10-Q 1 l84718ae10-q.txt MIDLAND ENTERPRISES INC. FORM 10-Q 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, 2000 ---------------------- 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 ------- MIDLAND ENTERPRISES INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 04-2284434 -------------------------------------------------------------------------------- (State or 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 ------------------------------ -------------------------------------------------------------------------------- (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. 2 1 MIDLAND ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS

(000 OMITTED) --------------------------------------------------------------- FOR THE THREE MONTHS ENDED FOR THE ~~SIX~~NINE MONTHS ENDED -------------------------- -------------------------- ~~JUNE~~SEPT. 30, ~~JUNE~~SEPT. 30, ~~JUNE~~SEPT. 30, ~~JUNE~~SEPT. 30, 2000 1999 2000 1999 --------- --------- --------- --------- REVENUES $ 70,~~406~~075 $ 6569,~~783~~690 $~~141~~211,~~676~~751 $~~127~~196,~~109~~799 -------- -------- -------- -------- OPERATING COSTS AND EXPENSES: Operating expenses $ 5251,~~261~~779 $ 4649,~~286~~213 $~~106~~157,~~181~~960 $ 90139,~~710~~923 Depreciation and amortization 6,~~081~~035 6,~~065~~063 1218,~~213~~248 1218,~~165~~228 Selling, general & administrative 3,~~341~~386 3,~~055~~059 610,~~665~~051 69,~~129~~188 Overhead allocation from Parent 700 775 12,~~400~~100 12,~~550~~325 Taxes, other than income 3,~~833~~667 3,~~866~~851 711,~~952~~619 711,~~678~~529 -------- -------- -------- -------- $ 6665,~~216~~567 $ 6062,~~047~~961 $~~134~~199,~~411~~978 $~~118~~181,~~232~~193 -------- -------- -------- -------- OPERATING EARNINGS $ 4,~~190~~508 $ 56,~~736~~729 $ 711,~~265~~773 $ 815,~~877~~606 -------- -------- -------- -------- OTHER INCOME (EXPENSE): Interest income from Parent $ 1,~~102~~260 $ ~~725~~763 $ 23,~~027~~287 $ 12,~~396~~159 Interest income other 10498 6 19517 1824 Gain on sale of assets and other, net (Note 2~~,020~~) 9154 1,~~968~~886 812,022 1,967 -------- -------- -------- -------- $ 31,~~132~~812 $ ~~822~~2,655 $ 45,~~014~~826 $ 14,~~495~~150 -------- -------- -------- -------- INTEREST EXPENSE: Long-term debt $ 3,~~103~~049 $ 3,~~217~~168 $ 69,~~213~~262 $ 69,~~467~~635 Other, including amortization of debt expense 6872 61(442) ~~133~~205 ~~119~~(323) -------- -------- -------- -------- $ 3,~~171~~121 $ 32,~~278~~726 $ 69,~~346~~467 $ 69,~~586~~312 -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES $ 43,~~151~~199 $ 36,~~280~~658 $ 48,~~933~~132 $ 310,~~786~~444 PROVISION FOR INCOME TAXES 1,~~585~~382 12,~~231~~436 13,~~977~~359 13,~~459~~895 -------- -------- -------- -------- NET EARNINGS $ 21,~~566~~817 $ 24,~~049~~222 $ 24,~~956~~773 $ 26,~~327~~549 ======== ======== ======== ========

The accompanying notes are an integral part of these financial statements. 3 2 MIDLAND ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

(000 OMITTED) --------------------------------------------- ~~JUNE~~SEPT. 30, DEC. 31, ~~JUNE~~SEPT. 30, 2000 1999 1999 -------- -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 86 $ 86 $ 8660 Receivables -- Trade, net 18,~~033~~488 18,532 1722,~~185~~199 Parent 7284,~~340~~599 66,158 5964,~~745~~587 Other ~~1,565~~403 1,990 21,~~813~~580 Materials, supplies & fuel 89,~~885~~085 9,925 78,~~438~~256 Prepaid expenses 3,~~683~~433 2,205 3,~~571~~539 -------- -------- -------- TOTAL CURRENT ASSETS $~~104~~116,~~592~~094 $ 98,896 $ 90100,~~838~~221 -------- -------- -------- PROPERTY AND EQUIPMENT, AT COST $~~672~~666,~~891~~016 $688,415 $~~686~~684,~~528~~560 Less-accumulated depreciation ~~359~~357,~~747~~421 364,976 ~~361~~363,~~710~~558 -------- -------- -------- NET PROPERTY AND EQUIPMENT $~~313~~308,~~144~~595 $323,439 $~~324~~321,~~818~~002 -------- -------- -------- OTHER ASSETS: Deferred pension charges $ 16,699 $ 16,699 $ 15,372 Other 5,~~121~~165 5,042 65,~~019~~678 -------- -------- -------- TOTAL OTHER ASSETS $ 21,~~820~~864 $ 21,741 $ 21,~~391~~050 -------- -------- -------- TOTAL ASSETS $~~439~~446,~~556~~553 $444,076 $~~437~~442,~~047~~273 ======== ======== ========

