Annual Report (Form 10-K), fiscal year 1994

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 and 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. In December, 1993, the Company sold its liquid barges and in conjunction, Chotin, a subsidiary, sold its liquid contract and trade name. The Registrant, through other subsidiaries, also performs repair work on marine equipment and operates two coal dumping terminals, a phosphate rock and phosphate chemical fertilizer terminal, and a marine fuel supply facility. In June 1994, the Company sold its barge construction facility located in Louisiana.
Substantially all of the barges, towboats and tugboats operated by the Registrant's barge line subsidiaries are owned by and chartered from the Registrant. A substantial portion of this equipment is mortgaged or leased and the payments under related charter agreements with its subsidiaries are pledged to secure long-term debt or to meet lease payments.
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 West Virginia Terminals Inc.
(B) INDUSTRY SEGMENTS ----------------- 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 65% of the Registrant's total 1994 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 which ORCO carries in significant amounts.
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 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 owns and 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. West Virginia Terminals Inc. operates a coal dumping facility in Kenova, West Virginia.
The record tonnage in 1994 increased 11% over 1993, despite the absence of the liquid business, due to a stronger economy as evidenced by increased shipments of coal, aggregates, ores, steel products and scrap. Tonnage in 1993 increased slightly over 1992 due to increased shipments of non-coal commodities. Coal tonnage in 1993 was negatively impacted by a prolonged coal miners strike.
The next table summarizes the ton miles of cargo transported by Registrant's subsidiaries for the period 1992 - 1994.
Ton miles are the product of tons and distance transported. The record tonmiles in 1994, reflected the 11% increase in tonnage noted above. The slight decline in ton miles from 1992 to 1993 reflected shorter average hauls on approximately equal tonnage. In addition to changes in ton miles transported, Registrant's revenues and net income are affected by other factors such as competitive conditions, weather and the segment of the river system traveled. 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 seasonal fall harvest of grain, average 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 --------- No customer, or group of customers under common control, accounted for 10% or more of the total revenues in 1994. 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 long-term transportation and terminalling contracts which expire at various dates from January 1996 through June 2003. During 1994, approximately 38% 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. Many 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. Due to the capital-intensive, high fixed cost nature of the Registrant's business, the negotiation of long-term contracts which facilitate steady and efficient utilization of equipment is important to profitable operations.
(C) (1) (VIII) BACKLOG ------- The backlog of transportation and terminalling business under long-term contracts is summarized in the next table:
The 1994 revenue backlog (which is based on contracts that extend beyond December 31, 1995) is shown at prices current as of December 31, 1994 which are subject to escalation/de-escalation provisions. Since services under many of the long-term contracts are based on customer requirements, Midland has estimated its backlog based on its forecast of the requirements of these long-term contract customers. The revenue backlog decline from 1993 primarily reflects the amended terms of a contract with Gulf Power Company, which was in dispute at December 31, 1993. As amended, the contract's term was reduced approximately 60%, while the average trip length of the tonnage was reduced 70% resulting in a 60% lower average rate per ton. The combined impact accounted for a 35% decline in the revenue backlog, although other long-term contract extensions and additions were partially offsetting. The tonnage backlog was reduced 11% due to the Gulf Power contract amendment, however, the cumulative effect of other long-term contract additions and extensions were more than offsetting. This includes the positive impact on the backlog calculation from Midland's 5 year contract extension with the Cincinnati Gas & Electric Company, Midland's largest customer, negotiated early in 1994.
(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 ----------- 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 alternate methods of transportation for bulk commodities when the origin and destination of such movements are contiguous to navigable waterways.
Primary competitors of the Registrant's barge line subsidiaries include other barge lines and railroads (including one integrated rail-barge carrier). There are a number of companies offering transportation services on the waterways served by the Registrant. In recent years, competition among major barge line companies has been intense due to an imbalance between barge supply and demand, impacted at times by weak grain and coal export markets. This in turn has led to revenue and margin erosion, prompted cost and productivity improvements, and some industry consolidation. During the second half of 1994, however, barge demand and supply moved toward equilibrium with rates and margins improving. However, it is uncertain whether these short-term gains will be sustained beyond 1995.
