<PAGE> 1
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 September 30, 1999
------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________________to_______________________
Commission File Number 2-39895
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MIDLAND ENTERPRISES INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2284434
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 PIKE STREET, CINCINNATI, OHIO 45202
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 513-721-4000
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- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
________________________________________________________________________________
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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MIDLAND ENTERPRISES INC. AND SUBSIDIARIES 1
-----------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
<TABLE>
<CAPTION>
(000 OMITTED)
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FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 69,690 $ 66,850 $ 196,799 $ 194,671
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Operating expenses $ 49,213 $ 45,134 $ 139,923 $ 132,449
Depreciation and amortization 6,063 5,942 18,228 17,679
Selling, general & administrative 3,059 3,087 9,188 9,251
Overhead allocation from Parent 775 750 2,325 2,250
Taxes, other than income 3,851 3,517 11,529 10,814
--------- --------- --------- ---------
$ 62,961 $ 58,430 $ 181,193 $ 172,443
--------- --------- --------- ---------
OPERATING EARNINGS $ 6,729 $ 8,420 $ 15,606 $ 22,228
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income (expense) - Parent $ 763 $ (33) $ 2,159 $ 957
Interest income other 6 6 24 63
Gain on sale of assets
and other, net (Note 2) 1,886 92 1,967 276
--------- --------- --------- ---------
$ 2,655 $ 65 $ 4,150 $ 1,296
--------- --------- --------- ---------
INTEREST EXPENSE:
Long-term debt $ 3,168 $ 1,996 $ 9,635 $ 7,342
Other, including amortization
of debt expense (442) 42 (323) 128
--------- --------- --------- ---------
$ 2,726 $ 2,038 $ 9,312 $ 7,470
--------- --------- --------- ---------
EARNINGS BEFORE INCOME TAXES $ 6,658 $ 6,447 $ 10,444 $ 16,054
PROVISION FOR INCOME TAXES 2,436 2,323 3,895 5,798
--------- --------- --------- ---------
EARNINGS BEFORE EXTRAORDINARY ITEMS $ 4,222 $ 4,124 $ 6,549 $ 10,256
--------- --------- --------- ---------
EXTRAORDINARY ITEMS, NET OF TAX:
Credit for coal miners retiree
health care $ - $ - $ - $ 2,827
Loss on early retirement of
debt - - - (1,465)
--------- --------- --------- ---------
NET EARNINGS $ 4,222 $ 4,124 $ 6,549 $ 11,618
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
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MIDLAND ENTERPRISES INC. AND SUBSIDIARIES 2
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CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
(000 OMITTED)
--------------------------------
SEPT. 30, DEC. 31, SEPT. 30,
1999 1998 1998
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<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 60 $ 86 $ 192
Receivables -
Trade, net 22,199 17,765 18,069
Parent 64,587 56,572 57,759
Other 1,580 2,965 1,482
Materials, supplies & fuel 8,256 6,940 7,977
Prepaid expenses 3,539 1,866 3,116
-------- -------- --------
TOTAL CURRENT ASSETS $100,221 $ 86,194 $ 88,595
-------- -------- --------
PROPERTY AND EQUIPMENT, AT COST $684,560 $679,014 $677,836
Less-accumulated depreciation 363,558 350,015 347,981
-------- -------- --------
NET PROPERTY AND EQUIPMENT $321,002 $328,999 $329,855
-------- -------- --------
OTHER ASSETS:
Deferred pension charges $ 15,372 $ 15,198 $ 14,520
Other 5,678 5,857 5,453
-------- -------- --------
TOTAL OTHER ASSETS $ 21,050 $ 21,055 $ 19,973
-------- -------- --------
TOTAL ASSETS $442,273 $436,248 $438,423
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
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MIDLAND ENTERPRISES INC. AND SUBSIDIARIES 3
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
(000 OMITTED)
--------------------------------
SEPT. 30, DEC. 31, SEPT. 30,
1999 1998 1998
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<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current portion of long - term debt $ 5,069 $ 4,742 $ 4,629
Accounts payable trade 11,201 11,204 14,708
Reserve for insurance claims 9,908 10,739 10,571
Interest payable 5,873 3,755 4,171
Taxes payable 5,675 3,663 3,378
Accrued expenses 4,276 4,080 4,150
Other current liabilities 6,537 7,448 7,052
-------- -------- --------
TOTAL CURRENT LIABILITIES $ 48,539 $ 45,631 $ 48,659
-------- -------- --------
LONG-TERM DEBT $143,699 $147,448 $148,620
-------- -------- --------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes $ 68,954 $ 64,012 $ 62,393
Unamortized investment tax credits 1,845 2,116 2,211
Post-retirement health care 9,500 9,058 8,858
Other reserves 2,097 1,981 2,151
-------- -------- --------
TOTAL RESERVES AND DEFERRED CREDITS $ 82,396 $ 77,167 $ 75,613
-------- -------- --------
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 115,119 113,482 113,011
-------- -------- --------
TOTAL STOCKHOLDER'S EQUITY $167,639 $166,002 $165,531
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $442,273 $436,248 $438,423
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
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MIDLAND ENTERPRISES INC. AND SUBSIDIARIES 4