The accompanying notes are an integral part of these financial statements. 4 3 MIDLAND ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

(000 OMITTED) --------------------------------------------- ~~JUNE~~SEPT. 30, DEC. 31, ~~JUNE~~SEPT. 30, 2000 1999 1999 -------- -------- -------- LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of long - term debt $ 54,~~101~~500 $ 5,167 $ 45,~~969~~069 Accounts payable trade 911,~~893~~538 14,595 11,~~114~~201 Reserve for insurance claims 910,~~340~~082 10,326 9,~~647~~908 Interest payable 35,~~046~~719 3,120 35,~~691~~873 Taxes payable 35,~~767~~160 4,306 45,~~603~~675 Accrued expenses 34,~~827~~196 3,911 4,~~032~~276 Other current liabilities 87,~~074~~691 7,422 76,~~063~~537 -------- -------- -------- TOTAL CURRENT LIABILITIES $ 4348,~~048~~886 $ 48,847 $ 4548,~~119~~539 -------- -------- -------- LONG-TERM DEBT $~~140~~139,~~195~~546 $142,500 $~~145~~143,~~134~~699 -------- -------- -------- RESERVES AND DEFERRED CREDITS: Deferred income taxes $ 7274,~~911~~785 $ 70,627 $ 6668,~~917~~954 Unamortized investment tax credits 1,~~615~~540 1,767 1,~~934~~845 Post-retirement health care 9,~~818~~311 9,296 9,~~307~~500 Other reserves 3,~~172~~233 2,981 2,~~052~~097 -------- -------- -------- TOTAL RESERVES AND DEFERRED CREDITS $ 8788,~~516~~869 $ 84,671 $ 8082,~~210~~396 -------- -------- -------- 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 116,~~277~~732 115,538 ~~114~~115,~~064~~119 -------- -------- -------- TOTAL STOCKHOLDER'S EQUITY $~~168~~169,~~797~~252 $168,058 $~~166~~167,~~584~~639 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $~~439~~446,~~556~~553 $444,076 $~~437~~442,~~047~~273 ======== ======== ========

The accompanying notes are an integral part of these financial statements. 5 4 MIDLAND ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

(000 OMITTED) ---------------------------- FOR THE ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPT. 30, ~~JUNE~~SEPT. 30, 2000 1999 -------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 24,~~956~~773 $ 26,~~327~~549 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1218,~~213~~248 1218,~~165~~228 Deferred and current income taxes 14,~~671~~786 35,~~398~~927 Net gain on sale of assets (1,~~829~~748) (911,919) Other changes in assets and liabilities: Trade receivables ~~498~~515 ~~581~~(4,433) Materials, supplies & fuel ~~1,040~~840 (~~498~~1,316) Accounts payable (43,~~702~~057) (903) Accrued expenses and other current liabilities ~~(419)~~3,133 (1,~~142)~~598 Other (~~580~~282) ~~(1,547)~~235 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1027,~~848~~208 $ 1524,~~103~~866 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures $ (13,~~820~~403) $ (89,~~260~~284) Increase in Parent receivable (618,~~182~~441) (38,~~173~~015) Proceeds from asset dispositions 1,~~742~~837 ~~162~~740 -------- -------- NET CASH USED BY INVESTING ACTIVITIES $ (620,~~260~~007) $(1116,~~271~~559) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt $ (23,~~371~~621) $ (23,~~087~~422) Cash dividends paid to Parent (23,~~217~~580) (14,~~745~~911) -------- -------- NET CASH USED BY FINANCING ACTIVITIES $ (47,~~588~~201) $ (38,~~832~~333) -------- -------- Net increase (decrease) in cash and cash equivalents $ -- $ --(26) Cash and cash equivalents at beginning of period 86 86 -------- -------- Cash and cash equivalents at end of period $ 86 $ 8660 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest, net of amounts capitalized $ 6,~~034~~285 $ 6,~~301~~664 Income taxes $ ~~295~~777 $ (12,~~970~~062)