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, at average rates per ton mile which are generally below those charged by Class 1 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, 1994, Registrant and its subsidiaries employed approximately 1,300 persons, of whom approximately 35% are represented by labor unions. One of Midland's labor contracts expires in July, 1995.
(D) FOREIGN OPERATIONS ------------------ 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, 1994, the Registrant's floating equipment consisted of 2,378 barges and 90 boats.
West Virginia Terminals Inc. leases a coal dumping facility in Kenova, West Virginia. ORCO leases office facilities in Cincinnati, Ohio. EATCO owns terminal facilities on leased land in Tampa, Florida. ORTCO owns a coal dumping facility in Huntington, West Virginia. Hartley owns shipyard facilities in Paducah, Kentucky and a marine supply facility in West Virginia.
Capital expenditures for the Registrant in 1994 totalled approximately $4.3 million. These expenditures were made principally for renewal of existing equipment.
(B) NOT APPLICABLE.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS ----------------- None
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 $17,050,000 in 1994 and $10,086,000 in 1993.
The payment of dividends is subject to the restrictions described in Note 4 to the 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 ---------------------
1994 COMPARED TO 1993 - --------------------- Midland's 1994 revenues increased 4% on record ton miles, up 10% compared to 1993, reflecting increased shipments of coal, aggregates, ores and towing of tramp barges. Revenues generated from the increase in volume were partially offset by rate reductions negotiated early in the year, business mix changes from an increased percentage of backhauls and increased towing of tramp barges. Midland's liquid barge business, which was sold in December 1993, contributed 5% of Midland's revenues and ton miles in 1993.
Coal tonnage increased 11% from 1993, reflecting increased demand for utility coal under long term contracts as well as from spot purchases. Coal tonnage destined for export to the Gulf of Mexico also increased significantly over last year. During 1993 coal shipments were negatively impacted by the United Mine Workers (UMW) strike and the record flooding on the Mississippi River system. Non-coal tonnage increased 11% over 1993 despite a 15% reduction in grain tonnage, as Midland emphasized increased shipments of aggregates, steel, scrap, and ores much of which were imported materials representing backhaul opportunities originating at the Gulf of Mexico. Grain tonnage was negatively impacted by last year's flooding and crop damage as well as poor export markets during the first half of 1994, although 1994 second half grain volume and margins showed seasonal improvement.
Operating results of Midland's terminalling and support facilities were improved, led by increased coal terminalling, reflecting metallurgical coal demand by the steel industry, and increased phosphate product terminalling as export markets rebounded from 1993. During the second quarter of 1994 Midland sold its barge construction and repair facility located in Louisiana.
Operating earnings increased 8% over 1993 due to the significant volume gains discussed above, reduced operating and administrative expenses from ongoing cost reduction and productivity programs, as well as the absence of increased costs associated with inefficiencies caused by the UMW strike and Mississippi River flooding that occurred in 1993. Partially offsetting were higher operating expenses in 1994 associated with flooding and severe winter icing conditions that occurred in the first quarter, the absence of operating earnings from the liquid barge business and contractual and market rate reductions negotiated early in 1994.
In June 1994 Midland recognized a pretax gain of $2.3 million on the sale of its barge construction facility in Louisiana. Midland had recorded a $3.5 million reserve in December 1993 for the shutdown costs and carrying charges associated with this facility. In addition, in December 1993 Midland sold its liquid barge business, as mentioned earlier, at a pretax gain of $8.0 million. These transactions are included in "Other income."
Midland's 1993 net earnings were impacted by the increase in the statutory Federal income tax rate from 34% to 35%, effective January 1, 1993, that resulted in additional deferred tax requirements and an increase to the 1993 tax provision of approximately $1.8 million. As a result of this adjustment and the above changes in operating earnings and other income, net earnings increased 15% over 1993.
1993 COMPARED TO 1992 - --------------------- Midland's 1993 tonnage and tonmile production was unchanged from 1992 despite several significant events that negatively affected the river towing industry and Midland specifically.
