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 March 31, 1999
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 April 30, 1999
Common Stock, No Par Value 353,624,090 shares
1 of 33
<PAGE>
ENRON CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Income Statement - Three
Months Ended March 31, 1999 and 1998 3
Consolidated Balance Sheet - March 31, 1999
and December 31, 1998 4
Consolidated Statement of Cash Flows - Three
Months Ended March 31, 1999 and 1998 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 32
ITEM 2. Changes in Securities and Use of Proceeds 32
ITEM 6. Exhibits and Reports on Form 8-K 32
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENT
(In Millions, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Revenues $7,632 $5,682
Costs and Expenses
Cost of gas, electricity and other products 6,300 4,559
Operating expenses 645 437
Oil and gas exploration expenses 25 34
Depreciation, depletion and amortization 215 182
Taxes, other than income taxes 62 58
7,247 5,270
Operating Income 385 412
Other Income and Deductions
Equity in earnings of unconsolidated affiliates 68 44
Gains on sales of assets and investments 12 -
Other income, net 68 15
Income before Interest, Minority Interests
and Income Taxes 533 471
Interest and Related Charges, net 175 133
Dividends on Company-Obligated Preferred
Securities of Subsidiaries 19 19
Minority Interests 33 25
Income Taxes 53 80
Net Income Before Cumulative Effect of
Accounting Changes 253 214
Cumulative Effect of Accounting Changes,
net of tax (131) -
Net Income 122 214
Preferred Stock Dividends 4 4
Earnings on Common Stock $ 118 $ 210
Earnings per Share of Common Stock
Basic
Before Cumulative Effect of
Accounting Changes $ 0.73 $ 0.69
Cumulative Effect of Accounting Changes (0.38) -
Basic Earnings per Share $ 0.35 $ 0.69
Diluted
Before Cumulative Effect of
Accounting Changes $ 0.68 $ 0.65
Cumulative Effect of Accounting Changes (0.35) -
Diluted Earnings per Share $ 0.33 $ 0.65
Average Number of Common Shares Used
in Computation
Basic 342 305
Diluted 372 330
<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>
March 31, December 31,
1999 1998
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 296 $ 111
Trade receivables (net of allowance for
doubtful accounts of $14 and $14,
respectively) 2,190 2,060
Other receivables 1,344 833
Assets from price risk management activities 1,554 1,904
Inventories 458 514
Other 603 511
Total Current Assets 6,445 5,933
Investments and Other Assets
Investments in and advances to unconsolidated
affiliates 4,632 4,433
Assets from price risk management activities 2,271 1,941
Goodwill 2,690 1,949
Other 5,076 4,437
Total Investments and Other Assets 14,669 12,760
Property, Plant and Equipment, at cost
Exploration and Production, successful
efforts method 4,903 4,814
Transportation and Distribution 5,522 5,481
Wholesale Energy Operations and Services 6,046 4,858
Retail Energy Services 158 141
Corporate and Other 568 498
17,197 15,792
Less accumulated depreciation, depletion
and amortization 5,612 5,135
Property, Plant and Equipment, net 11,585 10,657
Total Assets $32,699 $29,350
<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>
March 31, December 31,
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 2,694 $ 2,380
Liabilities from price risk
management activities 1,542 2,511
Other 1,408 1,216
Total Current Liabilities 5,644 6,107
Long-Term Debt 9,419 7,357
Deferred Credits and Other Liabilities
Deferred income taxes 2,194 2,357
Liabilities from price risk
management activities 1,852 1,421
Other 1,640 1,916
Total Deferred Credits and
Other Liabilities 5,686 5,694
Minority Interests 2,125 2,143
Company-Obligated Preferred Securities
of Subsidiaries 1,001 1,001
Shareholders' Equity
Second preferred stock, cumulative,
no par value 131 132
Series A Junior Voting Convertible
Preferred Stock, no par value 1,000 -
Common stock, no par value 6,249 5,117
Retained earnings 2,256 2,226
Accumulated other comprehensive income (711) (162)
Common stock held in treasury (50) (195)
Other (51) (70)
Total Shareholders' Equity 8,824 7,048
Total Liabilities and Shareholders' Equity $32,699 $29,350
<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>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Cash Flows From Operating Activities
Reconciliation of net income to net cash
provided by (used in) operating activities
Net income $ 122 $ 214
Cumulative effect of accounting changes,
net of tax 131 -
