10-Q 1 l88331ae10-q.txt MIDLAND ENTERPRISES INC. 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 March 31, 2001 -------------- 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~~For ~~THE~~the ~~THREE~~Three ~~MONTHS~~Months ~~ENDED~~Ended ~~FOR~~March ~~THE NINE MONTHS ENDED -------------------------- -------------------------- SEPT. 30~~31, ~~SEPT.~~March 3031, ~~SEPT.~~2001 ~~30, SEPT. 30,~~ 2000 ~~1999 2000 1999~~ --------- --------- ~~---------~~(Predecessor) ~~---------~~Revenues ~~REVENUES~~ $~~70,075~~ ~~$69~~67,~~690~~586 $~~211,751~~ ~~$196~~71,~~799~~270 ------- -~~------~~ -------- ~~--------~~ OPERATING COSTS AND EXPENSES: Operating expenses $ 51,~~779~~179 $~~49,213~~ ~~$157~~53,~~960~~920 ~~$139,923~~ Depreciation and amortization 65,~~035~~828 6,~~063~~132 ~~18,248~~Goodwill ~~18,228~~amortization 525 -- Selling, general & administrative expenses 3,~~386~~254 3,~~059~~324 ~~10,051 9,188~~ Overhead allocation from Parent 795 700 ~~775 2,100 2,325~~ Taxes, other than income 3,~~667~~802 34,~~851~~119 ~~11,619 11,529~~ ------- -~~------~~ -------- ~~--------~~ $ 65,~~567~~383 $~~62,961~~ ~~$199~~68,~~978~~195 ~~$181,193~~ ------- -~~------~~ -------- ~~--------~~ OPERATING EARNINGS $ 42,~~508~~203 $ 63,~~729~~075 ~~$ 11,773 $ 15,606~~ ------- -~~------~~ -------- ~~--------~~ OTHER INCOME (EXPENSE): Interest income from Parent $ 1,~~260~~202 $ ~~763~~925 ~~$ 3,287 $ 2,159~~ Interest income other ~~498~~212 69 ~~517 24 Gain on sale of assets and other~~Other, net (~~Note~~88) 2(52) ~~54 1,886 2,022 1,967~~ ------- -~~------~~ -------- ~~--------~~ $ 1,~~812~~326 $ ~~2,655~~882 ~~$ 5,826 $ 4,150~~ ------- -~~------~~ -------- ~~--------~~ INTEREST EXPENSE: Long-term debt $ 32,~~049~~990 $ 3,~~168~~110 ~~$ 9,262 $ 9,635~~ Other, including amortization of debt expense 7274 ~~(442)~~65 ~~205 (323)~~ ------- -~~------~~ -------- ~~--------~~ $ 3,~~121~~064 $ 23,~~726~~175 ~~$ 9,467 $ 9,312~~ ------- -~~------~~ -------- ~~--------~~Earnings ~~EARNINGS~~before ~~BEFORE~~income ~~INCOME~~taxes ~~TAXES~~ $ ~~3,199~~465 $ ~~6,658~~782 $Provision ~~8,132~~for $Income ~~10,444~~taxes ~~PROVISION~~416 ~~FOR~~392 ~~INCOME TAXES 1,382 2,436 3,359 3,895~~ ------- -~~------~~ -------- ~~--------~~ NET EARNINGS $ ~~1,817~~49 $ ~~4,222~~390 ~~$ 4,773 $ 6,549~~ ======= =~~======~~ ======== ~~========~~

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

(000 OMITTED) --------------------------------------------- ~~SEPT.~~March 3031, ~~DEC~~Dec. 31, ~~SEPT.~~March 3031, 2001 2000 ~~1999~~2000 ~~1999~~ --------- -------- --------- (Predecessor) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 8620,039 $ 8611,178 $ 6086 Receivables -- Trade, net 1815,~~488~~871 1813,~~532~~445 2219,~~199~~537 Parent 8473,~~599~~007 6673,~~158~~016 6472,~~587~~373 Other ~~403~~999 1,~~990~~446 1,~~580~~581 Materials, supplies & fuel 98,~~085~~524 98,~~925~~945 89,~~256~~224 Prepaid expenses 31,~~433~~021 21,~~205~~824 31,~~539~~914 -------- -------- -------- TOTAL CURRENT ASSETS $~~116~~119,~~094~~461 $ 98109,~~896~~854 $~~100~~104,~~221~~715 -------- -------- -------- PROPERTY AND EQUIPMENT, AT COST $~~666~~337,~~016~~882 $~~688~~332,~~415~~202 $~~684~~679,~~560~~807 Less-accumulated depreciation ~~357~~9,~~421~~721 ~~364~~3,~~976~~880 363,~~558~~121 -------- -------- -------- NET PROPERTY AND EQUIPMENT $~~308~~328,~~595~~161 $~~323~~328,~~439~~322 $~~321~~316,~~002~~686 -------- -------- -------- OTHER ASSETS: Deferred pension charges $ 1613,~~699~~871 $ 1613,~~699~~871 $ 1516,~~372~~698 Goodwill, net (2) 60,956 59,651 -- Other 51,~~165~~406 58,~~042~~337 5,~~678~~534 -------- -------- -------- TOTAL OTHER ASSETS $ 2176,~~864~~233 $ 2181,~~741~~859 $ 2122,~~050~~232 -------- -------- -------- TOTAL ASSETS $~~446~~523,~~553~~855 $~~444~~520,~~076~~035 $~~442~~443,~~273~~633 ======== ======== ========

