UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 1-13159
ENRON CORP.
(Exact name of registrant as specified in its charter)
Oregon 47-0255140
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
Enron Building
1400 Smith Street
Houston, Texas 77002
(Address of principal executive (Zip Code)
offices)
(713) 853-6161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at July 31, 1998
Common Stock, No Par Value 329,480,873 shares
1 of 38
ENRON CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Income Statement - Three
Months Ended June 30, 1998 and 1997 and
Six Months Ended June 30, 1998 and 1997 3
Consolidated Balance Sheet - June 30, 1998
and December 31, 1997 4
Consolidated Statement of Cash Flows - Six
Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 37
ITEM 4. Submission of Matters to a Vote of Security
Holders 37
ITEM 6. Exhibits and Reports on Form 8-K 37
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In Millions, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues $6,557 $3,251 $12,239 $8,595
Costs and Expenses
Cost of gas, electricity and
other products 5,528 2,711 10,087 7,343
Operating expenses 570 308 1,007 581
Oil and gas exploration expenses 26 24 60 46
Depreciation, depletion and
amortization 190 125 372 249
Taxes, other than income taxes 45 33 103 69
Contract restructuring charge - 675 - 675
6,359 3,876 11,629 8,963
Operating Income (Loss) 198 (625) 610 (368)
Other Income and Deductions
Equity in earnings of
unconsolidated subsidiaries 109 40 153 81
Gains on sales of assets and
investments 4 39 4 156
Other income, net 34 (2) 49 12
Income (Loss) Before Interest, Minority
Interests and Income Taxes 345 (548) 816 (119)
Interest and Related Charges, net 131 79 264 149
Dividends on Company-Obligated
Preferred Securities of Subsidiaries 20 16 39 31
Minority Interests 19 17 44 36
Income Tax Expense (Benefit) 30 (240) 110 (137)
Net Income (Loss) 145 (420) 359 (198)
Preferred Stock Dividends 5 4 9 8
Earnings (Loss) on Common Stock $ 140 $ (424) $ 350 $ (206)
Earnings (Loss) Per Share of
Common Stock
Basic $ 0.44 $(1.71) $ 1.12 $(0.83)
Diluted $ 0.42 $(1.71) $ 1.06 $(0.83)
Average Number of Common Shares
Used in Computation
Basic 319 248 312 248
Diluted 346 248 338 248
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 175 $ 170
Trade receivables 2,815 1,697
Other receivables 703 454
Assets from price risk management activities 2,971 1,577
Other 814 771
Total Current Assets 7,478 4,669
Investments and Other Assets
Investments in and advances to unconsolidated
subsidiaries 2,761 2,656
Assets from price risk management activities 2,536 1,352
Goodwill 1,884 1,910
Other 4,091 3,665
Total Investments and Other Assets 11,272 9,583
Property, Plant and Equipment, at cost 14,318 13,742
Less accumulated depreciation, depletion
and amortization 4,810 4,572
Net Property, Plant and Equipment 9,508 9,170
Total Assets $28,258 $23,422
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,730 $ 2,119
Liabilities from price risk
management activities 2,739 1,476
Other 920 817
Total Current Liabilities 6,389 4,412
Long-Term Debt 6,989 6,254
Deferred Credits and Other Liabilities
Deferred income taxes 2,052 2,039
Liabilities from price risk
management activities 2,252 1,190
Other 1,707 1,769
Total 6,011 4,998
Minority Interests 1,089 1,147
Company-Obligated Preferred Securities
of Subsidiaries 993 993
Shareholders' Equity
Second preferred stock, cumulative,
no par value 132 134
Common stock, no par value 5,084 4,224
Retained earnings 2,051 1,852
Cumulative foreign currency
translation adjustment (159) (148)
Common stock held in treasury (247) (269)
Other (including Flexible Equity Trust) (74) (175)
Total 6,787 5,618
Total Liabilities and Shareholders' Equity $28,258 $23,422
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities
Net income (loss) $ 359 $ (198)
Depreciation, depletion and amortization 372 249
Oil and gas exploration expenses 60 46
Deferred income taxes 60 (178)
Gains on sales of assets and investments (32) (125)
Changes in components of working capital (660) (193)
Net assets from price risk management
activities (253) (67)
Amortization of production payment transaction (21) (21)
Other, net (16) (36)
Net Cash Used in Operating Activities (131) (523)
Cash Flows From Investing Activities
Proceeds from sales of assets and investments 58 341
Capital expenditures (585) (625)
Equity investments (166) (225)
Acquisition of subsidiary stock (180) -
Business acquisitions, net of cash acquired (25) (40)
Other, net (359) (98)
Net Cash Used in Investing Activities (1,257) (647)
Cash Flows From Financing Activities
Net increase in short-term borrowings 769 958
Issuance of long-term debt 305 409
Repayment of long-term debt (341) (302)
Issuance of company-obligated preferred
securities of subsidiaries - 372
Issuance of common stock 844 -
Dividends paid (204) (165)
Net (acquisition) disposition of treasury stock 7 (84)
Other, net 13 (63)
Net Cash Provided by Financing Activities 1,393 1,125
Increase (Decrease) in Cash and Cash Equivalents 5 (45)
Cash and Cash Equivalents, Beginning of Period 170 256
Cash and Cash Equivalents, End of Period $ 175 $ 211
Changes in Components of Working Capital
Receivables $(1,345) $ 381
Payables 691 (310)
Other (6) (264)
Total $ (660) $ (193)
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements included herein
have been prepared by Enron Corp. (Enron) without audit
pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, these statements reflect
all adjustments (consisting only of normal recurring
entries) which are, in the opinion of management, necessary
for a fair statement of the financial results for the
interim periods. Certain information and notes normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although
Enron believes that the disclosures are adequate to make the
information presented not misleading. These consolidated
financial statements should be read in conjunction with the
financial statements and the notes thereto included in
Enron's Annual Report on Form 10-K for the year ended
December 31, 1997 (Form 10-K).
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.
Certain reclassifications have been made in the 1997
amounts to conform with the 1998 presentation.
"Enron" is used from time to time herein as a collective
reference to Enron Corp. and its subsidiaries and
affiliates. The businesses of Enron are conducted by the
subsidiaries and affiliates whose operations are managed by
their respective officers.
2. BUSINESS ACQUISITIONS
Effective July 1, 1997, Enron merged with Portland
General Corporation (PGC) in a stock-for-stock transaction
and in November 1997, Enron acquired the minority interest
in Enron Global Power & Pipelines L.L.C. (EPP) in a stock-
for-stock transaction. Additionally, during 1997, Enron
acquired renewable energy, telecommunications and energy
management businesses for cash, Enron and subsidiary stock
and notes. Enron has accounted for these acquisitions using
the purchase method of accounting as of the effective date
of each transaction.
The following summary presents unaudited pro forma
consolidated results of operations for the six months ended
June 30, 1997 as if the business acquisitions had occurred
at the beginning of 1997. The pro forma results are for
illustrative purposes only and are not necessarily
indicative of the operating results that would have occurred
had the business acquisitions been consummated at that date,
nor are they necessarily indicative of future operating
results (in millions, except per share amounts).
<TABLE>
<CAPTION>
Six Months Ended
June 30,1997
<S> <C>
Revenues $9,272
Income before interest, minority
interests and income taxes 36
Net income (loss) (128)
Earnings per share
Basic $(0.44)
Diluted $(0.44)
</TABLE>
On July 16, 1998 Enron, through a wholly-owned
subsidiary, was the successful bidder for an interest in
Elektro Eletricidade e Servicos S.A. (Elektro), Brazil's
sixth largest electricity distributor. Enron's winning bid
for a controlling interest in Elektro was approximately $1.3
billion. Elektro serves approximately 1.5 million customers
through approximately 51,000 miles of distribution lines in
the state of Sao Paulo.
