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 September 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 October 31, 1998
Common Stock, No Par Value 330,728,209 shares
1 of 43
<PAGE>
ENRON CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Income Statement - Three
Months Ended September 30, 1998 and 1997 and
Nine Months Ended September 30, 1998 and 1997 3
Consolidated Balance Sheet - September 30, 1998
and December 31, 1997 4
Consolidated Statement of Cash Flows - Nine
Months Ended September 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 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 42
ITEM 6. Exhibits and Reports on Form 8-K 42
<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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues $11,320 $5,806 $23,558 $14,401
Costs and Expenses
Cost of gas, electricity and other
products 10,017 4,927 20,103 12,270
Operating expenses 614 418 1,621 999
Oil and gas exploration expenses 34 22 94 68
Depreciation, depletion and
amortization 215 169 587 418
Taxes, other than income taxes 50 45 153 114
Contract restructuring charge - - - 675
10,930 5,581 22,558 14,544
Operating Income (Loss) 390 225 1,000 (143)
Other Income and Deductions
Equity in earnings of unconsolidated
subsidiaries 8 57 161 138
Gains (losses) on sales of assets
and investments (1) (34) 3 122
Other income, net 8 63 57 75
Income (Loss) Before Interest,
Minority Interests and Income Taxes 405 311 1,221 192
Interest and Related Charges, net 134 122 398 271
Dividends on Company-Obligated
Preferred Securities of Subsidiaries 19 19 58 50
Minority Interests 16 22 60 58
Income Tax Expense (Benefit) 68 14 178 (123)
Net Income (Loss) 168 134 527 (64)
Preferred Stock Dividends 4 5 13 13
Earnings (Loss) on Common Stock $ 164 $ 129 $ 514 $ (77)
Earnings (Loss) Per Share of Common
Stock
Basic $ 0.50 $ 0.44 $ 1.62 $(0.29)
Diluted $ 0.47 $ 0.42 $ 1.53 $(0.29)
Average Number of Common Shares
Used in Computation
Basic 329 294 318 268
Diluted 356 317 344 268
<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>
September 30, December 31,
1998 1997
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 383 $ 170
Trade receivables 2,661 1,697
Other receivables 752 454
Assets from price risk management activities 1,787 1,577
Other 966 771
Total Current Assets 6,549 4,669
Investments and Other Assets
Investments in and advances to unconsolidated
subsidiaries 4,382 2,656
Assets from price risk management activities 2,306 1,352
Goodwill 1,976 1,910
Other 4,509 3,665
Total Investments and Other Assets 13,173 9,583
Property, Plant and Equipment, at cost 15,064 13,742
Less accumulated depreciation, depletion
and amortization 5,037 4,572
Net Property, Plant and Equipment 10,027 9,170
Total Assets $29,749 $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>
September 30, December 31,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 2,898 $ 2,119
Liabilities from price risk management
activities 1,907 1,476
Short-term debt 1,102 -
Other 1,208 817
Total Current Liabilities 7,115 4,412
Long-Term Debt 8,475 6,254
Deferred Credits and Other Liabilities
Deferred income taxes 2,040 2,039
Liabilities from price risk management
activities 1,465 1,190
Other 1,568 1,769
Total 5,073 4,998
Minority Interests 1,142 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 5,110 4,224
Retained earnings 2,138 1,852
Cumulative foreign currency translation
adjustment (170) (148)
Common stock held in treasury (202) (269)
Other (including Flexible Equity Trust) (57) (175)
Total 6,951 5,618
Total Liabilities and Shareholders' Equity $29,749 $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>
Nine Months Ended
September 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) $ 527 $ (64)
Depreciation, depletion and amortization 587 418
Oil and gas exploration expenses 94 68
Deferred income taxes 109 (193)
Gains on sales of assets and investments (31) (129)
Changes in components of working capital (372) (427)
Net assets from price risk management
activities (458) (198)
Amortization of production payment transaction (32) (32)
Other, net (107) (31)
Net Cash Provided by (Used in) Operating Activities 317 (588)
Cash Flows From Investing Activities
Proceeds from sales of assets and investments 59 441
Capital expenditures (1,231) (953)
Equity investments (1,498) (692)
Merchant banking investments (487) -
Acquisition of subsidiary stock (180) -
Business acquisitions, net of cash acquired (87) (77)
Other, net (93) (215)
Net Cash Used in Investing Activities (3,517) (1,496)
Cash Flows From Financing Activities
Net increase in short-term borrowings 1,997 723
Issuance of long-term debt 1,253 2,059
Repayment of long-term debt (388) (419)
Issuance of company-obligated preferred
securities of subsidiaries - 372
Issuance of common stock 867 -
Dividends paid (307) (255)
Net (acquisition) disposition of treasury stock 6 (396)
Other, net (15) (62)
Net Cash Provided by Financing Activities 3,413 2,022
Increase (Decrease) in Cash and Cash Equivalents 213 (62)
Cash and Cash Equivalents, Beginning of Period 170 256
Cash and Cash Equivalents, End of Period $ 383 $ 194
Changes in Components of Working Capital
Receivables $(1,317) $ (95)
Payables 860 (124)
Other 85 (208)
Total $ (372) $ (427)
<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
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. The acquisition was consummated in
late August.
On July 24, 1998 Enron announced a cash offer for all
outstanding 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 was unanimously recommended by the board of
directors of Wessex.
On October 2, 1998, Enron announced that it had received
valid acceptances of its offer for Wessex representing more
than 90 percent of Wessex's issued ordinary share capital.
On the same date, Enron Water (Europe) Plc made payment for
91.9 percent of Wessex's issued ordinary share capital.
Further, on October 2, 1998, Enron issued notices to those
Wessex ordinary shareholders who had not already accepted
the offer, informing them that it intended to exercise its
rights under British law to acquire compulsorily all the
outstanding ordinary shares of Wessex. The compulsory share
acquisition is expected to be consummated in November 1998.
The Elektro and Wessex acquisitions were initially
financed by short-term indebtedness and bridge loans
totaling approximately $3 billion and by approximately $.6
billion of non-recourse debt incurred by Wessex.
Although Enron currently has a greater than 50 percent
interest in the subsidiary which acquired Elektro, the
subsidiary is being presented under the equity method. As a
part of the permanent financing structure, which is expected
to be in place prior to year-end, management is actively
pursuing a sale of 50 percent of the subsidiary. Enron
intends to restructure the Wessex financing in a similar
manner.