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

(000 OMITTED) --------------------------------------------- ~~SEPT.~~March 3031, ~~DEC~~Dec. 31, ~~SEPT.~~March 3031, 2001 2000 ~~1999~~2000 ~~1999~~ --------- --------- --------- (Predecessor) LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of long - term debt $ 43,~~500~~687 $ 53,~~167~~980 $ 54,~~069~~974 Accounts payable trade 1112,~~538~~999 1411,~~595~~161 1112,~~201~~390 Reserve for insurance claims 109,~~082~~756 109,~~326~~367 910,~~908~~371 Interest payable 5,~~719~~643 32,~~120~~974 5,~~873~~795 Taxes payable 54,~~160~~682 4,~~306~~038 53,~~675~~899 Accrued expenses 4,~~196~~325 4,280 3,~~911~~732 4Reserve for separation payments (3) 548 3,~~276~~654 -- Other current liabilities 716,~~691~~744 714,~~422~~624 67,~~537~~464 --------- --------- --------- TOTAL CURRENT LIABILITIES $ 4858,~~886~~384 $ 4854,~~847~~078 $ 48,~~539~~625 --------- --------- --------- LONG-TERM DEBT $~~139~~ 138,~~546~~136 $~~142~~ 138,~~500~~819 $~~143~~ 141,~~699~~447 --------- --------- --------- RESERVES AND DEFERRED CREDITS: Deferred income taxes $ 7477,~~785~~176 $ 7077,~~627~~141 $ 6871,~~954~~303 Unamortized investment tax credits 1,~~540~~441 1,~~767~~486 1,~~845~~690 Post-retirement health care 919,~~311~~105 919,~~296~~092 9,~~500~~370 Other reserves 35,~~233~~523 25,~~981~~378 23,~~097~~042 --------- --------- --------- TOTAL RESERVES AND DEFERRED CREDITS $ 88103,~~869~~245 $ 84103,~~671~~097 $ 8285,~~396~~405 --------- --------- --------- 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 52225,~~519~~984 52225,~~519~~984 52,519 Retained (deficit) earnings ~~116~~(1,~~732~~895) ~~115~~(1,~~538~~944) 115,~~119~~636 --------- --------- --------- TOTAL STOCKHOLDER'S EQUITY $~~169~~ 224,~~252~~090 $~~168~~ 224,~~058~~041 $~~167~~ 168,~~639~~156 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $~~446~~ 523,~~553~~855 $~~444~~ 520,~~076~~035 $~~442~~ 443,~~273~~633 ========= ========= =========

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 ~~NINE~~THREE MONTHS ENDED ~~SEPT.~~MARCH 3031, ~~SEPT.~~MARCH 3031, 2001 2000 ~~1999~~ -------- --------~~------------~~ (Predecessor) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ ~~4,773~~49 $ ~~6,549~~390 Adjustments to reconcile net earnings to net cash provided by operating activities: Amortization of goodwill 525 -- Depreciation and amortization 185,~~248~~828 186,~~228~~132 Deferred and current income taxes ~~4,786~~3 ~~5,927~~360 Net loss (gain) on sale of assets ~~(1,748)~~7 (~~1,919~~123) Other changes in assets and liabilities: Trade receivables ~~515~~(2,715) (41,~~433~~015) Materials, supplies & fuel ~~840~~421 ~~(1,316)~~701 Accounts payable (31,~~057)~~838 (32,201) Accrued expenses and other current liabilities 32,~~133~~763 12,~~598~~489 Other ~~(282)~~790 ~~235~~355 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 279,~~208~~509 $ 247,~~866~~088 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures $ (~~3,403~~399) $ (~~9,284~~502) ~~Increase~~Decrease (increase) in Parent receivable ~~(18,441)~~9 (86,~~015~~215) Proceeds from asset dispositions 717 1,~~837~~167 ~~740~~ -------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $~~(20,007)~~ 327 $ (165,~~559~~550) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt $ (~~3,621~~976) $ (31,~~422~~246) Cash dividends paid to Parent ~~(3,580)~~-- (~~4,911~~292) -------- -------- NET CASH USED BY FINANCING ACTIVITIES $ (~~7,201~~976) $ (81,~~333~~538) -------- -------- Net increase ~~(decrease)~~ in cash and cash equivalents $ --8,860 $ ~~(26)~~-- Cash and cash equivalents at beginning of period 8611,179 86 -------- -------- Cash and cash equivalents at end of period $ 8620,039 $ 6086 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid ~~(received)~~ during the period for: Interest, net of amounts capitalized $ ~~6,285~~191 $ ~~6,664~~308 Income taxes $ ~~777~~413 $ ~~(2,062)~~42