On July 24, 1998 Enron announced an all-cash offer for
all outstanding common shares of Wessex Water Plc (Wessex).
Wessex provides water supply and wastewater services in
southwestern England. The offer, which was made by a
subsidiary of Enron, was made based on $10.33, as of July
24, for each share and values the common equity of Wessex,
on a fully diluted basis, at approximately $2.2 billion.
Enron's offer, which has been unanimously recommended by the
board of directors of Wessex, has been submitted to Wessex's
shareholders for approval. The shareholders' response to
the offer is due on August 28, 1998.
The initial funding of these acquisitions will be
financed by bridge loans totaling approximately $3.3
billion. Prior to year-end, Enron expects to restructure
the initial financing by obtaining permanent financing,
attracting new investors and monetizing selected assets.
After the restructuring, Enron's total capital structure is
not expected to be materially different from that at June
30, 1998.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes for the first half of 1998
and 1997 was $51 million and $24 million, respectively.
Cash paid for interest expense for the same periods, net of
amounts capitalized, was $295 million and $180 million,
respectively.
4. LITIGATION AND OTHER CONTINGENCIES
Enron is a party to various claims and litigation, the
significant items of which are discussed below. Although no
assurances can be given, Enron believes, based on its
experience to date and after considering appropriate
reserves that have been established, that the ultimate
resolution of such items, individually or in the aggregate,
will not have a materially adverse impact on Enron's
financial position or its results of operations.
Litigation. In 1995, several parties (the Plaintiffs)
filed suit in Harris County District Court in Houston,
Texas, against Intratex Gas Company (Intratex), Houston Pipe
Line Company and Panhandle Gas Company (collectively, the
Enron Defendants), each of which is a wholly-owned
subsidiary of Enron. The Plaintiffs were either sellers or
royalty owners under numerous gas purchase contracts with
Intratex, many of which have terminated. Early in 1996, the
case was severed by the Court into two matters to be tried
(or otherwise resolved) separately. In the first matter,
the Plaintiffs alleged that the Enron Defendants committed
fraud and negligent misrepresentation in connection with the
"Panhandle program," a special marketing program established
in the early 1980s. This case was tried in October 1996 and
resulted in a verdict for the Enron Defendants. In the
second matter, the Plaintiffs allege that the Enron
Defendants violated state regulatory requirements and
certain gas purchase contracts by failing to take the
Plaintiffs' gas ratably with other producers' gas at certain
times between 1978 and 1988. The court has certified a
class action with respect to ratability claims. The Court
of Appeals has affirmed the trial court's order granting
class certification. An appeal to the Texas Supreme Court
has been filed. The Enron Defendants deny the Plaintiffs'
claims and have asserted various affirmative defenses,
including the statute of limitations. The Enron Defendants
believe that they have strong legal and factual defenses,
and intend to vigorously contest the claims. Although no
assurances can be given, Enron believes that the ultimate
resolution of these matters will not have a materially
adverse effect on its financial position or results of
operations.
On November 21, 1996, an explosion occurred in or around
the Humberto Vidal Building in San Juan, Puerto Rico. The
explosion resulted in fatalities, bodily injuries and damage
to the building and surrounding property. San Juan Gas
Company, Inc. (San Juan), an Enron subsidiary, operates a
propane gas/air distribution system in the vicinity.
Although San Juan did not provide service to the building,
the National Transportation Safety Board (NTSB) has
concluded that the probable cause of the incident was gas
leaking from San Juan's distribution system. San Juan and
Enron strongly disagree with the NTSB findings. The NTSB
investigation found no path of migration of gas from San
Juan's system to the building and no forensic evidence that
propane gas fueled the explosion. Enron and San Juan have
been named as defendants in numerous lawsuits filed in U.S.
District Court for the district of Puerto Rico and the
Commonwealth court of Puerto Rico. These suits, which seek
damages for wrongful death, personal injury, business
interruption and property damage, allege that negligence of
Enron and San Juan, among others, caused the explosion.
Enron and San Juan are vigorously contesting the claims.
Although no assurances can be given, Enron believes that the
ultimate resolution of these matters will not have a
material adverse effect on its financial position or results
of operations.
Trojan Investment Recovery. In early 1993, Portland
General Electric Company (PGE) ceased commercial operation
of the Trojan Nuclear Plant. In April 1996 a circuit court
judge in Marion County, Oregon, found that the Oregon Public
Utility Commission (OPUC) could not authorize PGE to collect
a return on its undepreciated investment in Trojan,
contradicting a November 1994 ruling from the same court.
The ruling was the result of an appeal of PGE's 1995 general
rate order which granted PGE recovery of, and a return on,
87% of its remaining investment in Trojan. The 1994 ruling
was appealed to the Oregon Court of Appeals and was stayed
pending the appeal of the OPUC's March 1995 order. Both PGE
and the OPUC have separately appealed the April 1996 ruling,
which appeals were combined with the appeal of the November
1994 ruling at the Oregon Court of Appeals. On June 24,
1998, the Court of Appeals of the State of Oregon ruled that
the OPUC does not have the authority to allow PGE to recover
a rate of return on its undepreciated investment in the
Trojan generating facility. The court upheld the OPUC's
authorization of PGE's recovery of its undepreciated
investment in Trojan.
PGE plans to file a petition for review with the Oregon
Supreme Court. The OPUC has stated it will also file such a
petition for review. Enron cannot predict the outcome of
these actions. Additionally, due to uncertainties in the
regulatory process, management cannot predict, with
certainty, what ultimate rate-making action the OPUC will
take regarding PGE's recovery of a rate of return on its
Trojan investment. Although no assurances can be given,
Enron believes that the ultimate resolution of these matters
will not have a material adverse effect on its financial
position or results of operations.
Environmental Matters. Enron is subject to extensive
federal, state and local environmental laws and regulations.
These laws and regulations require expenditures in
connection with the construction of new facilities, the
operation of existing facilities and for remediation at
various operating sites. The implementation of the Clean
Air Act Amendments is expected to result in increased
operating expenses. These increased operating expenses are
not expected to have a material impact on Enron's financial
position or results of operations.
The Environmental Protection Agency (EPA) has informed
Enron that it is a potentially responsible party at the
Decorah Former Manufactured Gas Plant Site (the Decorah
Site) in Decorah, Iowa, pursuant to the provisions of the
Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA, also commonly known as Superfund).
The manufactured gas plant in Decorah ceased operations in
1951. A predecessor company of Enron purchased the Decorah
Site in 1963. Enron's predecessor did not operate the gas
plant and sold the Decorah Site in 1965. The EPA alleges
that hazardous substances were released to the environment
during the period in which Enron's predecessor owned the
site, and that Enron's predecessor assumed the liabilities
of the company that operated the plant. Enron contests
these allegations. The EPA is interested in determining
whether materials from the plant have adversely affected
subsurface soils at the Decorah Site. Enron has entered
into a consent order with the EPA by which it has agreed,
although admitting no liability, to replace affected topsoil
and remove impacted subsurface soils in certain areas of the
tract where the plant was formerly located. To date, the
EPA has identified no other potentially responsible parties
with respect to this site. Enron believes that expenses
incurred in connection with this matter will not have a
materially adverse effect on its financial position or
results of operations.
Enron has also received from the EPA an Order issued
under CERCLA alleging that Enron and two other parties are
responsible for the cost of demolition and proper disposal
of two 110 foot towers that apparently had been used in the
manufacture of carbon dioxide at a site called the "City
Bumper Site" in Cincinnati, Ohio. The carbon dioxide plant,
according to agency documents, was in operation from 1926 to
1966. Houston Natural Gas Corporation, a predecessor of
Enron Corp., merged with Liquid Carbonic Industries (LCI) on
January 31, 1969. Liquid Carbonic Corporation (LCC), a
subsidiary of LCI, had title to the site. Twenty-eight days
after the merger, on February 28, 1969, the site was sold to
a third party. In 1984, LCC was sold to an unaffiliated
party in a stock sale. Although Enron does not admit
liability with respect to any costs at this site, it has
agreed to cooperate with the EPA and other potentially
responsible parties to undertake the work contemplated by
EPA's Order. The agency has estimated that the demolition
of the towers and the disposal of their contents, some of
which may be hazardous waste, will cost approximately
$500,000. Enron does not expect to incur material
expenditures in connection with this site.