On October 30, 1998, Enron, through a wholly-owned
subsidiary, announced that it had reached a definitive
agreement with Cogen Technologies to acquire its interests
in three power plants located in New Jersey, which have an
aggregate generating capacity of 1,037 megawatts, for $1.1
billion (including $1.0 billion of non-recourse debt already
committed by financial institutions and $130 million of
capital to be contributed by the purchasers) and the
assumption of approximately $350 million in non-recourse
debt. The parties anticipate closing the transaction in
early 1999. Enron anticipates making the acquisition with
another party and expects to own a 50 percent interest.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes for the first nine months
of 1998 and 1997 was $51 million and $43 million,
respectively. Cash paid for interest expense for the same
periods, net of amounts capitalized, was $419 million and
$282 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 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 has filed a petition for review with the Oregon
Supreme Court. The OPUC has also filed such a petition for
review. Also on August 26, 1998, the Utility Reform Project
filed a Petition for Review with the Oregon Supreme Court
seeking review of that portion of the Oregon Court of
Appeals decision relating to PGE's recovery of its
undepreciated investment in Trojan. 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. 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>
Nine Months Ended
Third Quarter September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 168 $ 134 $ 527 $ (64)
Preferred stock dividends (4) (5) (13) (13)
Numerator for basic earnings
per share - income available
to common shareholders 164 129 514 (77)
Effect of dilutive securities:
Preferred stock dividends(a) 4 5 13 -
Numerator for diluted earnings
per share - income available
to common shareholders after
assumed conversions $ 168 $ 134 $ 527 $ (77)
Denominator:
Denominator for basic earnings
per share - weighted-average
shares 329 294 318 268
Effect of dilutive securities:
Preferred stock(a) 18 18 18 -
Employee stock options(a) 8 4 7 -
Other puts and forwards(a) 1 1 1 -
Dilutive potential common shares 27 23 26 -
Denominator for diluted earnings
per share - adjusted weighted-
average shares and assumed
conversions 356 317 344 268
Basic earnings (loss) per share $0.50 $0.44 $1.62 $(0.29)
Diluted earnings (loss) per share $0.47 $0.42 $1.53 $(0.29)
<FN>
(a) For the nine months ended September 30, 1997, the
dividends and conversion of preferred stock have been
excluded from the computation because they are
antidilutive.
</TABLE>
6. COMPREHENSIVE INCOME
Comprehensive income includes the following (in
millions):
<TABLE>
<CAPTION>
Nine Months Ended
Third Quarter September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Earnings (loss) on common stock $ 164 $ 129 $ 514 $ (77)
Other comprehensive income:
Foreign currency
translation adjustment (11) - (22) (2)
Total comprehensive income (loss) $ 153 $ 129 $ 492 $ (79)
</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
Third Quarter 1998
vs. Third 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 third quarter 1998 net income was $168 million
compared to $134 million in the third 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. Items impacting comparability are
discussed in the respective segment results. Net income
(loss) includes the following (in millions):
<TABLE>
<CAPTION>
Third Quarter
1998 1997
<S> <C> <C>
After-tax results from:
Core businesses $ 186 $ 163
Retail Energy Services (18) (16)
168 147
Items impacting comparability:
J-Block contract restructuring charge - (13)
Net income $ 168 $ 134
</TABLE>
Basic and diluted earnings (loss) per share of common
stock were as follows:
<TABLE>
<CAPTION>
Third Quarter
1998 1997
<S> <C> <C>
Basic earnings per share $ 0.50 $0.44
Diluted earnings (loss) per share:
Results from core businesses $ 0.52 $ 0.51
Results from Retail Energy Services (0.05) (0.05)
Items impacting comparability:
J-Block contract restructuring charge - (0.04)
Diluted earnings per share $ 0.47 $0.42
</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>
Third Quarter
1998 1997
<S> <C> <C>
Exploration and Production $ 25 $ 49
Transportation and Distribution:
Gas Pipeline Group 69 71
Portland General 61 51
Wholesale Energy Operations and Services 277 173
Retail Energy Services (23) (25)
Corporate and Other (4) (8)
Income before interest, minority
interests and taxes $ 405 $ 311
</TABLE>
Exploration and Production
Enron's exploration and production operations are
conducted by Enron Oil & Gas Company (EOG). IBIT of
Exploration and Production, which includes EOG's results and
results of hedges placed by Enron on commodity positions not
hedged by EOG, totaled $25 million and $49 million for the
third quarter of 1998 and 1997, respectively.
Wellhead volume and price statistics (including
intercompany amounts) are as follows:
<TABLE>
<CAPTION>
Third Quarter
1998 1997
<S> <C> <C>
Natural gas volumes (MMcf/d)(a)
North America 798 748
Trinidad 163 115
India 58 34
Total 1,019 897
Average natural gas prices ($/Mcf)
North America $1.75 $1.91
Trinidad 1.03 1.04
India 2.34 2.93
Composite 1.67 1.84
Crude oil/condensate volumes (MBbl/d)(a)
North America 19.4 14.8
Trinidad 3.1 3.4
India 5.1 2.4
Total 27.6 20.6
Average crude oil/condensate prices ($/Bbl)
North America $12.39 $18.88
Trinidad 11.37 18.91
India 11.59 18.21
Composite 12.13 18.81
<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>
Third Quarter
1998 1997
<S> <C> <C>
Net revenues $199 $193
Operating expenses 40 38
Exploration expenses 34 22
Depreciation, depletion and amortization 84 72
Taxes, other than income taxes 14 13
Other income, net (2) 1
Income before interest, minority
interests and taxes $ 25 $ 49
</TABLE>
Net Revenues
Exploration and Production's revenues, net of cost of gas
sold in connection with natural gas marketing, increased $6
million in the third quarter of 1998 as compared to the same
period in 1997, primarily due to increased production
volumes of natural gas and crude oil and condensate,
partially offset by lower wellhead natural gas and crude oil
and condensate prices.
Costs and Expenses
Operating expenses, including taxes other than income
taxes, depreciation, depletion and amortization and
exploration expenses increased primarily due to increased
production volumes and increased 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).
Gas Pipeline Group. The following table summarizes total
volumes transported for each of Enron's interstate natural
gas pipelines.