Depreciation, depletion and amortization 215 182
Oil and gas exploration expenses 25 34
Deferred income taxes 2 54
Gains on sales of assets and investments (40) (27)
Changes in components of working capital (556) (158)
Net assets from price risk management
activities (518) (249)
Merchant assets and investments:
Realized gains on sales (22) (48)
Proceeds from sales 26 134
Additions (96) (103)
Other operating activities 51 17
Net Cash Provided by (Used in) Operating
Activities (660) 50
Cash Flows From Investing Activities
Capital expenditures (519) (288)
Equity investments (409) (49)
Proceeds from sales of investments and
other assets 43 3
Business acquisitions, net of cash acquired (38) -
Other investing activities (207) (158)
Net Cash Used in Investing Activities (1,130) (492)
Cash Flows From Financing Activities
Issuance of long-term debt 114 -
Repayment of long-term debt (68) (42)
Net increase in short-term borrowings 1,119 623
Issuance of common stock 839 2
Dividends paid (113) (99)
Net disposition of treasury stock 119 3
Other financing activities (35) (42)
Net Cash Provided by Financing Activities 1,975 445
Increase in Cash and Cash Equivalents 185 3
Cash and Cash Equivalents, Beginning of Period 111 170
Cash and Cash Equivalents, End of Period $ 296 $ 173
Changes in Components of Working Capital
Receivables $ (549) $ (54)
Inventories 56 (27)
Payables 159 (44)
Other (222) (33)
Total $ (556) $(158)
<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, 1998 (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 1998
amounts to conform with the 1999 presentation.
"Enron" is used from time to time herein as a collective
reference to Enron Corp. and its subsidiaries and
affiliates. In material respects, the businesses of Enron
are conducted by the subsidiaries and affiliates whose
operations are managed by their respective officers.
2. CUMULATIVE EFFECT OF ACCOUNTING CHANGES
In the first quarter of 1999, Enron recorded an after-tax
charge of $131 million to reflect the initial adoption (as
of January 1, 1999) of two new accounting pronouncements.
In 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 all start-up activities and
organization costs be expensed as incurred and not
capitalized in certain instances, as had previously been
allowed. Also in 1998, the Emerging Issues Task Force
reached consensus on Issue No. 98-10, "Accounting for
Contracts involved in Energy Trading and Risk Management
Activities" (EITF 98-10), requiring energy trading contracts
to be recorded at fair value on the balance sheet, with the
changes in fair value included in earnings. The charge was
primarily related to the adoption of SOP 98-5.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes for the first quarter of
1999 and 1998 was $11 million and $21 million, respectively.
Cash paid for interest for the same periods, net of amounts
capitalized, was $185 million and $130 million, respectively.
Non-Cash Activity. Following the acquisition of an
additional 53% interest in Elektro Eletricidade e Servicos
S.A. (Elektro), Enron discontinued the use of temporary
control in accounting for its interest in Jacare Electrical
Distribution Trust (Jacare), the entity that holds Enron's
investment in Elektro. As a result, Jacare has been
consolidated effective January 1, 1999. Jacare's balance
sheet at that date consisted of net assets of approximately
$1,160 million, including goodwill of approximately $1,080
million, net property, plant and equipment of approximately
$820 million and debt of approximately $900 million.
In addition, as of January 1, 1999, Enron's investment in
unconsolidated affiliates decreased by approximately $450
million and minority interests increased by approximately
$720 million.
In March 1999, a joint venture that holds 250,000 shares
of Enron Series A Junior Convertible Preferred Stock was
amended to allow, among other things, control to be shared
equally between Enron and the third-party investor.
Consequently, the joint venture's financial statements are
no longer consolidated by Enron, resulting in an increase in
Enron's investment in unconsolidated affiliates of
approximately $500 million, an increase in preferred stock
of $1,000 million and a decrease in minority interests of
$500 million.
During the first quarter of 1999, Enron issued
approximately 3.8 million shares of common stock in
connection with the acquisition, by an unconsolidated
affiliate, of interests in three power plants in New Jersey.