5. EARNINGS PER SHARE
The computation of basic and diluted earnings per share
is as follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended
Second Quarter June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 145 $ (420) $ 359 $ (198)
Preferred stock dividends (5) (4) (9) (8)
Numerator for basic earnings
per share - income available
to common shareholders 140 (424) 350 (206)
Effect of dilutive securities:
Preferred stock dividends(a) 5 - 9 -
Numerator for diluted earnings
per share - income available
to common shareholders after
assumed conversions $ 145 $ (424) $ 359 $ (206)
Denominator:
Denominator for basic earnings
per share - weighted-average
shares 319 248 312 248
Effect of dilutive securities:
Preferred stock(a) 18 - 18 -
Stock options(a) 9 - 8 -
Dilutive potential common shares 27 - 26 -
Denominator for diluted earnings
per share - adjusted weighted-
average shares and assumed
conversions 346 248 338 248
Basic earnings (loss) per share $0.44 $(1.71) $1.12 $(0.83)
Diluted earnings (loss) per share $0.42 $(1.71) $1.06 $(0.83)
<FN>
(a) For the three and six months ended June 30, 1997,
the dividends and conversion of preferred stock and stock
options have been excluded from the computation because
they are antidilutive.
</TABLE>
6. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS)
No. 130 - "Reporting Comprehensive Income." Enron had
adopted this standard which establishes standards for
reporting and displaying comprehensive income and its
components.
Comprehensive income includes the following (in
millions):
<TABLE>
<CAPTION>
Six Months Ended
Second Quarter June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Earnings (loss) on common stock $ 140 $(424) $ 350 $(206)
Other comprehensive income:
Foreign currency
translation adjustment (12) 13 (11) (2)
Total comprehensive income (loss) $ 128 $(411) $ 339 $(208)
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENRON CORP. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Second Quarter 1998
vs. Second Quarter 1997
The following review of Enron's results of operations
should be read in conjunction with the Consolidated
Financial Statements.
RESULTS OF OPERATIONS
Consolidated Net Income
Enron's second quarter 1998 net income was $145 million
compared to a net loss of $420 million in the second quarter
of 1997. The results of operations discussion focuses on
core businesses, the retail energy services business
(primarily serving commercial and light industrial end-use
customers) and items impacting comparability of operations.
Core businesses include Exploration and Production (Enron
Oil & Gas Company), Transportation and Distribution (Gas
Pipeline Group and Portland General) and Wholesale Energy
Operations and Services (Enron Capital & Trade Resources and
Enron International). The results of Portland General have
been included in Enron's Consolidated Financial Statements
beginning July 1, 1997. See Note 2 to the Consolidated
Financial Statements. Items impacting comparability are
discussed in the respective segment results. Net income
(loss) includes the following (in millions):
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
After-tax results from:
Core businesses $ 174 $ 120
Retail Energy Services (29) (16)
145 104
Items impacting comparability(a)
J-Block contract restructuring charge - (450)
Charge to reflect depressed MTBE
margins on committed production - (74)
Net income (loss) $ 145 $(420)
<FN>
(a) Tax affected at 35%, except where a specific tax rate
applied.
</TABLE>
Basic and diluted earnings (loss) per share of common
stock were as follows:
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Basic earnings (loss) per share $ 0.44 $(1.71)
Diluted earnings (loss) per share:
Results from core businesses $ 0.50 $ 0.44
Results from Retail Energy Services (0.08) (0.06)
Items impacting comparability:
J-Block contract restructuring charge - (1.66)
Charge to reflect depressed MTBE
margin on committed production - (0.27)
Effect of anti-dilution(a) - (0.16)
Diluted earnings (loss) per share $ 0.42 $(1.71)
<FN>
(a) The conversion of certain options and preferred shares
to common for purposes of the diluted earnings (loss) per
share calculation was anti-dilutive by $0.16 per share.
However, in order to present comparable results, per
share amounts for each earnings component were calculated
after considering conversion.
</TABLE>
Income Before Interest, Minority Interests and Income Taxes
The following table presents income (loss) before
interest, minority interests and income taxes (IBIT) for
each of Enron's operating segments (in millions):
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Exploration and Production $ 29 $ 30
Transportation and Distribution:
Gas Pipeline Group 72 73
Portland General 62 -
Wholesale Energy Operations and Services 241 130
Retail Energy Services (43) (25)
Corporate and Other (16) (756)
Income (loss) before interest,
minority interests and taxes $ 345 $(548)
</TABLE>
Exploration and Production
Enron's exploration and production operations are
conducted by Enron Oil & Gas Company (EOG). IBIT of
Exploration and Production totaled $29 million and $30
million for the second quarter of 1998 and 1997,
respectively.
Wellhead volume and price statistics (including
intercompany amounts) are as follows:
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Natural gas volumes (MMcf/d)(a)
North America 722 781
Trinidad 132 114
India 53 1
Total 907 896
Average natural gas prices ($/Mcf)
North America $1.96 $1.80
Trinidad 1.08 1.04
India 2.57 2.97
Composite 1.87 1.70
Crude oil/condensate volumes (MBbl/d)(a)
North America 14.7 13.6
Trinidad 2.9 3.5
India 4.8 -
Total 22.4 17.1
Average crude oil/condensate prices ($/Bbl)
North America $12.82 $18.89
Trinidad 13.31 16.09
India 13.41 -
Composite 13.01 18.31
<FN>
(a) Million cubic feet per day or thousand barrels per day,
as applicable.
</TABLE>
The following analyzes the significant changes in the
various components of IBIT for Exploration and Production
(in millions):
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Net revenues $179 $172
Operating expenses 38 38
Exploration expenses 26 24
Depreciation, depletion and amortization 73 69
Taxes, other than income taxes 13 12
Other income, net - 1
Income before interest, minority
interests and taxes $ 29 $ 30
</TABLE>
Net Revenues
Exploration and Production's revenues, net of cost of gas
sold in connection with natural gas marketing, increased $7
million in the second quarter of 1998 as compared to the
same period in 1997, primarily due to higher wellhead
natural gas prices in North America and increased production
volumes of natural gas and crude oil and condensate in
India, partially offset by lower wellhead crude oil and
condensate prices and lower natural gas production volumes
in North America.
Costs and Expenses
Operating expenses, including taxes other than income
taxes, depreciation, depletion and amortization and
exploration expenses increased primarily due to increased
production and exploration activities.
Transportation and Distribution
Transportation and Distribution consists of Gas Pipeline
Group and Portland General. Gas Pipeline Group includes
Enron's interstate natural gas pipelines, primarily Northern
Natural Gas Company (Northern), Transwestern Pipeline
Company (Transwestern) and Enron's 50% interest in Florida
Gas Transmission Company (Florida Gas). Portland General
primarily reflects the results of Portland General Electric
Company (PGE) since the July 1, 1997 merger (see Note 2 to
the Consolidated Financial Statements).
Gas Pipeline Group. The following table summarizes total
volumes transported for each of Enron's interstate natural
gas pipelines.