<TABLE>
<CAPTION>
Third Quarter
1998 1997
<S> <C> <C>
Total Volumes Transported (Bbtu/d)(a)
Northern Natural Gas 3,792 4,063
Transwestern Pipeline 1,615 1,453
Florida Gas Transmission 1,471 1,486
Northern Border Pipeline 1,723 1,740
<FN>
(a) Reflects 100% of each entity's throughput volumes.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Third Quarter
1998 1997
<S> <C> <C>
Net revenues $144 $143
Operating expenses 68 77
Depreciation and amortization 17 16
Equity in earnings 8 11
Other income, net 2 10
Income before interest and taxes $ 69 $ 71
</TABLE>
Net Revenues
Revenues, net of cost of sales, of Gas Pipeline Group
(GPG) increased $1 million in the third quarter of 1998 as
compared to the same period in 1997 despite a decrease in
total volumes transported. The change in net revenues is
primarily a result of increased average transport rates.
Costs and Expenses
Operating expenses decreased $9 million during the
third quarter of 1998 as compared to the same period in
1997, primarily due to lower overhead costs.
Other Income, net
Other income, net decreased $8 million in the third
quarter of 1998 as compared to the third quarter of 1997,
primarily as a result of the resolution in 1997 of certain
liabilities previously reserved.
Portland General. For the third quarter of 1998,
Portland General realized IBIT of $61 million as compared to
$51 million in the same period in 1997, as follows (in
millions):
<TABLE>
<CAPTION>
Third Quarter
1998 1997
<S> <C> <C>
Revenues $280 $386
Purchased power and fuel 104 221
Operating expenses 76 69
Depreciation and amortization 47 45
Other income, net 8 -
Income before interest and taxes $ 61 $51
</TABLE>
Revenues
Revenues of Portland General declined $106 million in the
third quarter of 1998 as compared to the same period in
1997, primarily due to the transition of the majority of its
electricity wholesale business to the Wholesale Energy
Operations and Services segment beginning January 1, 1998,
partially offset by an $8 million reduction in 1997 revenues
resulting from an Oregon excise tax refund that was returned
by PGE to its customers that resulted in a corresponding
decrease in tax expense.
Costs and Expenses
Costs and expenses decreased $108 million in the third
quarter of 1998 as compared to the third quarter of 1997,
primarily as a result of the transition of its electricity
wholesale business to the Wholesale Energy Operations and
Services segment.
Other income, net
Other income, net increased $8 million in the third
quarter of 1998 as compared to the same period of 1997,
primarily due to Portland General's equity in earnings of a
telecommunications joint venture created in 1998.
Statistics for PGE for the third quarter of 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
Third Quarter
1998 1997
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 1,454 1,391
Commercial 1,861 1,831
Industrial 1,074 1,093
Total Retail 4,389 4,315
Wholesale(c) 2,675 8,556
Total Electricity Sales 7,064 12,871
Average Billed Revenue (cents per kWh)
Residential 6.43 5.71
Commercial 5.07 5.01
Industrial 3.37 3.45
Total Retail 4.47 4.84
Wholesale 2.61 2.10
Total Sales 3.88 3.02
Resource Mix
Coal 19% 7%
Combustion Turbine 17 5
Hydro 7 4
Total Generation 43 16
Firm Purchases 47 77
Secondary Purchases 10 7
Total Resources 100% 100%
Average Variable Power Cost (Mills/kWh)(b)
Generation 9.6 8.8
Firm Purchases 18.8 19.2
Secondary Purchases 32.1 13.0
Total Average Variable Power Cost 17.3 17.6
Retail Customers (end of period, thousands) 698 681
<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>
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 as well as a leader in the
development, construction 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>
Third Quarter
1998 1997
<S> <C> <C>
Asset Development and Construction $ 51 $ 14
Cash and Physical 137 4
Risk Management 44 68
Finance and Investing 81 126
Unallocated expenses (36) (39)
Income before interest, minority
interests and taxes $277 $173
</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 $51 million in the third quarter of
1998 from $14 million in the same period of 1997 primarily
as a result of earnings related to the sale of an interest
in a project in the construction phase, 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>
Third Quarter
1998 1997
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 7,749 7,321
Canada 3,656 2,353
Europe 1,176 748
Other 4 -
12,585 10,422
Transport Volumes 643 456
Total Gas Volumes 13,228 10,878
Oil 2,596 684
Liquids 652 858
Electricity(c) 17,684 7,854
Total 34,160 20,274
Electricity Volumes Marketed
(Thousand MWh)
United States 162,527 72,238
Europe 165 19
Total 162,692 72,257
Financial Settlements (Notional)(BBtue/d) 83,653 51,953
<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 to $137
million in the third quarter of 1998 as compared to $4
million in the same period of 1997 primarily due to earnings
related to Enron's international assets and increased
profits from both gas and power marketing. The volume of
electricity marketed increased over 100% from the third
quarter of 1997 while gas volumes marketed increased over
20% in the same period.
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 $24 million
in the third quarter of 1998 as compared to the third
quarter of 1997, primarily due to fewer originations in
Europe, partially offset by increased North American
originations.
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
decreased to $81 million in the third quarter of 1998 as
compared to $126 million in the same period of 1997,
primarily as a result of fewer originations and the decline
in value of Enron's investments, net of hedging activities,
caused by general market conditions, partially offset by
gains on restructurings and sales of investments.
Unallocated Expenses. Net unallocated expenses such as
rent, systems expenses and other support group costs
decreased in 1998 by $3 million.
Investing Activity. Included in the Enron Wholesale
business lines described above, for the third quarter of
1998, was approximately $200 million of gross margin (before
certain direct and indirect expenses) resulting from the
management of investments, as compared with approximately
$150 million during the third 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 $200 million and $80 million for the quarter
ended September 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 $23
million in the third quarter of 1998 compared to a loss of
$25 million in the third quarter of 1997. These results
primarily reflect the costs associated with securing new
contracts and developing the commodity, capital and services
capability to deliver on contracts signed to date by Energy
Services.
Corporate and Other
Corporate and Other, which includes results of Enron
Renewable Energy Corp., EOTT Energy Corp. (EOTT) and the
operations of Enron's methanol and MTBE plants, realized a
loss before interest, minority interests and income tax of
$4 million in the third quarter of 1998 compared to a loss
of $8 million for the same period in 1997.