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 material 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 trial court has certified
a class action with respect to ratability claims. On April
30, 1999, the Texas Supreme Court granted Enron's petition
for review and agreed to consider Enron's appeal of the
class certification. 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
material 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, operated a
propane/air distribution system in the vicinity. Although
San Juan did not provide service to the building, the
National Transportation Safety Board (NTSB) concluded that
the probable cause of the incident was propane leaking from
San Juan's distribution system. San Juan and Enron strongly
disagree. The NTSB found no path of migration of propane
from San Juan's system to the building and no forensic
evidence that propane fueled the explosion. Enron, San
Juan, and four San Juan affiliates have been named, along
with several third parties, as defendants in numerous
lawsuits filed in U.S. District Court for the district of
Puerto Rico and the Superior Court of Puerto Rico. These
suits, which seek damages for wrongful death, personal
injury, business interruption and property damage, allege
that negligence of Enron, San Juan and its affiliates, among
others, caused the explosion. Enron, San Juan and its
affiliates 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 (Trojan). 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 Commission'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. On April 29, 1999, the
Oregon Supreme Court accepted the petitions for review of
the Oregon Court of Appeals decision. 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. To date, the EPA has identified no other
potentially responsible parties with respect to this 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. Enron completed the final removal actions at the
site in November 1998, and expects to conclude all remaining
site activities in the spring of 1999. Enron does not
expect to incur material expenditures in connection with
this site.
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 agreed
to cooperate with the EPA and other potentially responsible
parties to undertake the work contemplated by EPA's Order.
The tower demolition and removal activities were completed
in October 1998, and a final project report has been
submitted to the EPA. Enron does not expect to incur
material expenditures in connection with this site.
Enron's natural gas pipeline companies conduct soil and
groundwater remediation of a number of their facilities.
Enron does not expect to incur material expenditures in
connection with soil and groundwater remediation.
5. EARNINGS PER SHARE
The computation of basic and diluted earnings per share
is as follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Numerator:
Basic
Income before cumulative effect of
accounting changes $ 253 $ 214
Preferred stock dividends (4) (4)
Income available to common shareholders 249 210
Cumulative effect of accounting changes (131) -
Net income available to common
shareholders $ 118 $ 210
Diluted
Income available to common shareholders $ 249 $ 210
Effect of dilutive securities:
Preferred stock dividends 4 4
Income before cumulative effect of
accounting changes 253 214
Cumulative effect of accounting changes (131) -
Net income available to common
shareholders after assumed conversion $ 122 $ 214
Denominator:
Denominator for basic earnings per
share - weighted-average shares 342 305
Effect of dilutive securities:
Preferred stock 18 18
Stock options 12 7
Dilutive potential common shares 30 25
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 372 330
Basic earnings per share:
Before cumulative effect of
accounting changes $0.73 $0.69
Cumulative effect of accounting changes (0.38) -
Basic earnings per share $0.35 $0.69
Diluted earnings per share:
Before cumulative effect of
accounting changes $0.68 $0.65
Cumulative effect of accounting changes (0.35) -
Diluted earnings per share $0.33 $0.65
</TABLE>
6. COMPREHENSIVE INCOME
Comprehensive income includes the following (in
millions):
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Earnings on common stock $ 118 $ 210
Other comprehensive income:
Foreign currency translation adjustment (549) (1)
Total comprehensive income (loss) $(431) $ 209
</TABLE>
Enron has investments in entities whose functional
currency is denominated in Brazilian Reals. During the
first quarter of 1999, the exchange rate for the Brazilian
Real to the U.S. dollar declined. Primarily as a result of
these investments, Enron recorded a non-cash foreign
currency translation adjustment, reducing shareholders'
equity by $549 million in the first quarter of 1999.
7. BUSINESS SEGMENT INFORMATION
Enron's business is divided into operating segments,
defined as components of an enterprise about which financial
information is available and evaluated regularly by the
Management Committee, which serves as the chief operating
decision making group.
<TABLE>
<CAPTION>
Wholesale
Exploration Transportation Energy Retail Corporate
and and Operations Energy and
(In Millions) Production Distribution and Services Services Other(c) Total
Three Months Ended
March 31, 1999
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues(a) $ 149 $ 477 $6,516 $ 363 $ 127 $7,632
Intersegment revenues(b) 54 4 79 7 (144) -
Total revenues $ 203 $ 481 $6,595 $ 370 $ (17) $7,632
Income (loss) before interest,
minority interests and
income taxes $ 12 $ 218 $ 320 $ (31) $ 14 $ 533
Three Months Ended
March 31, 1998
Unaffiliated revenues(a) $ 198 $ 502 $4,738 $ 195 $ 49 $5,682
Intersegment revenues(b) 33 6 134 11 (184) -
Total revenues $ 231 $ 508 $4,872 $ 206 $ (135) $5,682
Income (loss) before interest,
minority interests and
income taxes $ 43 $ 205 $ 249 $ (27) $ 1 $ 471
<FN>
(a) Unaffiliated revenues include sales to unconsolidated affiliates.