The accompanying notes are an integral part of these financial statements. 6 5 MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS MARCH 31, 2001 (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 2000 filed on Form 10-K are adequate to make the information presented not misleading. (2) GOODWILL In addition to the $60.0 million that was recorded on November 8, 2000 as a result of the acquisition of the Registrant's Parent by KeySpan Corporation (KeySpan), during the quarter ended March 31, 2001, the Registrant recorded additional goodwill of $1.8 million for certain fair value adjustments. Goodwill is being amortized over 30 years using the straight-line method. The Financial Accounting Standards Board ("FASB") recently issued a revision to its Exposure Draft ("ED") on "Business Combinations and Intangible Assets". In the ED, the FASB concluded that the amortization of goodwill would no longer be required. Instead, companies will need to perform impairment tests on the recorded amount and determine whether an impairment charge is necessary. The FASB is expected to conclude its deliberations on the matter in 2001, and depending on the timing of the final statement, the change may have a favorable impact on expected earnings in 2001. Goodwill amortization for 2001 is estimated to be approximately $2 million. Such a change will not affect cash flow. (3) RESERVE FOR SEPARATION PAYMENTS The Registrant recorded a $4.7 million liability for separation payments in the fourth quarter of 2000 in conjunction with the acquisition by KeySpan. During the first quarter of 2001, payments were made in the amount of $3.1 million. Including payments made in the fourth quarter of 2000, the remaining liability at March 31, 2001 is $.5 million. 7 6 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: --------------------- First quarter revenues declined 5% from the same period in 2000, primarily reflecting the absence of the Registrant's Red Circle operations, segments of which were sold in the second and fourth quarters of last year. Tonnage transported also declined due to the absence of the Red Circle business as well as softness in the steel sector. Compared to last year, rates were generally higher primarily due to fuel adjustment mechanisms contained in multi-year and annual barge transportation contracts that escalated freight rates in the quarter, as fuel prices rose 16% as compared to the first quarter of 2000. Market rates for spot business also improved slightly over the same period last year, and as a result, overall rates per ton mile increased 12% over the first quarter of 2000. First quarter tonnage transported decreased 6% from 2000 while related ton-miles declined 16% reflecting a shorter average length of haul in addition to the lower volume. Coal tonnage increased 1%, accounting for 71% of tonnage shipped, as stronger demand from utilities offset reduced shipments for industrial customers, specifically steel producers. Utility customers increased shipments in order to rebuild stockpiles that had been depleted as a result of a shortage of coal that was experienced in the fourth quarter of 2000, due to problems experienced with coal suppliers. Demand for metallurgical coal by steel producers declined as markets for steel products weakened and production was scaled back. Coal ton-miles decreased 4% however, reflecting a shorter average length of haul as coal buyers sought to purchase supply from alternative sources that resulted in a change in shipment patterns. Non-coal tonnage decreased 21% due in large part to the absence of movements of phosphate rock by Red Circle, as well as a significant decrease in demand for steel-related raw materials. While operating conditions in the quarter were generally good, there were periods of icing and high water that resulted in draft restrictions and reduced tow sizes, and heavy fog that caused transit delays. Operating costs decreased 5% due to the absence of the Red Circle operations offset mostly by higher fuel costs. As mentioned previously, while much of the higher fuel costs were recovered through contractual fuel escalation mechanisms, the Registrant's subsidiaries were still adversely impacted by the higher costs. As a result of these factors, and the amortization of goodwill, operating earnings were .9 million below the same period in 2000. Earnings before income taxes decreased $.3 million from the same period last year, with lower operating earnings offset somewhat by higher interest income. Net earnings also declined $.3 million as compared to the first quarter of 2000. KeySpan Corporation (KeySpan) acquired the Registrant's Parent, Eastern Enterprises (Eastern), on November 8, 2000. Pursuant to an order of the SEC issued under PUHCA by which the SEC approved the acquisition of Eastern, KeySpan is required to divest its interest in the Registrant by November 8, 2003, because Registrant's operations have been deemed not functionally related to KeySpan's core utility operations. 8 7 LIQUIDITY AND CAPITAL RESOURCES Capital expenditures of $.4 million and debt payments of $1.0 million were funded from cash provided by operating activities. Capital expenditures for 2001 are estimated at $9 million, the majority of which includes major improvements to towboats and shoreside facilities as well as the purchase of new equipment. These purchases will be funded with cash provided from operating activities. The Registrant received 27 barges in the first quarter from the like-kind exchange agreement on the Red Circle ocean units that were sold in October 2000. In addition, the Registrant has contracted for delivery of 50 new hopper barges in the third and fourth quarters of 2001. These barges will be operated under long-term operating leases. 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) Reports on Form 8-K There were no reports on Form 8-K filed in the first quarter of 2001. 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/ C. LUDWIG ----------------------------- C. LUDWIG CONTROLLER PRINCIPAL ACCOUNTING OFFICER DATE: MAY 14, 2001

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