10-Q 1 l89887ae10-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 June 30, 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 the Three Months Ended ~~March~~For 31the Six Months Ended -------------------------- ------------------------ June 30, ~~March~~June 3130, June 30, June 30, 2001 2000 2001 2000 -------- -------- --------- -------- (Predecessor) (Predecessor) Revenues $ 67,~~586~~778 $ 7170,~~270~~406 $ 135,364 $141,676 -------- -------- --------- -------- OPERATING COSTS AND EXPENSES: Operating expenses $ 5146,~~179~~645 $ 5352,~~920~~261 $ 97,824 $106,181 Depreciation and amortization 5,~~828~~700 6,~~132~~081 11,528 12,213 Goodwill amortization ~~525~~516 -- 1,041 -- Selling, general & administrative ~~expenses~~ 3,~~254~~020 3,~~324~~341 6,274 6,665 Overhead allocation from Parent ~~795~~796 700 1,591 1,400 Taxes, other than income 3,~~802~~782 43,~~119~~833 7,584 7,952 -------- -------- --------- -------- $ 6560,~~383~~459 $ 6866,~~195~~216 $ 125,842 $134,411 -------- -------- --------- -------- OPERATING EARNINGS $ 27,~~203~~319 $ 34,~~075~~190 $ 9,522 $ 7,265 -------- -------- --------- -------- OTHER INCOME (EXPENSE): Interest income from Parent $ 1,~~202~~065 $ ~~925~~1,102 $ 2,267 $ 2,027 Interest income other ~~212~~231 910 ~~Other~~443 19 Gain on sale of assets and other, net (8827) 2,020 (52115) 1,968 -------- -------- --------- -------- $ 1,~~326~~269 $ ~~882~~3,132 $ 2,595 $ 4,014 -------- -------- --------- -------- INTEREST EXPENSE: Long-term debt $ 2,~~990~~982 $ 3,~~110~~103 $ 5,972 $ 6,213 Other, including amortization of debt expense 7473 6568 148 133 -------- -------- --------- -------- $ 3,~~064~~055 $ 3,~~175~~171 $ 6,120 $ 6,346 -------- -------- ~~Earnings~~--------- ~~before~~-------- ~~income~~EARNINGS ~~taxes~~BEFORE INCOME TAXES $ ~~465~~5,533 $ ~~782~~4,151 ~~Provision~~$ ~~for~~5,997 ~~Income~~$ ~~taxes~~4,933 ~~416~~PROVISION ~~392~~FOR INCOME TAXES 2,141 1,585 2,557 1,977 -------- -------- --------- -------- NET EARNINGS $ 493,392 $ ~~390~~2,566 $ 3,440 $ 2,956 ======== ======== ========= ========

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

(000 OMITTED) ----------------------------------------------- ~~March~~June 3130, Dec. 31, ~~March~~June 3130, 2001 2000 2000 --------- -------- --------- (Predecessor) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 20,~~039~~841 $ 11,178 $ 86 Receivables - Trade, net 15,~~871~~093 13,445 1918,~~537~~033 Parent 7375,~~007~~407 73,016 72,~~373~~340 Other ~~999~~227 1,446 1,~~581~~565 Materials, supplies & fuel 8,~~524~~364 8,945 98,~~224~~885 Prepaid expenses 13,~~021~~491 1,824 13,~~914~~683 -------- -------- -------- TOTAL CURRENT ASSETS $~~119~~123,~~461~~423 $109,854 $104,~~715~~592 -------- -------- -------- PROPERTY AND EQUIPMENT, AT COST $~~337~~339,~~882~~639 $332,202 $~~679~~672,~~807~~891 Less-accumulated depreciation 915,~~721~~457 3,880 ~~363~~359,~~121~~747 -------- -------- -------- NET PROPERTY AND EQUIPMENT $~~328~~324,~~161~~182 $328,322 $~~316~~313,~~686~~144 -------- -------- -------- OTHER ASSETS: Deferred pension charges $ 13,871 $ 13,871 $ 16,~~698~~699 Goodwill, net (note 2) 60,~~956~~441 59,651 -- Other 1,~~406~~454 8,337 5,~~534~~121 -------- -------- -------- TOTAL OTHER ASSETS $ 7675,~~233~~766 $ 81,859 $ 2221,~~232~~820 -------- -------- -------- TOTAL ASSETS $523,~~855~~371 $520,035 $~~443~~439,~~633~~556 ======== ======== ========