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Total Volumes Transported (Bbtu/d)(a)
Northern Natural Gas 3,900 4,085
Transwestern Pipeline 1,675 1,476
Florida Gas Transmission 1,328 1,440
Northern Border Pipeline 1,737 1,785
<FN>
(a) Reflects 100% of each entity's throughput volumes.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Net revenues $137 $139
Operating expenses 68 76
Depreciation and amortization 17 16
Equity in earnings 9 8
Other income, net 11 18
Income before interest and taxes $ 72 $ 73
</TABLE>
Net Revenues
Revenues, net of cost of sales, of Gas Pipeline Group
(GPG) declined $2 million in the second quarter of 1998 as
compared to the same period in 1997. The change was
primarily due to warmer weather in Northern's service
territory in the beginning of the second quarter.
Costs and Expenses
Operating expenses decreased $8 million (11%) during
the second quarter of 1998 as compared to the same period in
1997. The decline of operating expenses is primarily due to
a change in allocation of indirect overhead charges.
Other Income, net
Other income, net decreased $7 million in the second
quarter of 1998 as compared to the second quarter of 1997,
primarily as a result of income recognized in the second
quarter of 1997 related to liquids assets sold in the first
quarter of 1997.
Portland General. Results for Portland General have been
included in Enron's Consolidated Financial Statements
beginning July 1, 1997. For the second quarter of 1998,
Portland General realized IBIT of $62 million, as follows
(in millions):
<TABLE>
<CAPTION>
Second Quarter
1998
<S> <C>
Revenues $269
Purchased power and fuel 94
Operating expenses 78
Depreciation and amortization 45
Other income, net 10
Income before interest and taxes $ 62
</TABLE>
Statistics for PGE for the second quarter of 1998 and
1997 (including amounts for 1997 for comparative purposes
only) are as follows:
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 1,524 1,462
Commercial 1,613 1,623
Industrial 1,106 1,086
Total Retail 4,243 4,171
Wholesale(c) 2,382 6,958
Total Electricity Sales 6,625 11,129
Average Billed Revenue (cents per kWh)
Residential 6.40 5.68
Commercial 5.07 5.14
Industrial 2.64 3.46
Total Retail 4.97 4.92
Wholesale 1.72 1.44
Total Sales 3.91 2.77
Resource Mix
Coal 12% 4%
Combustion Turbine 6 -
Hydro 11 6
Total Generation 29 10
Firm Purchases 64 82
Secondary Purchases 7 8
Total Resources 100% 100%
Average Variable Power Cost (Mills/kWh)(b)
Generation 6.6 4.4
Firm Purchases 14.3 12.3
Secondary Purchases 12.4 10.7
Total Average Variable Power Cost 13.2 12.1
Retail Customers (end of period, thousands) 694 677
<FN>
(a) Thousand megawatt-hours.
(b) Mills (1/10 cent) per kilowatt-hour.
(c) Wholesale electricity trading activities after
December 1997 were transferred to the Wholesale Energy
Operations and Services business segment.
</TABLE>
The results for the second quarter of 1998 include the
impact of lower margins on sales primarily attributed to
higher average power costs. The period also reflects an
increase in the number of retail customers.
Wholesale Energy Operations and Services
Enron's Wholesale Energy Operations and Services (Enron
Wholesale) business, conducted by Enron Capital & Trade
Resources (ECT) and Enron International(EI), provides
integrated energy related products and services to wholesale
customers, including the development and construction of
pipelines and power plants worldwide (Asset Development and
Construction), the physical delivery of energy commodities
and operation of physical assets of this segment (Cash and
Physical), energy-related risk management services (Risk
Management) and finance products for large energy intensive
customers and a significant number of energy-related
investments (Finance and Investing).
Enron continues to be a leading provider of energy
commodity sales and services and the development, construc-
tion and operation of energy infrastructure worldwide.
These activities have been and will continue to be a
significant part of Enron Wholesale's business. In addition,
economic value is being created as Enron expands its
worldwide energy businesses and offers comprehensive energy
products and services to its customers. An increasing
amount of earnings is derived from the growing number of
energy-related investments. Examples of these investments
include investments in debt and equity securities of oil
and gas producers and other energy-intensive companies as
well as Enron's international energy investments such as power
plants and natural gas pipelines. Earnings from these
investments primarily result from changes in the market
value of merchant banking related investments held during
the period, equity earnings and gains on sales or
restructurings of other investments.
Enron will continue to manage its assets in order to
maximize the value and minimize the risks associated with
this activity and to provide overall liquidity. In this
process, Enron utilizes portfolio and risk management
disciplines including certain hedging transactions to manage
market exposures (commodity, interest rate, foreign currency
and equity exposures). Enron Wholesale from time to time
monetizes its contract portfolios (producing cash and
transferring counterparty credit risk to third parties) and
sells interests in investments and assets.
The following table reflects IBIT for each of Enron
Wholesale's business lines (in millions):
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Asset Development and Construction $ 47 $ 30
Cash and Physical 101 82
Risk Management 8 11
Finance and Investing 125 38
Unallocated expenses (40) (31)
Income before interest, minority
interests and taxes $241 $130
</TABLE>
The following discussion analyzes the contributions to
IBIT and the outlook for each of the business lines.
Asset Development and Construction. This line of
business includes the development and construction of power
plants, pipelines and other energy infrastructure.
Earnings from the asset development and construction
business increased to $47 million in the second quarter of
1998 from $30 million in the same period of 1997 primarily
as a result of earnings related to Enron's international
power plant and pipeline projects, partially offset by
development costs.
Cash and Physical. The cash and physical operations
include earnings from physical contracts of one year or less
involving marketing and transportation of natural gas,
liquids, electricity and other commodities, earnings from
the management of Enron's contract portfolio and earnings
related to the operating assets of this segment. Also
included are the effects of actual settlements of long-term
physical and notional quantity-based contracts.
Enron Wholesale markets, transports and provides energy
commodities as reflected in the following table (including
intercompany amounts):
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 6,696 7,330
Canada 3,295 2,123
Europe 1,062 572
Other 5 -
11,058 10,025
Transport Volumes 630 686
Total Gas Volumes 11,688 10,711
Oil 2,534 454
Liquids 550 1,080
Electricity(c) 9,463 4,193
Total 24,235 16,438
Electricity Volumes Marketed
(Thousand MWh)
United States 86,075 38,141
Europe 40 18
Total 86,115 38,159
Financial Settlements (Notional) (BBtue/d) 67,411 45,647
<FN>
(a) Billion British thermal units equivalent per day.
(b) Includes third-party transactions by Enron Energy
Services.
(c) Represents electricity transaction volumes marketed,
converted to BBtue/d.
</TABLE>
The earnings from cash and physical increased 23% to
$101 million in the second quarter of 1998 as compared to
$82 million in the same period of 1997 primarily due to
earnings related to Enron's domestic assets and increased
profits from power marketing. The volume of electricity
marketed has increased over 100% from the second quarter of
1997.
Risk Management. Enron Wholesale's risk management
operations consist of market origination activity on new
long-term contracts (transactions greater than one year) and
restructuring of existing long-term contracts, including
development activity related to such contracts.
Earnings from risk management decreased by $3 million
in the second quarter of 1998 as compared to the second
quarter of 1997.
Finance and Investing. The finance and investing
operations provide a variety of capital products to its
worldwide customers, including loans and equity investments.
These products are offered directly or through joint
ventures.
Additionally, the finance and investing business includes
the management of Enron Wholesale's capital investments,
both operating and financial, as well as certain of Enron's
equity investments. Accordingly, the results of this
business include earnings from changes in the composition
and market value of these investments. Market value changes
result from both underlying operating strengths and
favorable conditions in the equity markets. Exposures
related to these investments are managed through certain
hedging transactions as well as through the overall
diversity of the investments.
Earnings from the finance and investing operations
increased to $125 million in the second quarter of 1998 as
compared to $38 million in the same period of 1997 as a
result of continued originations in the North American and
European markets and increased earnings associated with
Enron's energy investments.
Unallocated Expenses. Net unallocated expenses such as
rent, systems expenses and other support group costs
increased in 1998 due to continued expansion into new
markets and system upgrades.