The accompanying notes are an integral part of these financial statements. 6 5 MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (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 1999 filed on Form 10-K are adequate to make the information presented not misleading. (2) SALE OF ASSETS During the second quarter, the Registrant recorded a pretax gain of $1.8 million on the sale of an ocean barge. The sale of the barge closed in June with the Registrant receiving several new inland river hopper barges and a small amount of cash in exchange for the barge. The Registrant subsequently completed the sale of its two remaining ocean tug and barge units in the month of October 2000, at which time it will record a pretax gain of $5.6 million. Under the terms of the sale the Registrant will receive new inland river hopper barges and cash in exchange for the tug/barge units and the termination of their associated transportation agreement. 7 6 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On November 4, 1999 Eastern Enterprises ("Eastern") of Weston, Massachusetts, the Registrant's parent company, signed a definitive agreement that provides for the merger of Eastern with a wholly owned subsidiary of KeySpan Corporation ("KeySpan") of Brooklyn, New York, with Eastern surviving the merger and becoming a wholly-owned subsidiary of KeySpan. The transaction, which is subject to receipt of regulatory approvals, is expected to close in the fourth quarter of 2000. Eastern shareholders approved the merger on April 26, 2000. In connection with the consummation of the merger the Company anticipates that separation payments to officers, payment of vested stock options and other compensation related matters will result in a pretax charge of approximately $9.0 million in the fourth quarter of 2000. RESULTS OF OPERATIONS: Third quarter revenues increased slightly over the comparable period last year, as higher rates associated with rising fuel costs were mostly offset by declines in tonnage transported, and the absence of revenues from the Registrant's ocean tug and barge units. One of the ocean barges was sold in June 2000 and its tug was laid up; the two remaining units were idled since July and subsequently sold in October 2000. Year-to-date revenues increased 8%, due to the rise in fuel costs, in addition to higher tonnage transported earlier in the year. Fuel adjustment mechanisms contained in multi-year and annual contracts continued to escalate transportation rates as fuel prices rose 68% for the third quarter, and 73% for the first nine months, as compared to 1999. Rates per ton-mile for the quarter and year-to-date periods increased 14% and 12%, respectively, due to the fuel related rate increases, a higher mix of shorter haul coal tonnage and modestly improved market rates for spot commodities. Tonnage transported declined 3% in the third quarter, but rose 4% year to date compared to the same periods last year. Third quarter and year-to-date coal tonnage increased 10% and 12%, respectively, mainly reflecting tonnage for a new utility customer, as well as increased demand for existing accounts. Non-coal tonnage declined 21% in the third quarter and 9% year to date compared to last year, reflecting reduced shipments of grain, stone, fertilizer and steel related raw materials. A portion of the tonnage decline was attributable to the absence of the Registrant's ocean tug and barge operations. Ton-miles generated in the quarter and nine-month periods compared to last year declined 14% and 4%, respectively. The steeper decline in ton-miles resulted from increased coal tonnage, which has a shorter average length of haul, combined with decreased non-coal tonnage, which represents longer hauls to and from the Gulf of Mexico. Operating conditions throughout the first nine months were moderately better than in 1999; however, seasonal low water and lock delays did negatively affect operations from time to time this year. As compared to 1999, operating expenses increased 5% for the third quarter and 13% for the first nine months, due to several factors. In the third quarter, the aforementioned significant increase in fuel prices, which impacted the Registrant's direct cost of fuel, as well as the cost of purchased river related services, accounted for nearly the entire increase in operating costs compared to last year. Partly offsetting was lower maintenance and repair expense. For the nine-month period, higher fuel cost accounted for more than two thirds of the increase in operating expenses. The Registrant estimates the net impact of the higher fuel costs on 2000 year-to-date operating earnings to be approximately $3.5 million, over half of 8 7 which occurred in the first quarter. Higher labor and administrative expenses were mostly offset by lower accident and claims cost. As a result of these factors, operating earnings declined $2.2 million for the third quarter, and $3.8 million for the first nine months, as compared to last year. Earnings before income taxes decreased $3.5 million and $2.3 million for the third quarter and year to date, respectively, as compared to last year. Positively impacting the third quarter of 1999 was a $1.8 million gain on the sale of a surplus towboat. Partially offsetting was lower net interest expense in 2000 of $.6 million. For the year-to-date period, a gain of $1.8 million on the sale of an ocean barge was recorded in the second quarter of 2000. As a result, net earnings decreased $2.4 million for the third quarter, and $1.8 million year to date, as compared to last year. LIQUIDITY AND CAPITAL RESOURCES Capital expenditures and dividends paid to Parent in the first nine months of 2000 were funded from cash provided by operating activities. Capital expenditures for 2000 are estimated at $7 million, the majority of which pertains to the purchase of various machinery and equipment. These purchases will continue to be funded with cash provided from operating activities. In addition, the Registrant plans to lease up to 140 new hopper barges for delivery during 2000 under long-term operating leases. Through October 1, 2000, 85 new barges have been chartered to the Registrant under this arrangement. The reduction in trade receivables of $3.7 million as compared to the third quarter 1999 reflects improved collection of certain accounts, as well as shortened overall collection periods due to the market shift in commodity mix in the third quarter of 2000 toward short haul coal movements versus longer haul non-coal movements to and from the Gulf of Mexico. 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, 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. 9 8 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed in the third quarter of 2000. 10 9 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 SENIOR VICE PRESIDENT FINANCE PRINCIPAL FINANCIAL OFFICER DATE: OCTOBER 27, 2000

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