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

(000 OMITTED) ---------------------------------------------- ~~March~~June 3130, Dec. 31, ~~March~~June 3130, 2001 2000 2000 --------- --------- --------- (Predecessor) LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current portion of long - term debt $ 35,~~687~~359 $ 3,980 $ 45,~~974~~101 Accounts payable trade 1210,~~999~~521 11,161 129,~~390~~893 Reserve for insurance claims 9,~~756~~406 9,367 109,~~371~~340 Interest payable 52,~~643~~907 2,974 53,~~795~~046 Taxes payable 45,~~682~~056 4,038 3,~~899~~767 Accrued expenses 47,~~325~~333 4,280 3,~~732~~827 Reserve for separation payments (note 3) ~~548~~228 3,654 -- Other current liabilities 16,~~744~~218 14,624 78,~~464~~074 --------- --------- --------- TOTAL CURRENT LIABILITIES $ 5857,~~384~~028 $ 54,078 $ 4843,~~625~~048 --------- --------- --------- LONG-TERM DEBT $ ~~138~~135,~~136~~271 $ 138,819 $ ~~141~~140,~~447~~195 --------- --------- --------- RESERVES AND DEFERRED CREDITS: Deferred income taxes $ 77,~~176~~343 $ 77,141 $ 7172,~~303~~911 Unamortized investment tax credits 1,~~441~~400 1,486 1,~~690~~615 Post-retirement health care 19,~~105~~305 19,092 9,~~370~~818 Other reserves 5,~~523~~543 5,378 3,~~042~~172 --------- --------- --------- TOTAL RESERVES AND DEFERRED CREDITS $ 103,~~245~~591 $ 103,097 $ 8587,~~405~~516 --------- --------- --------- 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 225,984 225,984 52,519 Retained ~~(deficit)~~ earnings (1,~~895)~~496 (1,944) ~~115~~116,~~636~~277 --------- --------- --------- TOTAL STOCKHOLDER'S EQUITY $ ~~224~~227,~~090~~481 $ 224,041 $ 168,~~156~~797 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 523,~~855~~371 $ 520,035 $ ~~443~~439,~~633~~556 ========= ========= =========

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 ~~THREE~~SIX MONTHS ENDED ~~MARCH~~JUNE 3130, ~~MARCH~~JUNE 3130, 2001 2000 -------- ------------------- (Predecessor) ~~CASH~~Cash ~~FLOWS~~flows ~~FROM~~from ~~OPERATING~~operating ~~ACTIVITIES~~activities: Net earnings $ 493,440 $ ~~390~~2,956 Adjustments to reconcile net earnings to net cash provided by operating activities: Amortization of goodwill ~~525~~1,041 -- Depreciation and amortization 511,~~828~~528 612,~~132~~213 Deferred and current income taxes 341 ~~360~~1,671 Net ~~loss (~~gain) on sale of assets 7(51) (~~123~~1,829) Other changes in assets and liabilities: Trade receivables (~~2,715) (~~1,~~015~~941) 498 Materials, supplies & fuel ~~421~~581 ~~701~~1,040 Accounts payable ~~1,838~~(640) (24,~~201~~702) Accrued expenses and other current liabilities 2,~~763~~344 ~~2,489~~(419) Other ~~790~~(884) ~~355~~(580) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 915,~~509~~459 $ 710,~~088~~848 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures $ (~~399~~2,073) $ (~~502~~1,820) ~~Decrease~~Increase ~~(increase)~~ in Parent receivable 9(2,391) (6,~~215~~182) Proceeds from asset dispositions ~~717~~837 1,~~167~~742 -------- -------- NET CASH ~~PROVIDED (~~USED) BY INVESTING ACTIVITIES $ ~~327~~(3,627) $ (56,~~550~~260) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt $ (~~976~~2,169) $ (12,~~246~~371) Cash dividends paid to Parent -- (~~292~~2,217) -------- -------- NET CASH USED BY FINANCING ACTIVITIES $ (~~976~~2,169) $ (14,~~538~~588) -------- -------- Net increase in cash and cash equivalents $ 89,~~860~~663 $ -- Cash and cash equivalents at beginning of period 11,~~179~~178 86 -------- -------- Cash and cash equivalents at end of period $ 20,~~039~~841 $ 86 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of amounts capitalized $ ~~191~~5,770 $ ~~308~~6,034 Income taxes $ ~~413~~2,526 $ 42295