Interest and Related Charges, net
Interest and related charges, net is reported net of
interest capitalized of $17 million and $5 million for the
third quarter of 1998 and 1997, respectively. The net
expense increased $12 million in the third quarter of 1998
as compared to the same period of 1997, primarily due to
higher debt levels, including approximately $1.5 billion of
long-term debt issued between the fourth quarter of 1997 and
the third quarter of 1998 and approximately $1.3 billion of
short-term debt to fund the initial financing of the Elektro
acquisition. See Note 2 to the Consolidated Financial
Statements.
Dividends on Company-Obligated Preferred Securities of
Subsidiaries
Dividends on company-obligated preferred securities of
subsidiaries was $19 million in the third quarter of 1998
and 1997.
Minority Interests
Minority interests decreased $6 million in the third
quarter of 1998 compared to the same period in 1997,
primarily due to 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 third quarter of 1998,
partially offset by 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.
Income Tax Expense
Income taxes increased during the third quarter of 1998
as compared to the third quarter of 1997 primarily as a
result of increased earnings. 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
Nine Months Ended September 30, 1998
vs. Nine Months Ended September 30, 1997
RESULTS OF OPERATIONS
Consolidated Net Income
Enron reported net income of $527 million for the first
nine months of 1998 compared to a loss of $64 million during
the same period in 1997. Net income (loss) includes the
following (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
After-tax results from:
Core businesses $593 $ 448
Retail Energy Services (66) (41)
527 407
Items impacting comparability(a):
Gains on sales of liquids assets - 66
J-Block contract restructuring charge - (463)
Charge to reflect depressed MTBE
margin on committed production - (74)
Net income (loss) $527 $ (64)
<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>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Basic earnings (loss) per share $ 1.62 $(0.29)
Diluted earnings (loss) per share:
Results from core businesses $ 1.72 $ 1.56
Results from Retail Energy Services (0.19) (0.14)
Items impacting comparability:
Gains on sales of liquids assets - 0.23
J-Block contract restructuring charge - (1.61)
Charge to reflect depressed MTBE
margins on committed production - (0.26)
Effect of anti-dilution(a) - (0.07)
Diluted earnings (loss) per share $ 1.53 $(0.29)
<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 $0.07 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>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Exploration and Production $ 97 $ 121
Transportation and Distribution:
Gas Pipeline Group 267 381
Portland General 202 51
Wholesale Energy Operations and
Services 767 470
Retail Energy Services (93) (64)
Corporate and Other (19) (767)
Income (loss) before interest,
minority interests and taxes $1,221 $ 192
</TABLE>
Exploration and Production
EOG reported IBIT of $97 million in the first nine months
of 1998 compared to $121 million for the same period in
1997. The 1998 results includes EOG's results and hedges
placed by Enron on commodity positions not hedged by EOG.
Wellhead volume and price statistics (including
intercompany amounts) are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Natural gas volumes (MMcf/d)(a)
North America 755 756
Trinidad 135 114
India 53 11
Total 943 881
Average natural gas prices ($/Mcf)
North America $1.87 $2.09
Trinidad 1.06 1.04
India 2.52 2.93
Composite 1.79 1.96
Crude oil/condensate volumes (MBbl/d)(a)
North America 16.5 13.8
Trinidad 2.9 3.5
India 4.7 1.8
Total 24.1 19.1
Average crude oil/condensate prices
($/Bbl)
North America $13.18 $19.72
Trinidad 12.85 18.88
India 13.31 20.78
Composite 13.17 19.66
<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>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Net revenues $584 $545
Operating expenses 119 112
Exploration expenses 94 68
Depreciation, depletion and amortization 229 204
Taxes, other than income taxes 42 43
Other income (expense), net (3) 3
Income before interest, minority
interests and taxes $ 97 $121
</TABLE>
Net Revenues
Exploration and Production's revenues, net of cost of gas
sold in connection with natural gas marketing, increased $39
million in the first nine months of 1998 as compared to the
same period in 1997. Total production volumes increased in
the first nine months of 1998 as compared with the first
nine months 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 approximately $1
million in the first nine months of 1998, an improvement
from the prior year, which reflected a reduction of $55
million in net revenues.
Costs and Expenses
Operating expenses, depreciation, depletion and
amortization and exploration expenses increased primarily
due to increased production volumes, increased 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>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Total Volumes Transported (Bbtu/d)(a)
Northern Natural Gas 4,053 4,316
Transwestern Pipeline 1,649 1,399
Florida Gas Transmission 1,323 1,389
Northern Border Pipeline 1,766 1,800
<FN>
(a) Reflects 100% of each entity's throughput volumes.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Net revenues $473 $488
Operating expenses 205 226
Depreciation and amortization 50 50
Equity in earnings 28 29
Other income, net 21 38
IBIT before items impacting
comparability 267 279
Gains on sales of liquids assets - 102
Income before interest and taxes $267 $381
</TABLE>
Net Revenues
Revenues, net of cost of sales, of GPG declined $15
million in the first nine months 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 $21 million during the
first nine months of 1998 as compared to the same period in
1997. The decline is primarily due to reduced expenses
following the sale of natural gas liquids assets in the
first half of 1997 and to lower overhead costs.
Other Income, net
Other income, net decreased $17 million during the
first nine months of 1998 as compared to the same period in
1997. The decrease was primarily due to income recognized
in 1997 related to liquids assets sold in 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 nine months of 1998,
Portland General realized IBIT of $202 million, compared
with $51 million for the three month period from July 1,
1997 to September 30, 1997, as follows (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Revenues $869 $386
Purchased power and fuel 322 221
Operating expenses 230 69
Depreciation and amortization 136 45
Other income, net 21 -
Income before interest and taxes $202 $ 51
</TABLE>
The results for the first nine months of 1998 include the
impact of the warmer than normal winter, increased operating
expenses related to the January 1998 ice storm in PGE's
customer service area and the transfer of the majority of
its electricity wholesale business to the Enron Wholesale
segment. Other income of $21 million in 1998 includes the
equity in earnings of a telecommunications joint venture.