Coal tonnage declined 6% from 1992 primarily reflecting reduced shipments to electric utilities due to the United Mine Worker's (UMW) strike (resolved in December, 1993), disruption in river traffic caused by record flooding on the Mississippi River system, and the mid-year cessation of coal shipments under a long-term contract with Gulf Power Company. This contract, initially executed in 1971 and extending through 2007, generated revenues of $17,200,000 and $9,122,000 in the prior year and 1993, respectively. As a result, Midland filed suit in U.S. District Court in 1993. (This contractual dispute was resolved in 1994, resulting in amendment to the contract and resumption of shipments.)
Non-coal tonnage increased 13% over 1992, despite a 23% reduction in grain tonnage, and served to offset the lower coal volume, although at lower margins. The aforementioned flooding on the Mississippi River system and a poor export market impacted grain tonnage. Increased shipments of alumina, scrap and stone tonnage and towing of non-affiliated barges contributed to the increase in non-coal commodities.
Operating results of Midland's terminalling and shipyard repair facilities were mixed, with improved results for coal terminalling and shipyards being offset by lower phosphate product terminalling, as export markets continued to be depressed in 1993. As a result of the reduced coal affreightment tonnage and lower phosphate terminalling, consolidated revenues declined 3% as compared to 1992.
Operating earnings declined nearly 14% as compared to 1992 with all of the shortfall occurring in the second half of 1993. The reduction in coal tonnage as described above, as well as the UMW strikes' related impact on traffic patterns and operating costs, combined with the record flooding on the Upper Mississippi River system were the significant negative factors. The Upper Mississippi River flooding closed or severely restricted operations on that river segment during the third and fourth quarters which: idled equipment, significantly increased operating costs, and shifted business to less profitable markets. Depreciation expense was slightly higher than 1992 due to recent capital spending for fleet renewal, while administrative costs were 10% below 1992 due to lower employment and consulting costs, as well as gains on the purchase of pension annuities for retirees.
On December 21, 1993 Midland terminated its participation in the liquid barge affreightment business by the sale of its tank barges, affreightment contract, and "Chotin" trade name. The transaction resulted in a pre-tax gain of $7,988,000. In addition, the Company closed its barge construction facility in Port Allen, Louisiana, and recorded a $3,500,000 pre-tax charge to reflect costs associated with the final disposition of the facility. These transactions resulted in a net gain of $4,488,000 included in "Other Income."
In addition to the above changes in operating earnings and other income, Midland's 1993 after tax earnings were impacted by the increase in the statutory Federal income tax rate from 34% to 35% (See Note 5 of Notes to Financial Statements), which resulted in an increase to the 1993 tax provision of approximately $1,812,000. Midland's net earnings for 1992 included a one-time benefit of $12,156,000 on the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") recorded as of January 1, 1992.
LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Debt payments, dividends to Parent and capital expenditures of $4.3 million were primarily funded from cash provided by operating activities in 1994. The increase in cash and cash equivalents reflected mortgage indenture restrictions on the Company's receivables from Parent.
Planned capital expenditures for 1995 are estimated at $25.0 million, the majority of which pertains to purchase commitments for new open hopper barges. Management believes that projected cash flow from operations, in combination with currently available resources, is more than sufficient to meet Midland's 1995 capital expenditure and working capital requirements, normal debt repayments and anticipated dividends to Parent.
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 ________________________
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.
4.1 Ship financing agreement dated December 27, 1984.2
4.2 Promissory note of Midland Enterprises Inc. to Chemical Bank dated January 4, 1985.2
4.3 Indenture between Midland Enterprises Inc. and Shawmut Bank, N.A. dated as of April 1, 1988 (filed as Exhibit 4.2 to Registration Statement No. 33-20789).1
4.4 Indenture between Midland Enterprises Inc. and The First National Bank of Boston dated as of April 2, 1990 (filed as Exhibit 4.2 to Registration Statement No. 33-32120).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.)
24.1 Consent of Independent Public Accountants.1
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K ------------------- There were no reports on Form 8-K filed in the fourth quarter of 1994.
