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.
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:
* 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.
(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:
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.
(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.
(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.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not required.
PART II
ITEM 5.
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.
ITEM 6. SELECTED FINANCIAL DATA
Not required. Reference Management Narrative Analysis following Item 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.
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.
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item appears on page of this report. Such information is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Not required.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Not required.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not required.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not required.
PART IV
ITEM 14.
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 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.)
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(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.
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.
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.
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)
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.
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
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
ASSETS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
LIABILITIES AND STOCKHOLDER'S EQUITY
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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.
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.
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:
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.
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.
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:
The following reconciles the statutory U.S. Federal Income Tax provision to the recorded income tax provision:
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:
(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:
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:
(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
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) RETIREE BENEFITS (Continued)
HEALTH CARE
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:
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) RETIREE BENEFITS (Continued)
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:
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:
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:
(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.
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.
SCHEDULE II
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (000 OMITTED)