Investing Activity. Included in the Enron Wholesale
business lines described above, for the second quarter of
1998, was approximately $240 million of gross margin (before
certain direct and indirect expenses) resulting from the
management of investments, as compared with approximately
$40 million during the second quarter of 1997. These
earnings have been reflected in the business lines discussed
above based on the type of activity to which the investment
related. Cash proceeds from this activity totaled
approximately $450 million and $80 million for the
quarter ended June 30, 1998 and 1997, respectively.
Retail Energy Services
Enron Energy Services (Energy Services) is extending
Enron's energy expertise to end-use customers. This
includes sales of natural gas, electricity and energy
management services directly to commercial and light
industrial customers. Energy Services reported an operating
loss before interest, minority interest and taxes of $43
million in the second quarter of 1998 compared to a loss of
$25 million in the second quarter of 1997. These results
primarily reflect the costs associated with developing the
commodity, capital and services capability to deliver on
contracts signed to date by Energy Services.
Corporate and Other
Significant components of IBIT are as follows:
<TABLE>
<CAPTION>
Second Quarter
1998 1997
<S> <C> <C>
IBIT before items impacting comparability $(16) $ 19
Items impacting comparability:
J-Block gas contract restructuring charge - (675)
Charge to reflect depressed MTBE margins
on committed production - (100)
IBIT $(16) $(756)
</TABLE>
The decrease in IBIT before items impacting comparability
reflects the results of certain investments, including Enron
Renewable Energy Corp. (EREC), EOTT Energy Corp. (EOTT) and
the operations of Enron's methanol and MTBE plants.
Interest and Related Charges, net
Interest and related charges, net is reported net of
interest capitalized of $9 million and $4 million for the
second quarter of 1998 and 1997, respectively. The net
expense increased $52 million in the second quarter of 1998
as compared to the same period of 1997, primarily due to
higher debt levels, including $1.5 billion of debt issued by
Enron in the second half of 1997 and $1.1 billion of debt
assumed in connection with the merger with PGC.
Dividends on Company-Obligated Preferred Securities of Subsidiaries
Dividends on company-obligated preferred securities of
subsidiaries increased from $16 million in the second
quarter of 1997 to $20 million in the second quarter of
1998, primarily due to the issuance of approximately $200
million of additional preferred securities by an Enron
subsidiary in June 1997.
Minority Interests
Minority interests increased $2 million in the second
quarter of 1998 compared to the same period in 1997,
primarily due to the minority owner's share of dividends on
preferred stock issued in connection with the formation of
an Enron-controlled joint venture in late 1997, partially
offset by Enron's acquisition of the Enron Global Power &
Pipelines, L.L.C. minority interest in November 1997 and
lower net income from EOG in the second quarter of 1998.
Income Tax Expense
Income taxes increased during the second quarter of 1998
as compared to the second quarter of 1997 primarily as a
result of pretax losses in 1997 due to the non-recurring
charges for the restructuring of Enron's J-Block contract
and for depressed MTBE margins on committed production. The
effective tax rate differed from the statutory rate due to
equity earnings, tight gas sands tax credits and asset and
stock sale differences.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998
vs. Six Months Ended June 30, 1997
RESULTS OF OPERATIONS
Consolidated Net Income
Enron reported net income of $359 million for the first
six months of 1998 compared to a loss of $198 million during
the same period in 1997. Net income (loss) includes the
following (in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
After-tax results from:
Core businesses $407 $ 285
Retail Energy Services (48) (25)
359 260
Items impacting comparability(a)
Gains on sales of liquids assets - 66
J-Block contract restructuring charge - (450)
Charge to reflect depressed MTBE
margin on committed production - (74)
Net income (loss) $359 $(198)
<FN>
(a) Tax affected at 35%, except where a specific tax rate
applied.
</TABLE>
Basic and diluted earnings (loss) per share of common
stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Basic earnings (loss) per share $ 1.12 $(0.83)
Diluted earnings (loss) per share:
Results from core businesses $ 1.20 $ 1.05
Results from Retail Energy Services (0.14) (0.09)
Items impacting comparability:
Gains on sales of liquids assets - 0.24
J-Block contract restructuring charge - (1.65)
Charge to reflect depressed MTBE
margins on committed production - (0.27)
Effect of anti-dilution(a) - (0.11)
Diluted earnings (loss) per share $ 1.06 $(0.83)
<FN>
(a) The conversion of certain options and preferred shares
to common for purposes of the diluted earnings (loss) per
share calculation was anti-dilutive by $0.11 per share.
However, in order to present comparable results, per
share amounts for each earnings component were calculated
after considering conversion.
</TABLE>
Income Before Interest, Minority Interests and Income Taxes
The following table presents IBIT for each of Enron's
operating segments (in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Exploration and Production $ 72 $ 72
Transportation and Distribution:
Gas Pipeline Group 198 310
Portland General 141 -
Wholesale Energy Operations and Services 490 297
Retail Energy Services (70) (39)
Corporate and Other (15) (759)
Income (loss) before interest,
minority interests and taxes $816 $(119)
</TABLE>
Exploration and Production
IBIT of Exploration and Production totaled $72 million
for the first six months of both 1998 and 1997.
Wellhead volume and price statistics (including
intercompany amounts) are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Natural gas volumes (MMcf/d)(a)
North America 733 759
Trinidad 121 113
India 50 1
Total 904 873
Average natural gas prices ($/Mcf)
North America $1.94 $2.18
Trinidad 1.08 1.04
India 2.63 2.97
Composite 1.87 2.03
Crude oil/condensate volumes (MBbl/d)(a)
North America 15.0 13.3
Trinidad 2.8 3.6
India 4.5 1.4
Total 22.3 18.3
Average crude oil/condensate prices ($/Bbl)
North America $13.70 $20.19
Trinidad 13.66 18.86
India 14.31 22.99
Composite 13.82 20.15
<FN>
(a) Million cubic feet per day or thousand barrels per day,
as applicable.
</TABLE>
The following analyzes the significant changes in the
various components of IBIT for Exploration and Production
(in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Net revenues $385 $352
Operating expenses 79 74
Exploration expenses 60 46
Depreciation, depletion and amortization 145 132
Taxes, other than income taxes 28 30
Other income (expense), net (1) 2
Income before interest, minority
interests and taxes $ 72 $ 72
</TABLE>
Net Revenues
Exploration and Production's revenues, net of cost of gas
sold in connection with natural gas marketing, increased $33
million in the first half of 1998 as compared to the same
period in 1997. Total production volumes increased in the
first half of 1998 as compared with the first half of 1997,
although wellhead revenues declined due to lower prices.
Other marketing activities, including natural gas and crude
oil hedging and trading transactions, resulted in a decrease
to net revenues of less than $1 million in the first half of
1998, an improvement from the prior year, which reflected a
reduction of $53 million in net revenues.
Costs and Expenses
Operating expenses, including taxes other than income
taxes, depreciation, depletion and amortization and
exploration expenses increased primarily due to increased
production and exploration activities and overall market
increases.
Transportation and Distribution
Gas Pipeline Group. The following table summarizes total
volumes transported for each of Enron's interstate natural
gas pipelines.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Total Volumes Transported (Bbtu/d)(a)
Northern Natural Gas 4,185 4,445
Transwestern Pipeline 1,666 1,364
Florida Gas Transmission 1,248 1,331
Northern Border Pipeline 1,788 1,820
<FN>
(a) Reflects 100% of each entity's throughput volumes.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Net revenues $329 $345
Operating expenses 137 149
Depreciation and amortization 33 34
Equity in earnings 20 18
Other income, net 19 28
IBIT before items impacting comparability 198 208
Gains on sales of liquids assets - 102
Income before interest and taxes $198 $310
</TABLE>
Net Revenues
Revenues, net of cost of sales, of GPG declined $16
million (5%) in the first half of 1998 as compared to the
same period in 1997. The decrease is primarily due to the
sale of the liquids assets in the first quarter of 1997 and
the unusually warm winter in Northern's service territory in
1998.