__________________________
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.
2 Not filed herewith. Private placements that are less than 10% of the total assets of Registrant and its subsidiaries on a consolidated basis.
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. L. DOETTLING ------------------------- R. L. DOETTLING SENIOR VICE PRESIDENT, FINANCE AND ADMINISTRATION (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
DATE MARCH 16, 1995 ----------------------
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 16th day of March, 1995.
BY: F. C. RASKIN BY: R. L. DOETTLING ----------------------------- ------------------------------ F. C. RASKIN R. L. DOETTLING PRESIDENT; DIRECTOR SENIOR VICE PRESIDENT, FINANCE (PRINCIPAL EXECUTIVE OFFICER) AND ADMINISTRATION; DIRECTOR; (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
BY: P. E. HUBBARD BY: S. A. FRASHER ----------------------------- ------------------------------- P. E. HUBBARD S. A. FRASHER SENIOR VICE PRESIDENT, SALES VICE PRESIDENT, OPERATIONS; AND MARKETING; DIRECTOR DIRECTOR
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)
PAGE NUMBER ------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS FINANCIAL STATEMENTS:
Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992
Consolidated Balance Sheets -- December 31, 1994 and 1993
Consolidated Statements of Stockholder's Investment for the years ended December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
SCHEDULE:
II - Valuation and Qualifying Accounts and Reserves
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, 1994 and 1993, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1994. These consolidated financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As explained in Note 5 to the Consolidated Financial Statements, effective January 1, 1992, the Company changed its method of accounting for income taxes.
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, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio, January 24, 1995
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993 AND 1992
(1) SIGNIFICANT ACCOUNTING POLICIES
Midland Enterprises Inc. (the "Company") is a wholly-owned subsidiary of Eastern Enterprises ("Eastern") of Weston, Massachusetts. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated. The significant accounting policies followed by the Company and its subsidiaries are described below:
Note 2 - Retirement and employee benefit plans Note 3 - Post-retirement benefits other than pensions Note 5 - Income taxes Note 6 - Property and equipment
(a) The Company's principal business is barge transportation with its principal commodity being coal, substantially all of which is transported to electric utilities in the eastern half of the United States.
(b) Cash Equivalents - Cash equivalents are comprised of highly liquid instruments with original maturities of three months or less.
(c) Transactions with Parent - Parent receivables represent advances to Eastern which bear interest at the prime rate for 1992 and 1993 and at the applicable Federal rate as defined in the Internal Revenue Code for 1994; 5.75% at December 31, 1994, 6% at December 31, 1993 and 6% at December 31, 1992. The Company 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.
(d) Materials, Supplies and Fuel - Materials, supplies and fuel are stated at the lower of cost (first-in, first-out or average) or market.
(e) 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.
(f) Accounting for Income on Tows in Progress - The Company 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.
(g) Reserve for Insurance Claims - The Company is self-insured for personal injury and property claims, certain of which are insured above a deductible amount per occurrence. The Company'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.
(h) 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)
(2) RETIREMENT AND EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries, through various Company-administered plans and union-administered plans, provide retirement benefits for substantially all of their employees. Normal retirement age is 65, but provision is made for earlier retirement. Benefits under non-union plans are based on salary or wages and years of service, while benefits under union plans are based on negotiated amounts and years of service.
The funding of retirement and employee benefit plans is in accordance with the requirements of the plans and collective bargaining agreements and, where applicable, is in sufficient amount to satisfy the "Minimum Funding Standards" of the Employee Retirement Income Security Act of 1974.
During 1993 the Company settled portions of its defined benefit pension obligation through the purchase of annuity contracts from insurance companies. In compliance with the provisions of Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans," the Company recognized a pre-tax gain of $603,267 in 1993.
In 1994 the Company recognized pension curtailment gains of $796,861 relating to the closing and sale of certain operations, primarily Port Allen Marine.
Certain of the Company'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.
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its subsidiaries, through various Company-administered plans and other union retirement and welfare plans under collective bargaining agreements, provide certain health care and life insurance benefits for retired employees. The Company's employees, who are participants in the pension plans, become eligible for these benefits if they reach retirement age while working for the Company.