(b) Intersegment sales are made at prices comparable to those received
from unaffiliated customers and in some instances are affected by
regulatory considerations.
(c) Includes consolidating eliminations.
</TABLE>
Total assets by segment are as follows (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
Exploration and Production $ 2,980 $ 3,001
Transportation and Distribution 7,693 7,616
Wholesale Energy Operations
and Services 17,362 14,837
Retail Energy Services 708 747
Corporate and Other 3,956 3,149
Total Assets $32,699 $29,350
</TABLE>
The increase in the assets of the Wholesale Energy
Operations and Services segment is primarily a result of the
consolidation of Jacare, previously an unconsolidated
affiliate (see Note 3), and additions of approximately $300
million related to the construction of power plants in North
America.
<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
First Quarter 1999
vs. First Quarter 1998
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 first quarter 1999 net income, excluding the
cumulative effect of accounting changes, was $253 million
compared to $214 million in the first quarter of 1998.
Enron's operating segments include Exploration and
Production (Enron Oil & Gas Company), Transportation and
Distribution (Gas Pipeline Group and Portland General),
Wholesale Energy Operations and Services (Enron Capital &
Trade Resources and Enron International), Retail Energy
Services (Enron Energy Services) and Corporate and Other,
which includes certain new businesses. In the first quarter
of 1999, Enron recognized a charge of $131 million (net of
tax) as a cumulative effect of accounting changes.
Basic and diluted earnings per share of common stock were
as follows:
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Basic earnings per share:
Before cumulative effect of accounting
changes $ 0.73 $ 0.69
Cumulative effect of accounting changes (0.38) -
Reported basic earnings per share $ 0.35 $ 0.69
Diluted earnings per share:
Before cumulative effect of accounting
changes $ 0.68 $ 0.65
Cumulative effect of accounting changes (0.35) -
Reported diluted earnings per share $ 0.33 $ 0.65
</TABLE>
Income Before Interest, Minority Interests and Income Taxes
The following table presents income before interest,
minority interests and income taxes (IBIT) for each of
Enron's operating segments (in millions):
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Exploration and Production $ 12 $ 43
Transportation and Distribution:
Gas Pipeline Group 126 126
Portland General 92 79
Wholesale Energy Operations and Services 320 249
Retail Energy Services (31) (27)
Corporate and Other 14 1
Income before interest,
minority interests and taxes $533 $471
</TABLE>
Exploration and Production
Enron's exploration and production operations are
conducted by Enron Oil & Gas Company (EOG). IBIT of
Exploration and Production totaled $12 million and $43
million for the first quarter of 1999 and 1998,
respectively.
Wellhead volume and price statistics (including
intercompany amounts) are as follows:
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Natural gas volumes (MMcf/d)(a)
North America 781 745
Trinidad 152 109
India 71 47
Total 1,004 901
Average natural gas prices ($/Mcf)
North America 1.58 1.93
Trinidad 1.06 1.09
India 1.96 2.70
Composite 1.53 1.86
Crude oil/condensate volumes (MBbl/d)(a)
North America 15.8 15.3
Trinidad 2.8 2.8
India 7.1 4.2
Total 25.7 22.3
Average crude oil/condensate prices ($/Bbl)
North America 11.39 14.55
Trinidad 9.63 14.03
India 9.79 15.33
Composite 10.76 14.64
<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>
First Quarter
1999 1998
<S> <C> <C>
Net revenues $182 $206
Operating expenses 48 42
Exploration expenses 25 34
Depreciation, depletion and amortization 82 72
Taxes, other than income taxes 14 14
Operating income 13 44
Other income, net (1) (1)
Income before interest, minority
interests and taxes $ 12 $ 43
</TABLE>
Net Revenues
Exploration and Production's revenues, net of sales in
connection with natural gas marketing, decreased $24 million
in the first quarter of 1999 as compared to the same period
in 1998. The decline is primarily a result of decreased
gains on sales of reserves and related assets and decreased
revenues from other marketing activities, including natural
gas and crude oil hedging and trading transactions. Gains
on sales of reserves and related assets and other, net
totaled $1 million in the first three months of 1999 as
compared to $14 million in the same period of 1998. Other
marketing activities resulted in a net decrease in revenues
of $8 million in the first quarter of 1999 compared to an
increase of $2 million in the same period in 1998.