Costs and Expenses
Operating expenses decreased $12 million (8%) during
the first half of 1998 as compared to the same period in
1997. The decline is primarily due to reduced expenses
related to the sale of natural gas liquids assets in the
first half of 1997.
Items Impacting Comparability
During the first quarter of 1997, gains of $102 million
were recognized related to the sales of liquids assets,
including processing plants and Enron's interest in the
Enron Liquids Pipeline L.P.
Portland General. Results for Portland General have been
included in Enron's Consolidated Financial Statements
beginning July 1, 1997. For the first half of 1998,
Portland General realized IBIT of $141 million, as follows
(in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998
<S> <C>
Revenues $589
Purchased power and fuel 218
Operating expenses 154
Depreciation and amortization 89
Other income, net 13
Income before interest and taxes $141
</TABLE>
Statistics for PGE for the first half of 1998 and 1997
(including amounts for 1997 for comparative purposes only)
are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 3,600 3,604
Commercial 3,273 3,334
Industrial 2,096 2,069
Total Retail 8,969 9,007
Wholesale(c) 5,957 13,377
Total Electricity Sales 14,926 22,384
Average Billed Revenue (cents per kWh)
Residential 6.12 5.54
Commercial 5.06 5.10
Industrial 2.85 3.41
Total Retail 5.05 4.97
Wholesale 1.78 1.61
Total Sales 3.84 3.02
Resource Mix
Coal 13% 4%
Combustion Turbine 6 -
Hydro 10 8
Total Generation 29 12
Firm Purchases 65 81
Secondary Purchases 6 7
Total Resources 100% 100%
Average Variable Power Cost (Mills/kWh)(b)
Generation 6.8 4.3
Firm Purchases 15.4 14.3
Secondary Purchases 13.2 11.3
Total Average Variable Power Cost 13.9 13.4
Retail Customers (end of period, thousands) 694 677
<FN>
(a) Thousand megawatt-hours.
(b) Mills (1/10 cent) per kilowatt-hour.
(c) Wholesale electricity trading activities after
December 1997 were transferred to the Wholesale Energy
Operations and Services business segment.
</TABLE>
The results for the first six months of 1998 include the
impact of the warmer than normal winter and increased
operating expenses related to the January 1998 ice storm in
Portland General's customer service area.
Wholesale Energy Operations and Services
The following table reflects IBIT for each of Enron
Wholesale's business lines (in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Asset Development and Construction $ 62 $ 39
Cash and Physical 254 218
Risk Management 39 45
Finance and Investing 205 54
Unallocated expenses (70) (59)
Income before interest, minority
interests and taxes $490 $297
</TABLE>
The following discussion analyzes the contributions to
IBIT and the outlook for each of the business lines.
Asset Development and Construction. Earnings from the
asset development and construction business increased to $62
million in the first half of 1998 from $39 million in the
same period of 1997, primarily as a result of earnings
related to Enron's international power plant and pipeline
projects, partially offset by development costs.
Cash and Physical. Enron Wholesale markets, transports
and provides energy commodities as reflected in the
following table (including intercompany amounts):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 6,984 7,967
Canada 3,087 2,115
Europe 1,093 516
Other 3 -
11,167 10,598
Transport Volumes 540 448
Total Gas Volumes 11,707 11,046
Oil 2,147 558
Liquids 602 1,164
Electricity(c) 8,866 3,947
Total 23,322 16,715
Electricity Volumes Marketed (Thousand MWh)
United States 160,347 71,383
Europe 122 68
Total 160,469 71,451
Financial Settlements (Notional) (BBtue/d) 68,658 42,797
<FN>
(a) Billion British thermal units equivalent per day.
(b) Includes third-party transactions by Enron Energy
Services.
(c) Represents electricity transaction volumes marketed,
converted to BBtue/d.
</TABLE>
The earnings from cash and physical increased 17% in
the first half of 1998 as compared to the same period of
1997 primarily due to earnings related to Enron's domestic
assets and increased profits from power marketing where
volumes showed continued strength in the growing deregulated
market, partially offset by lower gas marketing margins
resulting from warmer weather and low price volatility
during the first half of 1998.
Risk Management. Earnings from risk management decreased
13% in the first half of 1998 as compared to the first half
of 1997 primarily due to lower contract originations.
Finance and Investing. Earnings from the finance and
investing operations increased to $205 million in the first
half of 1998 as compared to $54 million in the same period
of 1997 as a result of continued originations in the North
American and European markets and increased earnings
associated with Enron's energy investments.
Unallocated Expenses. Net unallocated expenses such as
rent, systems expenses and other support group costs
increased in 1998 due to continued expansion into new
markets and system upgrades.
Investing Activities. Included in the Enron Wholesale
business lines described above, for the six months ended
June 30, 1998, was approximately $320 million of gross
margin (before certain direct and indirect expenses)
resulting from the management of investments, as compared
with approximately $70 million during the six months ended
June 30, 1997. These earnings have been reflected in the
business lines discussed above based on the type of activity
to which the investment related. Cash proceeds from this
activity totaled approximately $500 million and $100
million for the six months ended June 30, 1998 and 1997,
respectively.
Retail Energy Services
Energy Services reported an operating loss before
interest, minority interest and taxes of $70 million in the
first half of 1998 compared to a loss of $39 million for the
same period of 1997. These results primarily reflect the
costs associated with developing the commodity, capital and
services capability to deliver on contracts signed to date
by Energy Services, as well as income from investments in
related businesses.
Corporate and Other
Corporate and Other realized a loss of $15 million in the
first half of 1998 compared to a loss of $759 million for
the same period in 1997.
Significant components of IBIT are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
<S> <C> <C>
IBIT before items impacting comparability $ (15) $ 16
Items impacting comparability:
J-Block gas contract restructuring charge - (675)
Charge to reflect depressed MTBE margins
on committed production - (100)
IBIT $ (15) $(759)
</TABLE>
The decrease in IBIT before items impacting comparability
reflects the results of certain investments, including EREC,
EOTT and the operations of Enron's methanol and MTBE plants.
Interest and Related Charges, net
Interest and related charges, net, is reported net of
interest capitalized of $15 million and $8 million for the
first half of 1998 and 1997, respectively. The net expense
increased $115 million in the first half of 1998 as compared
to the same period of 1997, primarily due to higher debt
levels, including $1.5 billion of debt issued by Enron in
the second half of 1997 and $1.1 billion of debt assumed in
connection with the merger with PGC.
Dividends on Company-Obligated Preferred Securities of Subsidiaries
Dividends on company-obligated preferred securities of
subsidiaries increased from $31 million in the first half of
1997 to $39 million in the first half of 1998, primarily due
to the issuance of approximately $200 million of additional
preferred securities by an Enron subsidiary in June 1997.
Minority Interests
Minority interests increased $8 million to $44 million in
the first half of 1998 compared to the same period in 1997,
primarily due to the minority owner's share of dividends on
preferred stock issued in connection with the formation of
an Enron-controlled joint venture in late 1997, partially
offset by Enron's acquisition of the Enron Global Power &
Pipelines, L.L.C. minority interest in November 1997 and
decreased net income from EOG in the first half of 1998.
Income Tax Expense
Income taxes increased during the first six months of
1998 as compared to the same period in 1997 primarily as a
result of pretax losses in 1997 due to the non-recurring
charges for the restructuring of Enron's J-Block contract
and for depressed MTBE margins on committed production. The
effective tax rate differed from the statutory rate due to
various transactions, including equity earnings, tight gas
sands tax credits and asset and stock sale differences.