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
(000 OMITTED)
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FOR THE NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
1999 1998
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net earnings $ 6,549 $ 11,618
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Extraordinary items, net - (1,362)
Depreciation and amortization 18,228 17,679
Deferred and current income taxes 5,927 2,447
Net (gain) loss on sale of assets (1,919) 2
Other changes in assets and liabilities:
Trade receivables (4,433) 138
Materials, supplies & fuel (1,316) 761
Accounts payable (3) (3,491)
Accrued expenses and other current liabilities 1,598 (2,020)
Other 235 (2,641)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 24,866 $ 23,131
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Capital expenditures $ (9,284) $(41,091)
Decrease (increase) in Parent receivable (8,015) 9,186
Proceeds from asset dispositions 740 850
-------- --------
NET CASH USED BY INVESTING ACTIVITIES $(16,559) $(31,055)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Repayment of long-term debt $ (3,422) $(53,896)
Issuance of long-term debt - 68,519
Cash dividends paid to Parent (4,911) (6,595)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ (8,333) $ 8,028
-------- --------
Net increase (decrease) in cash and cash equivalents $ (26) $ 104
Cash and cash equivalents at beginning of period 86 88
-------- --------
Cash and cash equivalents at end of period $ 60 $ 192
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
- --------------------------------------------------
Cash paid (received) during the period for:
Interest, net of amounts capitalized $ 6,664 $ 7,104
Income taxes $ (2,062) $ 3,381
</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
SEPTEMBER 30, 1999
(1) ACCOUNTING POLICIES
It is Midland Enterprises Inc.'s (the Registrant'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 the
Registrant's operations. All such adjustments are of a normal, recurring
nature.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the 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.
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 1998 filed on Form
10-K are adequate to make the information presented not misleading.
(2) SALE OF ASSETS
During the third quarter, the Registrant recorded a pretax gain of $1.8
million on the sale of a surplus towboat. The sale of the towboat closed in
July with the Registrant receiving several new hopper barges and a small
amount of cash in exchange for the vessel.
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6
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
- ----------------------
Third quarter demand for transportation services was nearly unchanged from the
second quarter. A strong market for grain exports, and increased import activity
of ores and steel related raw materials continued to offset declines in coal
demand by electric utilities, as high stockpiles slowed shipments. In comparison
to 1998, ton miles increased nearly 4% for the third quarter, and 3% for the
first nine months. Rates per ton mile in the quarter improved modestly over the
same period in 1998, primarily due to the strengthening of the grain and import
markets discussed above, while rates for spot coal movements were generally
lower. Rates also benefited from contractual pass through provisions contained
in multi-year contracts related to higher fuel prices that increased 22% in the
third quarter as compared to 1998, but remained 2% below 1998 for the first nine
months. As a result of these factors, consolidated revenues increased 4% for the
quarter and 1% for the first nine months.
Tonnage transported by the Registrant declined 2% for both the third quarter and
first nine months as compared to last year. Coal tonnage for the third quarter
and year to date declined 9% and 7%, respectively, as compared to 1998, mainly
for the reasons cited above. Ton miles from coal movements were down 10% for the
quarter and 3% year to date compared to last year, mainly from continued weak
demand for spot and export. Non-coal tonnage increased 11% and 6% for the third
quarter and year to date, respectively, as a result of the market factors
discussed above. Ton miles generated from non-coal movements increased
comparably.
Operating conditions in 1999 generally compared well with 1998, except for
severe icing during the first quarter, which negatively affected productivity
and costs. During the third quarter drought conditions impacted operations on
the lower Mississippi river, where water levels reached their lowest stages
since the drought of 1988. Operating expense increased 9% in the third quarter
and 6% for the first nine months in comparison to 1998. Higher costs associated
with crew labor, port expenses, vessel maintenance, and insurance mainly
contributed to the increase. As a result of the increased costs and lower
margins, operating earnings declined $1.7 million and $6.6 million in the third
quarter, and year to date, respectively, as compared to the same periods in
1998.
Third quarter earnings before income taxes in 1999 benefited from a $1.8 million
gain on the sale of an excess towboat, offset partially by higher net interest
expense from new long-term debt issued late in the third quarter of 1998.