Wellhead revenues, including the results of corporate
hedging activities, were unchanged from the same period a
year ago. Increased production volumes of natural gas and
crude oil and condensate were offset by lower average
wellhead prices worldwide (including corporate hedges) for
natural gas and crude oil and condensate.
Costs and Expenses
Operating expenses increased in the first quarter of 1999
compared to the same period in 1998 primarily as a result of
expanded operations and settlement of certain commercial
disputes with third parties. Depreciation, depletion and
amortization increased in the same period primarily as a
result of increased production.
Exploration expenses decreased primarily due to decreased
exploration activities in North America.
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), Enron's 50% interest in Florida Gas
Transmission Company (Florida Gas) and Enron's interest in
Northern Border Pipeline.
Gas Pipeline Group. The following table summarizes total
volumes transported for each of Enron's interstate natural
gas pipelines.
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Total Volumes Transported (Bbtu/d)(a)
Northern Natural Gas 4,544 4,476
Transwestern Pipeline 1,531 1,668
Florida Gas Transmission 1,225 1,168
Northern Border Pipeline 2,485 1,839
<FN>
(a) Reflects 100% of each entity's throughput volumes.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Net revenues $181 $192
Operating expenses 61 69
Depreciation and amortization 17 16
Equity in earnings 8 11
Other income, net 15 8
Income before interest and taxes $126 $126
</TABLE>
Operating Results
Revenues, net of cost of sales, and operating expenses of
Gas Pipeline Group (GPG) declined $11 million (6%) and $8
million (12%), respectively, in the first quarter of 1999 as
compared to the same period in 1998. The decreases are
primarily due to the expiration, in October 1998, of certain
transition cost recovery surcharges which caused a reduction
in revenues and a corresponding decrease in expenses. With
over 80% of its revenues derived from demand charges, GPG
should continue to provide stable earnings and cash flows in
1999.
Portland General. Statistics for PGE for the first
quarter of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 2,342 2,076
Commercial 1,816 1,654
Industrial 1,020 891
Total Retail 5,178 4,621
Wholesale 1,338 3,575
Total Electricity Sales 6,516 8,196
Average Rate (Thousand MWh)(a)
Residential 5.73 5.91
Commercial 4.91 5.07
Industrial 3.49 3.43
Total Retail 5.00 5.13
Wholesale 1.88 1.82
Total Sales 4.36 3.68
Resource Mix
Coal 18% 15%
Combustion Turbine 4 7
Hydro 13 9
Total Generation 35 31
Firm Purchases 47 65
Secondary Purchases 18 4
Total Resources 100% 100%
Average Variable Power Cost
(Mills/KWh)(b)
Generation 8.0 7.0
Firm Purchases 16.7 16.3
Secondary Purchases 15.0 14.2
Total Average Variable Power Cost 15.0 14.4
Retail Customers (end of period, thousands) 708 688
<FN>
(a) Thousand megawatt-hours.
(b) Mills (1/10 cent) per kilowatt-hour.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Revenues $299 $320
Purchased power and fuel 100 124
Operating expenses 70 76
Depreciation and amortization 46 44
Other income, net 9 3
Income before interest and taxes $ 92 $ 79
</TABLE>
Operating Results
Revenues and purchased power and fuel costs decreased $21
million and $24 million, respectively, in the first quarter
of 1999 as compared to the first quarter of 1998, primarily
as a result of the transfer of the majority of Portland
General's electricity wholesale business to the Enron
Wholesale segment. The impact of this transfer was
partially offset by increased retail revenues and generation
costs caused by an increase in total retail customers and
colder weather during the first quarter of 1999.
Wholesale Energy Operations and Services
Enron's wholesale energy operations and services business
(Enron Wholesale) operates in North America, Europe and
other countries. Activities are conducted primarily by
Enron Capital & Trade Resources and Enron International.