Statistics for PGE for the first nine months of 1998 and
1997 (including amounts for the first six months of 1997 for
comparative purposes only) are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 5,054 5,011
Commercial 5,134 5,186
Industrial 3,170 3,173
Total Retail 13,358 13,370
Wholesale (c) 8,632 22,043
Total Electricity Sales 21,990 35,413
Average Billed Revenue (cents per kWh)
Residential 6.21 5.59
Commercial 5.07 5.07
Industrial 3.03 3.43
Total Retail 4.86 4.87
Wholesale 2.04 1.80
Total Sales 3.86 3.01
Resource Mix
Coal 15% 6%
Combustion Turbine 9 2
Hydro 9 6
Total Generation 33 14
Firm Purchases 60 79
Secondary Purchases 7 7
Total Resources 100% 100%
Average Variable Power Cost (Mills/kWh)(b)
Generation 8.0 5.3
Firm Purchases 16.3 16.0
Secondary Purchases 21.8 11.9
Total Average Variable Power Cost 15.0 15.0
Retail Customers (end of period,
thousands) 698 681
<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>
Wholesale Energy Operations and Services
The following table reflects IBIT for each of Enron
Wholesale's business lines (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Asset Development and Construction $ 113 $ 53
Cash and Physical 391 222
Risk Management 83 113
Finance and Investing 286 180
Unallocated expenses (106) (98)
Income before interest, minority
interests and taxes $ 767 $470
</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
$113 million in the first nine months of 1998 from
$53 million in the same period of 1997, primarily as a
result of earnings related to the sale of an interest in a
project in the construction phase, 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>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 7,242 7,749
Canada 3,279 2,195
Europe 1,121 594
Other 3 -
11,645 10,538
Transport Volumes 575 451
Total Gas Volumes 12,220 10,989
Oil 2,298 600
Liquids 619 1,061
Electricity(c) 11,838 5,264
Total 26,975 17,914
Electricity Volumes Marketed
(Thousand MWh)
United States 322,874 143,621
Europe 287 87
Total 323,161 143,708
Financial Settlements (Notional)(BBtue/d) 73,711 45,883
<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 $169
million in the first nine months of 1998 as compared to the
same period of 1997 primarily due to earnings related to
Enron's domestic and international assets and increased
profits from power marketing where volumes increased over
100% in 1998, partially offset by increased expenses.
Risk Management. Earnings from risk management decreased
27% in the first nine months of 1998 as compared to the
first nine months of 1997 primarily due to fewer
originations in Europe, partially offset by increased North
American originations.
Finance and Investing. Earnings from the finance and
investing operations increased to $286 million in the first
nine months of 1998 as compared to $180 million in the same
period of 1997 as a result of increased originations in the
North American and European markets and increased earnings
associated with Enron energy investments net of hedging
activities.
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 nine months ended
September 30, 1998, was approximately $520 million of gross
margin (before certain direct and indirect expenses)
resulting from the management of investments, as compared
with approximately $220 million during the nine months ended
September 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 $700 million and
$180 million for the nine months ended September 30, 1998
and 1997, respectively.
Retail Energy Services
Energy Services reported an operating loss before
interest, minority interest and taxes of $93 million in the
first nine months of 1998 compared to a loss of $64 million
for the same period of 1997. These results primarily
reflect the costs associated with securing new contracts and
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 $19 million in the
first nine months of 1998 compared to a loss of $767 million
for the same period in 1997.
Significant components of IBIT are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
IBIT before items impacting comparability $ (19) $ 8
Items impacting comparability:
J-Block gas contract restructuring charge - (675)
Charge to reflect depressed MTBE margins
on committed production - (100)
IBIT $ (19) $(767)
</TABLE>
Interest and Related Charges, net
Interest and related charges, net, is reported net of
interest capitalized of $33 million and $13 million for the
first nine months of 1998 and 1997, respectively. The net
expense increased $127 million in the first nine months 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, $1.1 billion of debt
assumed in connection with the merger with PGC, the issuance
of $1.5 billion of debt by Enron between the end of 1997 and
the end of the third quarter of 1998 and the increase in
short-term borrowing mainly related to the initial financing
of the Elektro acquisition.
Dividends on Company-Obligated Preferred Securities of
Subsidiaries
Dividends on company-obligated preferred securities of
subsidiaries increased from $50 million in the first nine
months of 1997 to $58 million in the first nine months 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 to $60 million in
the first nine months 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 nine months
of 1998.
Income Tax Expense
Income taxes increased during the first nine 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 for governments of countries around
the world where Enron does business.
State of Readiness
Enron's Board of Directors have been briefed about the
Year 2000 problems generally and as it may affect Enron.
The Board has adopted a Year 2000 plan (the "Plan") covering
all of Enron's business units. The aim of the Plan is to
take reasonable steps to prevent Enron's mission-critical
functions from being impaired due to the Year 2000 problem.
"Mission-critical" functions are those critical functions
whose loss would cause an immediate stoppage of or
significant impairment to major business areas (a major
business area is one of material importance to Enron's
business).
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. As
part of the overall Plan, each business unit in turn has
developed, and is implementing, a Year 2000 plan specific to
it. Enron also has engaged outside consultants, technicians
and other external resources to aid in formulating and
implementing the Plan.
Enron is implementing the Plan, which will be modified as
events warrant. Under the Plan, Enron will continue to
inventory its mission-critical computer hardware and
software systems and embedded chips (computer chips with
date-related functions, contained in a wide variety of
devices); assess the effects of Year 2000 problems on the
mission-critical functions of Enron's business units; remedy
systems, software and embedded chips in an effort to avoid
material disruptions or other material adverse effects on
mission-critical functions, processes and systems; verify
and test the mission-critical systems to which remediation
efforts have been applied; and attempt to mitigate those
mission-critical aspects of the Year 2000 problem that are
not remediated by January 1, 2000, including the development
of contingency plans to cope with the mission-critical
consequences of Year 2000 problems that have not been
identified or remediated by that date.
The Plan recognizes that the computer,
telecommunications, and other systems ("Outside Systems") of
outside entities ("Outside Entities") have the potential for
major, mission-critical, adverse effects on 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 identifying and contacting
Outside Entities whose systems, in Enron's judgment, have or
may have a substantial effect on Enron's ability to continue
to conduct the mission-critical aspects of its 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." Enron will attempt
reasonably to coordinate with these Outside Entities in an
ongoing effort to obtain assurance that the Outside Systems
that are mission-critical to Enron 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, analyze, convert (where
necessary), test, and develop contingency plans for Enron's
connections to these mission-critical Outside Systems and to
ascertain the extent to which they are, or can be made to
be, Year 2000 ready and compatible with Enron's mission-
critical systems.