YEAR 2000
The Year 2000 problem results from the use in computer
hardware and software of two digits rather than four digits
to define the applicable year. The use of two digits was a
common practice for decades when computer storage and
processing was much more expensive than today. When
computer systems must process dates both before and after
January 1, 2000, two-digit year "fields" may create
processing ambiguities that can cause errors and system
failures. For example, computer programs that have date-
sensitive features may recognize a date represented by "00"
as the year 1900 instead of 2000. These errors or failures
may have limited effects, or the effects may be widespread,
depending on the computer chip, system or software, and its
location and function.
The effects of the Year 2000 problem are exacerbated
because of the interdependence of computer and
telecommunications systems in the United States and
throughout the world. This interdependence certainly is
true for Enron and Enron's suppliers, trading partners, and
customers, as well as among the governments of countries
around the world where Enron does business.
Enron Year 2000 Plan
Enron's Board of Directors has been briefed about the
Year 2000 problem generally and as it may affect Enron. The
Board has adopted a Year 2000 plan (the Plan) covering all
of Enron's business units.
Enron is implementing the Plan, which will be modified as
events warrant. Implementation of Enron's Year 2000 plan is
directly supervised by a Senior Vice President who is aided
by a Year 2000 Project Director. The Project Director
coordinates the implementation of the Plan among Enron's
business units. Each business unit in turn has developed,
and is implementing, a Year 2000 plan specific to it, as
part of the overall Plan. Enron also has engaged certain
outside consultants, technicians and other external
resources to aid in formulating and implementing the Plan.
Under the Plan, Enron will continue to inventory its
computer hardware and software systems and embedded chips
and software; assess the effects of Year 2000 problems on
all Enron enterprises; remedy those problems to the maximum
practicable extent; verify and test the systems to which
remediation efforts have been applied; and attempt to
ameliorate those aspects of the Year 2000 problem that
cannot practicably be remediated by January 1, 2000,
including the development of contingency plans to cope with
the consequences of Year 2000 problems that have not been
identified or remediated by that date.
The Plan also recognizes that the computer,
telecommunications, and other systems (Outside Systems) of
outside entities (Outside Entities) play a major role in the
conduct of Enron's business. Enron does not have control of
these Outside Entities or Outside Systems. (In some cases,
Outside Entities are foreign governments or businesses
located in foreign countries.) However, Enron's Plan
includes an ongoing process of contacting Outside Entities
whose systems have, or may have, a substantial effect on
Enron's ability to continue to conduct business without
disruption from Year 2000 problems. The Plan envisions
Enron's attempting to inventory and assess the extent to
which these Outside Systems may not be "Year 2000 ready" or
"Year 2000 compatible" (that is, able to process data
reliably, both before and after January 1, 2000, without
disruption due to an inability to reliably process date
information). Enron will attempt diligently to coordinate
with these Outside Entities in an ongoing effort to obtain
assurance that these Outside Systems will be Year 2000
compatible well before January 1, 2000. Consequently, Enron
will work prudently with Outside Entities in a reasonable
attempt to inventory, assess, remediate, verify and test
Enron's connections to Outside Systems to ascertain the
extent to which they are, or can be made to be, Year 2000
ready and compatible with Enron's remediation of its own
systems. To the extent that Outside Systems are not
reasonably expected to be Year 2000 ready, Enron intends to
develop contingency plans in an attempt to minimize the
disruptions or other adverse effects resulting from year
2000 incompatibilities.
Current Status
Enron and all its business units are in the process of
completing preliminary assessments of Enron's Year 2000
problem, and Enron's business units are at various stages in
implementation of the Plan.
Although it is difficult to estimate the total costs of
implementing the Plan through January 1, 2000 and beyond,
Enron's preliminary estimate is that such costs will not be
material. However, although management believes that its
estimates are reasonable, there can be no assurance, for the
reasons stated in the next paragraph, that the actual costs
of implementing the Plan will not differ materially from the
estimated costs.
Outlook
From a forward-looking perspective, the extent and
magnitude of the Year 2000 problem as it will affect Enron,
both before and for some period after January 1, 2000, are
difficult to predict or quantify for a number of reasons.
Among the most important are the difficulty of locating all
software internal to Enron that is not Year 2000 compatible,
as well as "embedded" chips that may be in a great variety
of hardware used for process or flow control, environmental,
transportation, access, communications and other systems.
Enron believes that it will be able to identify and
remediate mission-critical internal computer systems and
systems containing embedded chips and will have contingency
plans to deal with these systems. Other important
difficulties relate to the lack of control over, and
difficulty inventorying, assessing, remediating, verifying
and testing, Outside Systems connected, and vital, to
Enron's computer, telecommunications or other mission-
critical systems; and the unavailability of certain
necessary internal or external resources, including but not
limited to trained hardware and software engineers,
technicians and other personnel to perform adequate
remediation, verification and testing of Enron systems or
Outside Systems. Year 2000 costs are difficult to estimate
accurately because of unanticipated vendor delays, technical
difficulties, the impact of tests of Outside Systems and
similar events. Additionally, there can be no assurance for
example that all Outside Systems will be adequately
remediated so that they are Year 2000 ready by January 1,
2000, or by some earlier date, so as not to create a
material disruption to Enron's business. If, despite
Enron's diligent, prudent efforts under its Year 2000 Plan,
there are Year 2000-related failures that create substantial
disruptions to Enron's business, the adverse impact on
Enron's business could be material. Moreover, the estimated
costs, referred to above, of implementing the Plan do not
take into account the costs, if any, that might be incurred
as a result of Year 2000-related failures that occur despite
Enron's implementation of the Plan.
NEW ACCOUNTING PRONOUNCEMENTS
On April 3, 1998, the AICPA issued Statement of Position
98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities," which generally requires that costs for start-
up activities and organization costs should be expensed as
incurred. SOP 98-5 is effective for financial statements
for fiscal years beginning after 1998 and initial adoption
is required to be reflected as a cumulative effect of
accounting change. Enron is evaluating the impact of SOP 98-5
and is currently unable to estimate the impact of adopting
this accounting pronouncement.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative
instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance
sheet as either an asset or liability measured at its fair
value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in
the income statement, and requires that a company must
formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. A company may also implement the
Statement as of the beginning of any fiscal quarter after
issuance, however, SFAS No. 133 cannot be applied
retroactively. Enron has not yet determined the timing of
or method of adoption of SFAS No. 133. Enron believes that
SFAS No. 133 will not have an impact on its accounting for
price risk management activities but has not yet quantified
the effect on its hedging activities.
FINANCIAL CONDITION
<TABLE>
Cash Flows
<CAPTION>
Six Months Ended
June 30,
(In Millions) 1998 1997
<S> <C> <C>
Cash provided by (used in):
Operating activities $ (131) $ (523)
Investing activities (1,257) (647)
Financing activities 1,393 1,125
</TABLE>
Cash used in operating activities totaled $131 million in
the first half of 1998 as compared to $523 million in the
same period last year. The change reflects higher earnings
in 1998 and payments of $440 million made in 1997 in
connection with the resolution of the J-block gas contract
partially offset by higher working capital requirements and
an increase in net assets from price risk management
activities. The changes in the receivable and payable
components of working capital and net assets from price risk
management activities were primarily a result of the high
volume of power marketed by Enron and the increase in the
per unit price of power in the second quarter of 1998.
Enron expects that its working capital requirements will
decrease by year-end.
Cash used in investing activities totaled $1,257 million
in the first six months of 1998 as compared to $647 million
in the same period of 1997. The 1998 amount reflects
increased cash used to acquire merchant investments
(investments by Enron Wholesale in connection with its
finance and investing line of business) and 7.7 million shares
of EOG stock and a decrease in the amount of proceeds
received from asset sales.