Enron Wholesale is categorized into two business lines:
(a) Commodity Sales and Services and (b) Energy Assets and
Investments. Integrated energy-related products and
services related to these business lines are offered to
wholesale customers in varying degrees in each of Enron
Wholesale's markets.
Enron manages its commodity and asset portfolios in order
to maximize value, minimize the associated risks and provide
overall liquidity. In this process, Enron utilizes
portfolio and risk management disciplines including certain
hedging transactions to manage portions of its 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 business line
(in millions):
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Commodity Sales and Services $224 $129
Energy Assets and Investments 136 151
Unallocated expenses (40) (31)
Income before interest, minority
interests and taxes $320 $249
</TABLE>
The following discussion analyzes the contributions to
IBIT for each of the business lines.
Commodity Sales and Services. Enron Wholesale provides
reliable delivery of energy commodities at predictable
prices. The commodity sales and services operations
includes the purchase, sale, marketing and delivery of
natural gas, electricity, liquids and other commodities,
restructuring of existing long-term contracts and the
management of Enron's commodity contract portfolios. In
addition, Enron provides risk management products and
services to energy customers that hedge movements in price
and location-based price differentials. Enron's risk
management products and services are designed to provide
stability to customers in markets impacted by commodity
price volatility. Also included in this business is the
management of certain operating assets that directly relate
to this business, including domestic intrastate pipelines
and storage facilities.
Enron Wholesale markets and transports a substantial
quantity of energy commodities as reflected in the following
table (including intercompany amounts):
<TABLE>
<CAPTION>
First Quarter
1999 1998
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 9,088 7,276
Canada 3,954 2,876
Europe 1,792 1,125
Other 7 1
14,841 11,278
Transport Volumes 556 450
Total Gas Volumes 15,397 11,728
Oil 3,704 1,756
Liquids 580 654
Electricity(c) 9,594 8,262
Total 29,275 22,400
Electricity Volumes Marketed (Thousand MWh)
United States 85,962 74,272
Europe 297 82
Other 87 -
Total 86,346 74,354
Financial Settlements (Notional) (BBtue/d) 94,974 69,918
<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 utilizing the input method.
</TABLE>
The earnings from commodity sales and services
increased 74% in the first quarter of 1999 as compared to
the same period of 1998 primarily due to increased profits
from power and gas marketing resulting from a more than 30%
increase in volumes as well as favorable changes in energy
and credit markets worldwide, partially offset by higher
expenses.
Energy Assets and Investments. Enron Wholesale's energy
assets and investments activities include investments in
debt and equity securities of oil and gas producers and
other energy-intensive companies. Additionally, Enron
Wholesale develops, constructs, operates and manages a large
portfolio of energy investments such as power plants and
natural gas pipelines. Earnings primarily result from
changes in the market value of merchant investments held
during the period, equity earnings and gains on sales or
restructurings of energy investments.
Earnings from energy assets and investments decreased 10%
in the first quarter of 1999 as compared to the same period
in 1998 primarily as a result of decreased earnings from the
management of Enron Wholesale's merchant investments,
partially offset by higher earnings from international
energy asset operations and increased construction profits.
Unallocated Expenses. Net unallocated expenses such as
rent, systems expenses and other support group costs
increased in 1999 due to continued expansion into new
markets and system upgrades.
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 industrial
customers. In the first quarter of 1999, Energy Services
continued to make significant progress in expanding its
customer base and contracting activities by executing
several significant commodity and services contracts with
new customers. Energy Services reported an operating loss
before interest, minority interest and taxes of $31 million
in the first quarter of 1999 compared to a loss of $27
million in the first quarter of 1998. 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
Corporate and Other includes results of Azurix Corp.,
which provides water and wastewater services, Enron
Communications, Inc. (ECI), which delivers high content
media to business customers, Enron Renewable Energy Corp.
(EREC), EOTT Energy Corp. (EOTT) and the operations of
Enron's methanol and MTBE plants. Corporate and Other
realized IBIT of $14 million in the first quarter of 1999
compared to $1 million for the same period in 1998. The
increase is primarily the result of increased earnings from
EREC related to the sale of certain facilities.