It is important to recognize that the processes of
inventorying, assessing, analyzing, converting (where
necessary), testing, and developing contingency plans for
mission-critical items in anticipation of the Year 2000
event are necessarily iterative processes. That is, the
steps are repeated as Enron learns more about the Year 2000
problem and its effects on Enron's internal systems and on
Outside Systems, and about the effects that embedded chips
may have on Enron's systems and Outside Systems. As the
steps are repeated, it is likely that new problems will be
identified and addressed. Enron anticipates that it will
continue with these processes through January 1, 2000 and,
if necessary based on experience, into the Year 2000 in
order to assess and remediate problems that reasonably can
be identified only after the start of the new century.
As of November 1998, Enron and all its business units are
at various stages in implementation of the Plan, as shown in
the following tables. The first table deals with the Enron
business units' mission-critical internal systems (including
embedded chips) and the second deals with the business
units' mission-critical Outside Systems. Any notation of
"complete" conveys the fact only that the initial iteration
of this phase has been substantially completed.
Year 2000 Plan Readiness by Enron Business Unit
(Mission-Critical Internal Items)
<TABLE>
<CAPTION>
Contingency
Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan
<S> <C> <C> <C> <C> <C> <C> <C>
Exploration and
Production IP IP IP IP IP IP IP
Transportation
and Distribution:
Gas Pipeline
Group IP IP IP IP IP IP IP
Portland General C C C IP IP IP IP
Wholesale:
Domestic C C IP IP IP IP TBI
Europe C C C IP IP IP IP
Other Intl. IP IP IP IP IP IP IP
Retail Energy
Services C C C IP IP IP IP
Corporate and
Other C C IP IP IP IP IP
<FN>
Legend: C = Complete IP = In Process TBI = To Be Initiated
</TABLE>
Year 2000 Plan Readiness by Enron Business Unit
(Mission-Critical Outside Entities)
<TABLE>
<CAPTION>
Contingency
Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan
<S> <C> <C> <C> <C> <C> <C> <C>
Exploration and
Production IP IP IP IP IP IP IP
Transportation
and Distribution:
Gas Pipeline
Group C IP IP IP IP IP IP
Portland General C IP IP IP TBI IP TBI
Wholesale:
Domestic C IP TBI TBI TBI IP TBI
Europe C C IP TBI TBI IP TBI
Other Intl. IP IP IP IP IP IP IP
Retail Energy
Services IP IP IP IP IP IP IP
Corporate and
Other C IP IP IP IP IP TBI
<FN>
Legend: C = Complete IP = In Process TBI = To Be Initiated
</TABLE>
The following tables show, by business unit, historical and estimated
completion dates, as applicable, for the initial iteration of various stages of
the Plan. The first table deals with the Enron business units' mission-
critical internal systems (including embedded chips) and the second deals with
the business units' mission-critical Outside Systems.
Year 2000 Plan Completion Dates by Enron Business Unit
(Mission-Critical Internal Items)
<TABLE>
<CAPTION>
Contingency
Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan
<S> <C> <C> <C> <C> <C> <C> <C>
Exploration and
Production 12/98 12/98 3/99 6/99 9/99 9/99 9/99
Transportation
and Distribution:
Gas Pipeline
Group 12/98 2/99 4/99 6/99 7/99 8/99 6/99
Portland General 12/97 10/98 10/98 6/99 9/99 9/99 12/98
Wholesale:
Domestic 6/98 8/98 12/98 6/99 6/99 6/99 9/99
Europe 7/98 8/98 8/98 4/99 4/99 7/99 7/99
Other Intl. 3/99 3/99 4/99 6/99 7/99 8/99 6/99
Retail Energy
Services 6/98 7/98 8/98 11/98 3/99 6/99 6/99
Corporate and
Other 9/98 10/98 1/99 2/99 3/99 6/99 6/99
</TABLE>
Year 2000 Plan Completion Dates by Enron Business Unit
(Mission-Critical Outside Entities)
<TABLE>
<CAPTION>
Contingency
Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan
<S> <C> <C> <C> <C> <C> <C> <C>
Exploration and
Production 3/99 6/99 6/99 9/99 9/99 9/99 9/99
Transportation
and Distribution:
Gas Pipeline
Group 11/98 1/99 4/99 5/99 5/99 6/99 6/99
Portland General 10/98 11/98 11/98 6/99 6/99 6/99 6/99
Wholesale:
Domestic 7/98 12/98 3/99 6/99 9/99 9/99 9/99
Europe 6/98 7/98 12/98 8/99 8/99 8/99 8/99
Other Intl. 2/99 2/99 4/99 6/99 7/99 8/99 6/99
Retail Energy
Services 1/99 1/99 1/99 1/99 4/99 6/99 6/99
Corporate and
Other 10/98 3/99 3/99 6/99 6/99 6/99 12/98
</TABLE>
Enron will continue to closely monitor work under the
Plan and to revise estimated completion dates for the
initial iteration of each listed process.
Costs to Address Year 2000 Issues
Under the Plan and otherwise, Enron has not incurred
material historical costs for Year 2000 awareness,
inventory, assessment, analysis, conversion, testing, or
contingency planning. Further, Enron anticipates that its
future costs for these purposes, including those for
implementing its Year 2000 contingency plans, will not be
material.
Although management believes that its estimates are
reasonable, there can be no assurance, for the reasons
stated in the "Summary" section below, that the actual costs
of implementing the Plan will not differ materially from the
estimated costs or that Enron will not be materially
adversely affected by Year 2000 issues.
Year 2000 Risk Factors
Regulatory requirements. Certain of Enron's business
units operate in industries that are regulated by
governmental authorities. Enron expects to satisfy these
regulatory authorities' requirements for achieving Year 2000
readiness. If Enron's reasonable expectations in this
regard are in error, and if a regulatory authority should
order the temporary cessation of Enron's operations in one
or more of these areas, the adverse effect on Enron could be
material. Outside Entities could face similar problems that
materially adversely affect Enron.
Shortage of resources. Between now and Year 2000 there
will be increased competition for people with in the
technical and managerial skills necessary to deal with the
Year 2000 problem. While Enron is taking substantial
precautions to recruit and retain sufficient people skilled
in dealing with the Year 2000 problem and has hired
consultants who bring additional skilled people to deal with
the Year 2000 problem as it affects Enron, Enron could face
shortages of skilled personnel or other resources, such as
Year 2000 ready computer chips, and these shortages might
delay or otherwise impair Enron's progress toward making its
mission-critical systems Year 2000 ready. Outside
Entities could face similar problems that materially
adversely affect Enron. Enron believes that the possible
impact of the shortage of skilled people is not, and will
not be, unique to Enron.