Cash provided by financing activities totaled $1,393
million in the first half of 1998 as compared to $1,125
million during the same period of 1997. Financing
activities in the first half of 1998 include net proceeds of
approximately $837 million from the sale of 17.25 million
shares of Enron common stock and net issuances of short- and
long-term debt of $733 million. Proceeds were primarily
used to fund investment activities.
Enron is able to fund its normal working capital
requirements mainly through operations or, when necessary,
through the utilization of credit facilities and its ability
to sell commercial paper and accounts receivable.
FINANCIAL RISK MANAGEMENT
Enron Wholesale's business offers price risk management
services primarily related to commodities associated with
the energy sector (natural gas, crude oil, natural gas
liquids and electricity). Enron's other businesses also
enter into forwards, swaps and other contracts primarily for
the purpose of hedging the impact of market fluctuations on
assets, liabilities, production and other contractual
commitments. For a complete discussion of the types of
financial risk management products used by Enron, the types
of market risks associated with Enron's portfolio of
transactions, and the methods used by Enron to manage market
risks, see Enron's Annual Report on Form 10-K for the year
ended December 31, 1997.
In late June and early July 1998, a combination of warmer
weather and lack of power generation capacity caused
significant price swings in power markets in the Eastern
United States. As a result, Enron's value at risk for
commodity price risk for the Enron Wholesale business at
June 30, 1998 increased to $44 million as compared to $25
million at December 31, 1997. However, since that time, the
value at risk for commodity price risk has declined to
levels comparable to year-end 1997. This decline was due to
numerous factors, including lower power prices and
volatility as well as changes in Enron's risk positions.
Enron's value at risk for its non-trading commodity price
risk includes only the risk related to the financial
instruments that serve as hedges and does not include the
related underlying hedged production. During the second
quarter of 1998, Enron evaluated and began managing its
price risk exposure related to EOG production as production
estimates became more determinable for the remainder of 1998
and 1999. As a result, the value at risk for Enron's non-
trading commodity price risk has increased approximately 50%
as compared to the value at risk at December 31, 1997.
CAPITALIZATION
Total capitalization at June 30, 1998 was $15.9 billion.
Debt as a percentage of total capitalization decreased to
44.1% at June 30, 1998 as compared to 44.6% at December 31,
1997 and 46.8% at June 30, 1997. The decrease primarily
reflects the issuance during 1997 of approximately 62.0
million shares of common stock in connection with the
acquisitions of PGC and the minority interest in EPP (see
Note 2 to the Consolidated Financial Statements) and the
issuance, in May 1998, of 17.25 million shares of common
stock, partially offset by increased debt.
As described in Note 2 to the Consolidated Financial
Statements, in July 1998, Enron announced two proposed
acquisitions totaling $3.5 billion. Enron plans to finance
these acquisitions prior to year-end with a combination of
permanent financing, the addition of third-party investors
and the sale of selected assets. After the restructuring,
Enron's total capital structure is not expected to be
materially different from that at June 30, 1998.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward
looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Although Enron believes that its
expectations are based on reasonable assumptions, it can
give no assurance that its goals will be achieved. Important
factors that could cause actual results to differ materially
from those in the forward looking statements herein include
political developments in foreign countries, ability to
penetrate new retail natural gas and electricity markets in
the United States and Europe, the timing and extent of
changes in commodity prices for crude oil, natural gas,
electricity and interest rates, the extent of EOG's success
in acquiring oil and gas properties and in discovering,
developing, producing and marketing reserves, the timing and
success of Enron's efforts to develop international power,
pipeline and other infrastructure projects and conditions of
the capital markets and equity markets during the periods
covered by the forward looking statements.
<PAGE>
PART II. OTHER INFORMATION
ENRON CORP. AND SUBSIDIARIES
ITEM 1. Legal Proceedings
See Part I. Item 1, Note 4 to Consolidated Financial
Statements entitled "Litigation and Other Contingencies,"
which is incorporated herein by reference.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Enron Corp. was
held on May 5, 1998 in Houston, Texas, for the purpose of
electing a board of directors and the appointment of
auditors. Proxies for the meeting were solicited pursuant
to Section 14(a) of the Securities Exchange Act of 1934 and
there was no solicitation in opposition to management's
nominees.
(a) All of management's nominees for directors as listed in
the proxy statement were elected with the following vote:
<TABLE>
<CAPTION>
Nominee Shares FOR Shares WITHHELD
<S> <C> <C>
Robert A. Belfer 269,617,479 2,958,316
Norman P. Blake, Jr. 270,017,054 2,558,741
Ronnie C. Chan 268,477,840 4,097,955
John H. Duncan 269,870,197 2,705,598
Joe H. Foy 269,849,722 2,726,073
Wendy L. Gramm 269,891,769 2,684,026
Ken L. Harrison 270,073,072 2,502,723
Robert K. Jaedicke 269,811,724 2,764,071
Kenneth L. Lay 269,827,805 2,747,990
Charles A. LeMaistre 269,714,549 2,861,246
Jerome J. Meyer 269,919,823 2,655,972
Jeffrey K. Skilling 269,980,191 2,595,604
John A. Urquhart 269,922,780 2,653,015
John Wakeham 269,913,491 2,662,304
Charls E. Walker 269,738,460 2,837,335
Bruce G. Willison 270,070,586 2,505,209
Herbert S. Winokur, Jr. 270,065,730 2,510,065
</TABLE>
(b) The appointment of Arthur Andersen LLP as independent
auditor was approved by the following vote:
<TABLE>
<CAPTION>
Shares FOR Shares AGAINST Shares ABSTAINING
<C> <C> <C>
270,054,055 1,481,009 1,040,731
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 12 - Computation of Ratio of Earnings to
Fixed Charges
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
ENRON CORP.
(Registrant)
Date: August 13, 1998 By: /s/ Richard A. Causey
Richard A. Causey
Senior Vice President and Chief
Accounting, Information and
Administrative Officer
(Principal Accounting Officer)
<PAGE>
Exhibit 12
<TABLE>
ENRON CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Dollars in Millions)
(Unaudited)
<CAPTION>
Six Months
Ended Year Ended December 31,
6/30/98 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Earnings available for fixed charges
Net income $359 $105 $ 584 $ 520 $ 453 $333
Less:
Undistributed earnings and
losses of less than 50% owned
affiliates (23) (89) (39) (14) (9) (20)
Capitalized interest of
nonregulated companies (17) (16) (10) (8) (9) (26)
Add:
Fixed charges(1) 391 674 454 436 487 471
Minority interest 44 80 75 27 30 28
Income tax expense 123 (65) 297 310 190 148
Total $877 $689 $1,361 $1,271 $1,142 $934
Fixed Charges
Interest expense(1) $361 $624 $ 404 $ 386 $ 445 $436
Rental expense representative of
interest factor 30 50 50 50 42 35
Total $391 $674 $ 454 $ 436 $ 487 $471
Ratio of earnings to fixed charges 2.24 1.02 3.00 2.92 2.34 1.98
<FN>
(1) Amounts exclude costs incurred on sales of accounts receivables.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 175
<SECURITIES> 0
<RECEIVABLES> 3,439
<ALLOWANCES> 0
<INVENTORY> 291
<CURRENT-ASSETS> 7,478
<PP&E> 14,318
<DEPRECIATION> 4,810
<TOTAL-ASSETS> 28,258
<CURRENT-LIABILITIES> 6,389
<BONDS> 6,989
0
132
<COMMON> 5,084
<OTHER-SE> 1,571
<TOTAL-LIABILITY-AND-EQUITY> 28,258
<SALES> 9,789
<TOTAL-REVENUES> 12,239
<CGS> 10,087
<TOTAL-COSTS> 11,629
<OTHER-EXPENSES> (206)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264
<INCOME-PRETAX> 469
<INCOME-TAX> 110
<INCOME-CONTINUING> 359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 359
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.06
</TABLE>