Interest and Related Charges, net
Interest and related charges, net, is reported net of
interest capitalized of $13 million and $6 million for the
first three months of 1999 and 1998, respectively. The net
expense increased $42 million in the first quarter of 1999
as compared to the same period of 1998, primarily due to an
increase of approximately $2.1 billion in debt, including
approximately $900 million due to the consolidation of
Jacare, the entity that holds Enron's investment in Elektro
(see Note 3 to the Consolidated Financial Statements).
Minority Interests
Minority interests increased $8 million to $33 million in
the first quarter of 1999 compared to the same period in
1998, primarily due to the minority owner's share of the
results of Jacare prior to the purchase of additional shares
of Elektro (see Note 3 to the Consolidated Financial
Statements), and the limited partner's share of earnings
related to a partnership created in December 1998, partially
offset by decreased net income from EOG in the first quarter
of 1999.
Income Tax Expense
The projected effective tax rate for 1999 is lower than
the statutory rate mainly due to equity earnings and
differences between the book and tax basis of certain assets
and stock sales. In addition, income taxes decreased during
the first quarter of 1999 as compared to the first quarter
of 1998 primarily as a result of a settlement of an IRS
audit issue.
Cumulative Effect of Accounting Changes
In the first quarter of 1999, Enron recorded an after-tax
charge of $131 million to reflect the initial adoption (as
of January 1, 1999) of SOP 98-5 and EITF 98-10. See Note 2
to the Consolidated Financial Statements.
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 has been briefed about the
Year 2000 problems generally and as they 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 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 May 3, 1999, Enron and all its business units were
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 of Outside Entities.
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 C C C IP IP IP IP
Transportation
and Distribution:
Gas Pipeline Group C C C IP IP IP IP
Portland General C C C IP IP IP IP
Wholesale:
Domestic C C C IP IP IP IP
Europe C C C C IP IP IP
Other International C C C IP IP IP IP
Retail Energy Services C C C C IP IP IP
Corporate and Other C C C IP IP IP IP
</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 C IP IP IP IP IP IP
Transportation
and Distribution:
Gas Pipeline Group C C C IP IP IP IP
Portland General C C C IP IP IP IP
Wholesale:
Domestic C C IP IP IP IP IP
Europe C C C IP IP IP IP
Other International C C IP IP IP IP IP
Retail Energy Services C C C C IP IP IP
Corporate and Other C C C IP IP IP IP
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 of Outside Entities.
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(a) 12/98 3/99 3/99 6/99 9/99 9/99 9/99
Transportation and
Distribution:
Gas Pipeline Group(a) 12/98 1/99 4/99 6/99 7/99 8/99 6/99
Portland General 12/97 10/98 10/98 6/99 6/99 6/99 6/99
Wholesale(a):
Domestic 6/98 8/98 12/98 6/99 6/99 6/99 6/99
Europe 7/98 8/98 8/98 4/99 5/99 7/99 7/99
Other International 3/99 3/99 4/99 6/99 7/99 8/99 6/99
Retail Energy Services(a) 1/99 2/99 3/99 4/99 5/99 7/99 7/99
Corporate and Other(b) 2/99 2/99 3/99 6/99 6/99 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 3/99 5/99 7/99 9/99 9/99 9/99
Europe 6/98 7/98 3/99 8/99 8/99 8/99 8/99
Other International 2/99 2/99 5/99 6/99 7/99 8/99 6/99
Retail Energy Services 1/99 1/99 3/99 4/99 5/99 6/99 6/99
Corporate and Other(b) 10/98 3/99 3/99 6/99 6/99 6/99 6/99
<FN>
(a) The estimated completion date for the majority of the mission-critical
internal items is 6/99 or before.
(b) Excludes operations recently acquired by EOTT. Including the
acquisition, the completion date for mission-critical internal items will be
two months later, and the completion date for mission-critical outside
entities will be four months later.
</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 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 towards 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. 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 minimizing 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, while Enron's Year 2000 costs are not expected
to be material, such 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
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 treatment.
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 a material 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
Cash Flows
<TABLE>
<CAPTION>
First Quarter
(In Millions) 1999 1998
<S> <C> <C>
Cash provided by (used in):
Operating activities $ (660) $ 50
Investing activities (1,130) (492)
Financing activities 1,975 445
</TABLE>
Cash used in operating activities totaled $660 million
during the first three months of 1999 as compared to cash
provided of $50 million in the same period last year. The
change in cash from operating activities in the first
quarter of 1999 reflects an increase in net assets from
price risk management activities and higher working capital
requirements.