Potential shortcoming. Enron estimates that its mission-
critical systems, domestic and international, will be Year
2000-ready substantially before January 1, 2000. However,
there is no assurance that the Plan will succeed in
accomplishing its purposes or that unforeseen circumstances
will not arise during implementation of the Plan that would
materially and adversely affect Enron.
Cascading effect. Enron and its business units are
taking reasonable steps to identify, assess, and, where
appropriate, replace devices that contain embedded chips.
Despite these reasonable efforts, Enron anticipates that it
will not be able to find and remediate all embedded chips in
systems in Enron's business units. Further, Enron
anticipates that Outside Entities on which Enron depends
also will not be able to find and remediate all embedded
chips in their systems. Some of the embedded chips that
fail to operate or that produce anomalous results may create
system disruptions or failures. Some of these disruptions
or failures may spread from the systems in which they are
located to other systems in a cascade. These cascading
failures may have adverse effects upon Enron's ability to
maintain safe operations and may also have adverse effects
upon Enron's ability to serve its customers and otherwise to
fulfill certain contractual and other legal obligations.
The embedded chip problem is widely recognized as one of the
more difficult aspects of the Year 2000 problem across
industries and throughout the world. Enron believes that
the possible adverse impact of the embedded chip problem is
not, and will not be, unique to Enron.
Third parties. Enron cannot assure that suppliers upon
which it depends for essential goods and services will
convert and test their mission-critical systems and
processes in a timely and effective manner. Failure or
delay to do so by all or some of these entities, including
U.S. federal, state or local governments and foreign governments,
could create substantial disruptions having a material adverse
affect on Enron's business.
Contingency Plans
As part of the Plan, Enron is developing contingency
plans that deal with two aspects of the Year 2000 problem:
(1) that Enron, despite its good-faith, reasonable efforts,
may not have satisfactorily remediated all of its internal
mission-critical systems; and (2) that Outside Systems may
not be Year 2000 ready, despite Enron's good-faith,
reasonable efforts to work with Outside Entities. Enron's
contingency plans are being designed to minimize the
disruptions or other adverse effects resulting from Year
2000 incompatibilities regarding these mission-critical
functions or systems, and to facilitate the early
identification and remediation of mission-critical Year 2000
problems that first manifest themselves after January 1,
2000.
Enron's contingency plans will contemplate an assessment
of all its mission-critical internal information technology
systems and its internal operational systems that use
computer-based controls. This process will commence in the
early minutes of January 1, 2000, and continue for hours,
days, or weeks as circumstances require. Further, Enron
will in that time frame assess any mission-critical
disruptions due to Year 2000-related failures that are
external to Enron. The assessment process will cover, for
example, loss of electrical power from utilities;
telecommunications services from carriers; or building
access, security, or elevator service in facilities occupied
by Enron.
Enron's contingency plans include the creation of teams
that will be standing by on the evening of December 31,
1999, prepared to respond rapidly and otherwise as necessary
to mission-critical Year 2000-related problems as soon as
they become known. The composition of teams that are
assigned to deal with Year 2000 problems will vary according
to the nature, mission-criticality, and location of the
problem. Because Enron operates internationally, some of
its Year 2000 contingency teams will be stationed at Enron's
mission-critical facilities overseas.
Worst Case Scenario
The Securities and Exchange Commission requires that
public companies forecast the most reasonably likely
worst case Year 2000 scenario. In doing so, Enron is
assuming that the company's Year 2000 plan will not be effective.
Analysis of the most reasonably likely worst case Year 2000
scenarios Enron may face leads to contemplation of the
following possibilities which, though unlikely in some or
many cases, must be included in any consideration of worst
cases: widespread failure of electrical, gas, and similar
supplies by utilities serving Enron domestically and
internationally; widespread disruption of the services of
communications common carriers domestically and internationally;
similar disruption to means and modes of transportation for Enron
and its employees, contractors, suppliers, and customers;
significant disruption to Enron's ability to gain access to,
and remain working in, office buildings and other
facilities; the failure of substantial numbers of Enron's
mission-critical information (computer) hardware and
software systems, including both internal business systems
and systems (such as those with embedded chips) controlling
operational facilities such as electrical generation,
transmission, and distribution systems and oil and gas
plants and pipelines, domestically and internationally; and
the failure, domestically and internationally, of Outside
Systems, the effects of which would have a cumulative
material adverse impact on Enron's mission-critical systems.
Among other things, Enron could face substantial claims by
customers or loss of revenues due to service interruptions,
inability to fulfill contractual obligations, inability to
account for certain revenues or obligations or to bill
customers accurately and on a timely basis, and increased
expenses associated with litigation, stabilization of
operations following mission-critical failures, and the
execution of contingency plans. Enron could also experience
an inability by customers, traders, and others to pay, on a
timely basis or at all, obligations owed to Enron. Under
these circumstances, the adverse effect on Enron, and the
diminution of Enron's revenues, would be material, although
not quantifiable at this time. Further in this scenario,
the cumulative effect of these failures could have a
substantial adverse effect on the economy, domestically and
internationally. The adverse effect on Enron, and the
diminution of Enron's revenues, from a domestic or global
recession or depression also is likely to be material,
although not quantifiable at this time.
Enron will continue to monitor business conditions with
the aim of assessing and quantifying material adverse
effects, if any, that result or may result from the Year
2000 problem.
Summary
Enron has a Plan to deal with the Year 2000 challenge and
believes that it will be able to achieve substantial Year
2000 readiness with respect to the mission critical systems
that it controls. However, 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 these are: the
difficulty of locating "embedded" chips that may be in a
great variety of mission-critical hardware used for process
or flow control, environmental, transportation, access,
communications and other systems; the difficulty of
inventorying, assessing, remediating, verifying and testing
Outside Systems; the difficulty in locating all mission-
critical software (computer code) internal to Enron that is
not Year 2000 compatible; 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 mission-critical
Enron systems or Outside Systems. Accordingly, there can be
no assurance that all of Enron's Systems and 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 reasonable efforts under its Year 2000
Plan, there are mission-critical Year 2000-related failures
that create substantial disruptions to Enron's business, the
adverse impact on Enron's business could be material.