In 1994 the Company recognized post-retirement benefit curtailment gains of $410,455 relating to the closing and sale of certain operations.
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) POST-RETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The weighted average discount rate used in determining the accumulated benefit obligation was 7.5%. An 11% and 12% increase in cost of covered health care benefits has been assumed for 1994 and 1993, respectively. This rate of increase is assumed to drop gradually to 5% after 7 years. A one percentage point increase in the assumed health care cost trend would have increased the net periodic post-retirement benefit cost by $54,000 in 1994 and $48,000 in 1993 and the accumulated post-retirement benefit obligation by $675,000 in 1994 and $561,000 in 1993.
======== ========
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM OBLIGATIONS AND CREDIT AGREEMENTS (CONTINUED)
(a) Summary of Long-Term Debt (Continued)
The First Preferred Ship Mortgage Bonds, Ship Financing Bond, and obligations under capital leases are secured by a substantial portion of the Company's towboats and barges and by assignment of rentals for that equipment payable to the Company by its subsidiaries. $25,000,000 First Preferred Ship Mortgage Medium-Term Notes were issued in 1992.
Under the most restrictive of the mortgage indentures, the Company, (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 Company 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, (b) is required to maintain Consolidated Net Current Assets at least equal to $1,250,000, and (c) 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 Company from its stockholder) plus (ii) Consolidated Senior Secured Funded Debt (all terms as defined in the applicable indenture). Under these agreements, $17,214,000 of retained earnings at December 31, 1994 are available for additional dividends to Eastern.
Included in obligations under capital leases is $32,404,000 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 $3,354,000 in 1995, $3,684,000 in 1996, $4,057,000 in 1997, $4,468,000 in 1998, and $4,921,000 in 1999.
(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, 1999. The Company's maximum available borrowings under the credit agreement are $50,000,000. The agreement requires a facility fee, which averages 1/7 of 1% of the unused portion. During 1994 and at December 31, 1994, the Company had no borrowings outstanding under this agreement. The interest rate for borrowings is the agent bank's prime rate or, at Eastern's option, various alternatives.
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM OBLIGATIONS AND CREDIT AGREEMENTS (CONTINUED)
(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 $3,354,000 in 1995, $3,684,000 in 1996, $4,057,000 in 1997, and $4,468,000 in 1998, and $9,921,000 in 1999.
(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 sold. It is the Company's intention to repurchase its own bonds with these funds to be used for sinking fund requirements.
(5) INCOME TAXES
The Company and its subsidiaries are members of an affiliated group of Companies which files a consolidated Federal Income Tax return with Eastern. The Companies follow 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)
Effective January 1, 1992, Midland adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". SFAS 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
At the date of adoption, Midland recorded a tax credit of approximately $12,156,000 which represents the net decrease to the deferred tax liabilities as of that date. This amount has been reflected in the consolidated statement of earnings as the cumulative effect of an accounting change.
The Revenue Reconciliation Act of 1993, increased the statutory Federal income tax rate from 34% to 35%, effective January 1, 1993. The provision for income tax in 1993 includes approximately $240,000 for the impact of the rate change in the current earnings, and approximately $1,572,000 to reflect the additional deferred tax requirements as of January 1, 1993, in accordance with SFAS 109.
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) 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. Depreciation and amortization as a percentage of average depreciable assets was 3.9%, 4.2% and 4.1% in 1994, 1993 and 1992, respectively.
(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 Company 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.
(7) COMMITMENTS
The Company and its subsidiaries lease certain facilities, vessels and equipment under long-term leases which expire on various dates through 2008.
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) SIGNIFICANT CUSTOMERS
None of the subsidiaries' customers accounted for more than 10% of the Company's total consolidated operating revenues in 1994, 1993 and 1992.
(9) 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 approximates 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.
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) UNAUDITED INTERIM FINANCIAL INFORMATION
SCHEDULE II
MIDLAND ENTERPRISES INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE THREE YEARS ENDED DECEMBER 31, 1994 (OOO OMITTED)