Combined with the reduced operating earnings discussed above, earnings before
extraordinary items for the third quarter increased $.1 million. For the first
nine months of 1999, earnings before extraordinary items declined $3.7 million.
In March 1998, the Registrant recognized an extraordinary loss of $2.3 million
or $1.5 million net of tax, on the early extinguishment of $50 million of First
Preferred Ship Mortgage bonds due 2008. In June of 1998, the U. S. Supreme Court
upheld Eastern Enterprises' challenge to the constitutionality of the Coal
Industry Retiree Health Benefit Act of 1992 ("Coal Act") as applied to Eastern.
Consequently, the Registrant reversed its Coal Act reserve resulting in an
extraordinary gain of $4.3 million pre-tax or $2.8 million net in the second
quarter of 1998.
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7
As a result of these extraordinary items in 1998, net earnings for the first
nine months of 1999 declined a total of $5.1 million as compared to last year.
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 nearly all 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 also addressed these issues, the Registrant has communicated
with all critical third parties and has obtained satisfactory written
confirmation of third party readiness.
With respect to IT systems, the Registrant has accomplished its project plan.
The Registrant is operating a year 2000 compliant mainframe computer and has
since tested, modified or replaced where appropriate, all mainframe-based
"mission critical" programs including the Registrant's core applications for
traffic & dispatch, customer information and 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 all of
these systems. Data / voice communication and e-mail systems have also been
tested and replaced where necessary.
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 with 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
$2.5 million as detailed in the following chart. This includes the cost of
purchased software and hardware, consulting, as well as internal staff deployed
to this project. Based on management's current estimates, the costs are nearly
complete at the end of the third quarter of 1999.
($ Millions) Cost to Date Expected Future Cost
- --------------------------------------------------------------------------------
Capital $1.3 $0.1
Expense $1.0 $0.1
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8
RISK OF YEAR 2000 ISSUES
The Registrant has assessed the most reasonably 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 has completed preparation of a contingency plan. Toward this
effort, the Registrant has assessed third party risk with a plan intended to
assure critical suppliers, services and customers have actively worked 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 has obtained written and
verbal confirmation from these service providers and others as to their year
2000 readiness. Most written and verbal responses received describe programs in
place that are completed. A few provided projected completion dates of October
1999. Some 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 has located
or identified backup providers 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
- -------------------------------
Capital expenditures, dividends paid to Parent and long-term debt payments in
the first nine months of 1999 were funded from cash provided by operating
activities. Total planned capital expenditures for 1999 are projected at $19
million, the majority of which pertains to purchases of new barges, investments
in terminal facilities and information system improvements. In addition, the
Registrant has signed a series of long-term operating leases for up to 100 new
hopper barges for delivery by year-end.
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9
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
functionality of programs and systems in the year 2000, 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit 10.1 - Change of Control Agreement, dated as of September 22,
1999, by and between Eastern Enterprises, Midland Enterprises Inc.
and J. Mark Cook (incorporated by reference to Exhibit 10.11.6 to the
Quarterly Report on Form 10-Q of Eastern Enterprises for the quarter
ended September 30, 1999).
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed in the third quarter of 1999.
<PAGE> 11
10
SIGNATURE
---------
It is Midland's opinion that the financial information contained in this
report reflects all normal, recurring adjustments necessary to present a fair
statement of results for the periods reported; but such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of Midland's operations. All accounting policies have been
applied in a manner consistent with prior periods. Such financial information
is subject to year end adjustments and annual audit by independent public
accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934, Midland
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MIDLAND ENTERPRISES INC.
BY: /S/ R. FAILLO
---------------------------
R. FAILLO
VICE PRESIDENT
FINANCE AND TREASURER;
PRINCIPAL FINANCIAL OFFICER
DATE: OCTOBER 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 60
<SECURITIES> 0
<RECEIVABLES> 24,248
<ALLOWANCES> 469
<INVENTORY> 8,256
<CURRENT-ASSETS> 100,221
<PP&E> 684,560
<DEPRECIATION> 363,558
<TOTAL-ASSETS> 442,273
<CURRENT-LIABILITIES> 48,539
<BONDS> 143,699
0
0
<COMMON> 1
<OTHER-SE> 167,639
<TOTAL-LIABILITY-AND-EQUITY> 442,273
<SALES> 0
<TOTAL-REVENUES> 196,799
<CGS> 0
<TOTAL-COSTS> 169,660
<OTHER-EXPENSES> 7,363
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,312
<INCOME-PRETAX> 10,444
<INCOME-TAX> 3,895
<INCOME-CONTINUING> 6,549
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,549
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