Additionally, 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. Moreover, the estimated costs 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 requires that costs for start-up
activities and organization costs be expensed as incurred
and not capitalized as had previously been allowed. 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 adopting SOP 98-5, and it
expects to recognize an after-tax charge of approximately
$100 million in the first quarter of 1999. This charge will
be reflected net of tax as a separate line item above net
income.
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
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 or physical base contracts.
FINANCIAL CONDITION
<TABLE>
Cash Flows
<CAPTION>
Nine Months Ended
September 30,
(In Millions) 1998 1997
<S> <C> <C>
Cash provided by (used in):
Operating activities $ 317 $ (588)
Investing activities (3,517) (1,496)
Financing activities 3,413 2,022
</TABLE>
Cash provided by operating activities totaled $317
million in the first nine months of 1998 as compared to $588
million used 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 an increase in
net assets from price risk management activities.
Cash used in investing activities totaled $3,517 million
in the first nine months of 1998 as compared to $1,496
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), capital
expenditures, equity investments (primarily Elektro) 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 $3,413
million in the first nine months of 1998 as compared to
$2,022 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 $2,862 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. To ensure
sufficient liquidity, Enron has increased its available
credit lines by approximately $2 billion to over $5 billion.
CAPITALIZATION
Total capitalization at September 30, 1998 was $18.7
billion. Debt as a percentage of total capitalization
increased to 51.3% at September 30, 1998 as compared to
44.6% at December 31, 1997 and 50.5% at September 30, 1997.
The increase primarily reflects an increase of $3.3 billion
of debt in 1998, primarily resulting from new merchant
investments made by the Wholesale segment, increased capital
expenditures and the acquisition of Elektro (see Note 2 to
the Consolidated Financial Statements), partially offset by
the issuance, in May 1998, of 17.25 million shares of common
stock. In connection with the Elektro transaction, Enron
incurred approximately $1.3 billion of short-term
indebtedness. Assuming the conversion in late 1998 of 10.5
million Exchangeable Notes into EOG shares held by Enron,
the pro forma debt to capitalization percentage would be
approximately 50.5% at September 30, 1998.
Enron reclassifies short-term borrowings as long-term
debt based upon the availability of committed credit
facilities with expiration dates exceeding one year and
management's intent to maintain such amounts in excess of
one year.
Enron is a party to certain financial contracts which
contain provisions for early settlement in the event of a
significant market price decline in which Enron's common
stock falls below certain levels (prices ranging from $15 to
$22.50 per share) or if the credit ratings for Enron's
unsecured, senior long-term debt obligations fall below
investment grade. The impact of this early settlement could
include the issuance of additional shares of Enron common
stock.
Enron's senior unsecured long-term debt is currently
rated BBB+ by Standard & Poor's Corporation and Baa2 by
Moody's Investor Services. Enron's continued investment
grade status is critical to the success of its wholesale
businesses as well as its ability to maintain adequate
liquidity. Enron's management believes it will be able to
maintain or improve its credit rating.
Subsequent event and outlook. In early October, to
purchase the outstanding shares of Wessex (see Note 2 to the
Consolidated Financial Statements), Enron incurred
approximately $700 million of short-term indebtedness and
borrowed approximately $1.1 billion under a bridge loan
facility.
Management is actively pursuing permanent financing for
both the Elektro and Wessex acquisitions and anticipates
completion prior to year-end. The permanent financing will
result in a decrease in Enron's interest in the respective
subsidiaries to 50 percent. Proceeds from the issuances
will be used to repay advances made by Enron of
approximately $2 billion.
Management anticipates that the permanent financings for
the Elektro and Wessex acquisitions will involve commitments
to issue additional common stock in certain events, with the
number of shares issuable determined based on future common
stock prices. Such events include, among other
things,Enron's credit ratings falling below specified
levels.
Additionally, Enron is in the process of monetizing
certain of its portfolio of energy contracts and merchant
investments, which would result in proceeds to Enron in
excess of $1.5 billion which will be used to reduce debt.
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.
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 and
third quarters 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
to $18 million as compared to value at risk of $9 million at
December 31, 1997.
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; the ability of
Enron to penetrate new retail natural gas and electricity
markets in the United States and Europe; the timing and extent
of deregulation of energy markets in the United States and in
foreign jurisdictions; other regulatory developments in the
United States and in foreign countries, including tax legislation
and regulations; the extent of efforts by governments to privatize
natural gas and electric utilities and other industries; the timing
and extent of changes in commodity prices for crude oil, natural
gas, electricity, foreign currency 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, water and other
infrastructure projects; the ability of counterparties to
financial risk management instruments and other contracts
with Enron to meet their financial commitments to Enron;
Enron's success in implementing its Year 2000 Plan, the
effectiveness of Enron's Year 2000 Plan, and the Year 2000
readiness of Outside Entities; and Enron's ability to access
the capital markets and equity markets during the periods
covered by the forward looking statements, which will depend
on general market conditions and Enron's ability to maintain
or increase the credit ratings for its unsecured senior long-
term debt obligations.
<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 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
Current Report on Form 8-K filed October 16, 1998 to
report the acquisition of Wessex Water Plc.
Current Report on Form 8-K/A filed November 6, 1998 to
include financial statements of Wessex Water Plc as of March
31, 1998 and 1997 and pro forma financial statements for the
acquisition of Wessex Water Plc as of December 31, 1997 and
June 30, 1998.
<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: November 13, 1998 By: 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>
Nine Months
Ended Year Ended December 31,
9/30/98 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Earnings available for fixed
charges
Net income $527 $105 $ 584 $ 520 $ 453 $333
Less:
Undistributed earnings and
losses of less than 50%
owned affiliates (35) (89) (39) (14) (9) (20)
Capitalized interest of
nonregulated companies (41) (16) (10) (8) (9) (26)
Add:
Fixed charges(1) 595 674 454 436 487 471
Minority interest 60 80 75 27 30 28
Income tax expense 196 (65) 297 310 190 148
Total $1,302 $689 $1,361 $1,271 $1,142 $934
Fixed Charges
Interest expense(1) $ 544 $624 $ 404 $ 386 $ 445 $436
Rental expense representative
of interest factor 51 50 50 50 42 35
Total $ 595 $674 $ 454 $ 436 $ 487 $471
Ratio of earnings to fixed charges 2.19 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 383
<SECURITIES> 0
<RECEIVABLES> 3,346
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0
132
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</TABLE>
