, Eastern Enterprises ("Parent"), received notice
from the Social Security Administration claiming that the Parent is responsible
for health care and death benefit premiums for a certain group of retired coal
miners and their beneficiaries under the Federal Coal Industry Retiree Health
Benefit Act of 1992 ("Coal Act"). In 1995, 1996, and 1997 the Parent received
further notices from the Social Security Administration for an additional group
of retired coal miners and their beneficiaries. In 1993 and 1995, the Parent
recorded extraordinary charges to provide for its estimated undiscounted
obligations under the Coal Act with respect to the retired coal miners and their
beneficiaries assigned to the Parent as discussed in the Parent's 1996 Annual
Report. A portion of the assignments to the Parent was allegedly due to the
Parent's relationship to a predecessor entity of Registrant which is no longer
in business.
In 1995, Registrant recorded a reserve of $4,600,000 ($2,990,000 after-tax) to
provide for its estimated undiscounted obligations under the Coal Act. This
after-tax amount of $2,990,000 was properly reflected as an extraordinary item.
No additional reserve was recorded for 1996 or 1997, as the impact of the
additional notices received in 1996 was offset by a decrease in the estimated
rate of medical inflation. As of December 31, 1997 and 1996, $1.3 million and
$1.1 million, respectively, of this reserve was included in Other current
liabilities.
The Parent's constitutional challenge to the Coal Act failed in the First
Circuit Court of Appeals, which affirmed the federal district court's finding of
constitutionality. However, the Parent's petition for a writ of certiorari in
the Supreme Court was granted and on June 25, 1998 the U.S. Supreme Court ruled
that the Coal Act is unconstitutional as applied to the Parent. As a result of
the Supreme Court's decision, the Registrant reversed the reserve discussed
above, less associated expenses, resulting in an extraordinary gain of $4.3
million pretax or $2.8 million net of tax, in the second quarter of 1998.
F-18
<PAGE> 31
SCHEDULE II
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(000 OMITTED)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
----------------------- ----------
Balance Charged Charged Payments/ Balance
Beginning Costs & to Other Reclass/ End of
Of Year Expenses Accounts Other Year
--------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
1998
Allowances and reserves deducted
from assets-
Allowance for doubtful accounts $ 665 $ - $ - $ 4 $ 669
======= ======= ====== ======== =======
Reserves included in liabilities -
Reserve for environmental expenses 757 (306) - (9) 442
Reserve for insurance claims 11,980 3,869 1,968 (7,076) 10,741
Reserve for post-retirement
health care 8,569 1,416 - (927) 9,058
Reserve for employee benefits 4,483 4,715 1,546 (6,829) 3,915
Reserve for coal miners retiree
health care 4,600 (4,350) - (250) 0
------- ------- ------ -------- -------
Total Other Reserves $30,389 $ 5,344 $3,514 $(15,091) $24,156
======= ======= ====== ======== =======
1997
Allowances and reserves deducted
from assets-
Allowance for doubtful accounts $ 685 $ - $ - $ (20) $ 665
======= ======= ====== ======== =======
Reserves included in liabilities -
Reserve for environmental expenses 915 - - (158) 757
Reserve for insurance claims 11,881 6,248 (530) (5,619) 11,980
Reserve for post-retirement
health care 8,798 1,073 - (1,302) 8,569
Reserve for employee benefits 4,840 6,083 - (6,440) 4,483
Reserve for coal miners retiree
health care 4,600 - - - 4,600
------- ------- ------ -------- -------
Total Other Reserves $31,034 $13,404 $ (530) $(13,519) $30,389
======= ======= ====== ======== =======
1996
Allowances and reserves deducted
from assets-
Allowance for doubtful accounts $ 685 $ - $ - $ - $ 685
======= ======= ====== ======== =======
Reserves included in liabilities -
Reserve for environmental expenses 1,051 - (17) (119) 915
Reserve for insurance claims 13,037 6,596 1,972 (9,724) 11,881
Reserve for post-retirement
health care 8,727 1,036 - (965) 8,798
Reserve for employee benefits 3,339 6,570 - (5,069) 4,840
Reserve for coal miners retiree
health care 4,600 - - - 4,600
------- ------- ------ -------- -------
TOTAL OTHER RESERVES $30,754 $14,202 $1,955 $(15,877) $31,034
======= ======= ====== ======== =======
</TABLE>
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 17,765
<ALLOWANCES> 669
<INVENTORY> 6,940
<CURRENT-ASSETS> 86,194
<PP&E> 679,014
<DEPRECIATION> 350,015
<TOTAL-ASSETS> 436,248
<CURRENT-LIABILITIES> 45,631
<BONDS> 147,448
0
0
<COMMON> 1
<OTHER-SE> 166,002
<TOTAL-LIABILITY-AND-EQUITY> 436,248
<SALES> 0
<TOTAL-REVENUES> 261,061
<CGS> 0
<TOTAL-COSTS> 204,689
<OTHER-EXPENSES> 27,716
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,801
<INCOME-PRETAX> 17,855
<INCOME-TAX> 6,534
<INCOME-CONTINUING> 11,321
<DISCONTINUED> 0
<EXTRAORDINARY> 1,362
<CHANGES> 0
<NET-INCOME> 12,683
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