Cash used in investing activities totaled $1,130 million
during the first quarter of 1999 as compared to $492 million
during the same period in 1998. The 1999 amount reflects
increased cash used for capital expenditures, primarily
related to power plant construction in North America, and
equity investments, primarily in South Korea and Panama.
Cash provided by financing activities totaled $1,975
million during the first quarter of 1999 as compared to $445
million during the same period in 1998. The first three
months of 1999 includes net proceeds of approximately $839
million from the public offering of 13.8 million shares of
Enron common stock and net issuances of short- and long-term
debt of $1,165 million. Proceeds were primarily used to
fund investment activities.
Following the acquisition of an additional 53% interest
in Elektro, Enron discontinued the use of temporary control
in accounting for Jacare. In addition, a joint venture
was amended, causing the joint venture's financial
statements to be deconsolidated. These changes
resulted in non-cash activity to certain balance sheet
lines. See Note 3 to the Consolidated Financial Statements.
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.
Capitalization
Total capitalization at March 31, 1999 was $21.4 billion.
Debt as a percentage of total capitalization increased to
44.1% at March 31, 1999 as compared to 41.9% at December 31,
1998. The increase reflects increased debt (including
approximately $900 million of debt related to the
consolidation of Jacare) and a reduction in equity due to
foreign currency translation adjustments, partially offset
by equity issuances. The foreign currency translation
adjustment, which resulted in a reduction of shareholders'
equity by $549 million, was primarily related to the
devaluation of the Brazilian Real. Common equity was issued
in February 1999 through a public offering (13.8 million
shares) and in connection with the acquisition, through an
unconsolidated affiliate, of interests in three power plants
in New Jersey (3.8 million shares).
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, 1998.
Enron's value at risk for commodity price risk for its
trading business increased 25% to $25 million at March 31,
1999 as compared to $20 million at December 31, 1998. This
increase is attributable to increased natural gas and crude
oil prices, combined with a seasonal increase in the price
volatility for electricity.
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 2. Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
During the first quarter of 1999, pursuant to a private
placement exemption from the registration requirements
of the Securities Act of 1933, Enron issued 3,825,921
shares of common stock in connection with the
acquisition, by an unconsolidated affiliate, of
interests in three power plants in New Jersey.
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 March 18, 1999,
containing Enron Corp. Consolidated Financial
Statements for the year ended December 31, 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: May 13, 1999 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>
Three Months
Ended Year Ended December 31,
3/31/99 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Earnings available for fixed charges
Net income $253 $ 703 $105 $ 584 $ 520 $ 453
Less:
Undistributed earnings and
losses of less than 50%
owned affiliates - (44) (89) (39) (14) (9)
Capitalized interest of
nonregulated companies (14) (66) (16) (10) (8) (9)
Add:
Fixed charges(1) 245 809 674 454 436 487
Minority interest 32 77 80 75 27 30
Income tax expense 62 204 (65) 297 310 190
Total $578 $1,683 $689 $1,361 $1,271 $1,142
Fixed Charges
Interest expense(1) $229 $ 760 $624 $ 404 $ 386 $ 445
Rental expense representative
of interest factor 16 49 50 50 50 42
Total $245 $ 809 $674 $ 454 $ 436 $ 487
Ratio of earnings to fixed charges 2.36 2.08 1.02 3.00 2.92 2.34
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 296
<SECURITIES> 0
<RECEIVABLES> 3,216
<ALLOWANCES> 0
<INVENTORY> 458
<CURRENT-ASSETS> 6,445
<PP&E> 17,197
<DEPRECIATION> 5,612
<TOTAL-ASSETS> 32,699
<CURRENT-LIABILITIES> 5,644
<BONDS> 9,419
0
1,131
<COMMON> 6,249
<OTHER-SE> 1,444
<TOTAL-LIABILITY-AND-EQUITY> 32,699
<SALES> 6,377
<TOTAL-REVENUES> 7,632
<CGS> 6,300
<TOTAL-COSTS> 7,247
<OTHER-EXPENSES> (148)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> 306
<INCOME-TAX> 53
<INCOME-CONTINUING> 253
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (131)
<NET-INCOME> 122
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.33
</TABLE>