The accompanying notes are an integral part of these financial statements. 6 5 MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS JUNE 30, 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) RECENT ACCOUNTING PRONOUNCEMENTS On July 20, 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". The key concepts from the two interrelated Statements include mandatory use of the purchase method in accounting for business combinations, discontinuance of goodwill amortization, a revised framework for testing goodwill impairment at a "reporting unit" level, and new criteria for the identification and potential amortization of other intangible assets. Other changes to existing accounting standards involve the amount of goodwill to be used in determining the gain or loss on the disposal of assets, and a requirement to test goodwill for impairment at least annually under the revised framework. The Business Combination Statement is generally effective for combinations that are initiated after June 30, 2001. The Statement on Goodwill and Other Intangible Assets is effective for fiscal years beginning after December 15, 2001, however, for business combinations consummated after June 30, 2001, the requirements to discontinue goodwill amortization are effective upon issuance of the Statements. The first part of the annual impairment test is to be performed within six months of adopting the Statement on Goodwill and Other Intangible Assets. We are evaluating the impact that these Statements will have on our operations. Further, we are currently amortizing approximately $2.1 million of goodwill on an annual basis. As noted, effective January 1, 2002, goodwill will no longer be subject to amortization, but instead will be tested for impairment. 7 6 In July of 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The Standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Standard is effective for fiscal years beginning after June 15, 2001, with earlier application encouraged. We are currently evaluating the impact, if any, that the Statement may have on our results of operations and financial condition. (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 six months of 2001, payments were made in the amount of $3.4 million. Including payments made in the fourth quarter of 2000, the remaining liability at June 30, 2001 is $.2 million. 8 7 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Revenues for the second quarter and year to date periods as compared to 2000 declined 4% and 5%, respectively, primarily as a result of the absence of the Registrant's Red Circle operations. Segments of the operation were sold in the second and fourth quarters of last year. Tonnage transported during both periods also declined due to the sale of Red Circle operations, in addition to a continued decline in shipments for the steel sector. Barge transportation rates were generally higher compared to last year due to fuel adjustment mechanisms contained in multi-year and annual contracts, as fuel prices rose 6% for the second quarter, and 11% year to date as compared to 2000. Tonnage transported declined 3% for the second quarter, and 5% for the year to date period, as compared to 2000. Related ton miles declined 8% and 12% from the same periods in 2000, reflecting a shorter average length of haul combined with the lower volume. Coal tonnage decreased 2% for the second quarter, offsetting the increase experienced in the first quarter as utility customers were again faced with shortages of coal due to a variety of problems experienced with coal suppliers. Demand for metallurgical coal by steel producers was flat with the second quarter of 2000, but declined 2% year to date reflecting weak markets for steel products experienced during the first quarter when production was scaled back. Coal ton miles declined 11% for the second quarter and 8% for the year to date period, 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 7% and 14% as compared to the second quarter and first six months in 2000, respectively, due in large part to the absence of movements of phosphate rock by Red Circle, as well as a continued decline in demand for steel-related raw materials. Vessel productivity and operating costs in the first quarter were negatively impacted by periods of icing and high water on northern rivers that reduced vessel drafts and tow sizes. During the second quarter, the Registrant's main operating areas experienced generally good operating conditions, although the Mississippi River north of Cairo, Illinois, was closed due to flooding for nearly six weeks. Nevertheless, second quarter and year-to-date operating expenses were 11% and 8% below previous year levels as a result of the improved operating conditions, reduced activity levels, the absence of the Red Circle operations and improved vessel productivity. Reductions in labor costs, maintenance, port, cargo handling, and administrative expenses contributed to the savings. The aforementioned higher fuel costs were partially offsetting. As a result of these factors, and including the amortization of goodwill in 2001, operating earnings for the second quarter were $3.1 million above the same period in 2000 and $2.3 million above 2000 through the first six months. Earnings before income taxes increased $1.4 million and $1.1 million for the second quarter and year to date, respectively as compared to last year. During the second quarter of 2000, the Registrant recorded a $1.8 million gain on the sale of an ocean barge associated with the Red Circle operations. Net earnings improved $.8 million for the second quarter, and $.5 million year to date as compared to the prior year. 9 8 OTHER 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. LIQUIDITY AND CAPITAL RESOURCES For the first six months, capital expenditures of $2.1 million and debt payments of $2.2 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 shore side 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. 10 9 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 second quarter of 2001. 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/ C. LUDWIG ---------------------------- C. LUDWIG CONTROLLER PRINCIPAL ACCOUNTING OFFICER DATE: AUGUST 13, 2001

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