UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 31, 1999
Common Stock, No Par Value 356,916,343 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 June 30, 1999 and 1998 and
Six Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheet - June 30, 1999
and December 31, 1998 4
Consolidated Statement of Cash Flows - Six
Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 41
ITEM 4. Submission of Matters to a Vote of Security
Holders 41
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 Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $9,672 $6,557 $17,304 $12,239
Costs and Expenses
Cost of gas, electricity and
other products 8,347 5,528 14,647 10,087
Operating expenses 780 570 1,425 1,007
Oil and gas exploration expenses 20 26 45 60
Depreciation, depletion and amortization 236 190 451 372
Taxes, other than income taxes 56 45 118 103
9,439 6,359 16,686 11,629
Operating Income 233 198 618 610
Other Income and Deductions
Equity in earnings of unconsolidated
affiliates 163 109 231 153
Gains on sales of assets and investments - 4 12 4
Other income, net 73 34 141 49
Income Before Interest, Minority Interests
and Income Taxes 469 345 1,002 816
Interest and Related Charges, net 175 131 350 264
Dividends on Company-Obligated Preferred
Securities of Subsidiaries 19 20 38 39
Minority Interests 23 19 56 44
Income Tax 30 30 83 110
Net Income Before Cumulative Effect of
Accounting Changes 222 145 475 359
Cumulative Effect of Accounting Changes,
net of tax - - (131) -
Net Income 222 145 344 359
Preferred Stock Dividends 19 5 23 9
Earnings on Common Stock $ 203 $ 140 $ 321 $ 350
Earnings Per Share of Common Stock
Basic
Before Cumulative Effect of Accounting
Changes $ 0.57 $ 0.44 $ 1.30 $ 1.12
Cumulative Effect of Accounting Changes - - (0.38) -
Basic Earnings per Share $ 0.57 $ 0.44 $ 0.92 $ 1.12
Diluted
Before Cumulative Effect of Accounting
Changes $ 0.54 $ 0.42 $ 1.22 $ 1.06
Cumulative Effect of Accounting Changes - - (0.35) -
Diluted Earnings per Share $ 0.54 $ 0.42 $ 0.87 $ 1.06
Average Number of Common Shares Used in
Computation
Basic 354 319 348 312
Diluted 386 346 379 338
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
(Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 286 $ 111
Trade receivables 2,730 2,060
Other receivables 792 833
Assets from price risk management activities 1,756 1,904
Inventories 557 514
Other 772 511
Total Current Assets 6,893 5,933
Investments and Other Assets
Investments in and advances to unconsolidated
affiliates 4,779 4,433
Assets from price risk management activities 2,364 1,941
Goodwill 2,696 1,949
Other 5,599 4,437
Total Investments and Other Assets 15,438 12,760
Property, Plant and Equipment, at cost 17,507 15,792
Less accumulated depreciation, depletion
and amortization 5,691 5,135
Net Property, Plant and Equipment 11,816 10,657
Total Assets $34,147 $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>
June 30, December 31,
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 2,603 $ 2,380
Liabilities from price risk management
activities 2,386 2,511
Other 1,457 1,216
Total Current Liabilities 6,446 6,107
Long-Term Debt 8,979 7,357
Deferred Credits and Other Liabilities
Deferred income taxes 2,352 2,357
Liabilities from price risk management
activities 2,068 1,421
Other 1,620 1,916
Total 6,040 5,694
Minority Interests 2,475 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 6,588 5,117
Retained earnings 2,369 2,226
Accumulated other comprehensive income (760) (162)
Common stock held in treasury (1) (195)
Other (121) (70)
Total 9,206 7,048
Total Liabilities and Shareholders' Equity $34,147 $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>
Six Months Ended
June 30,
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 $ 344 $ 359
Cumulative effect of accounting changes 131 -
Depreciation, depletion and amortization 451 372
Oil and gas exploration expenses 45 60
Deferred income taxes (11) 60
Gains on sales of assets and investments (65) (32)
Changes in components of working capital (909) (660)
Net assets from price risk management
activities 247 (253)
Merchant assets and investments:
Realized gains on sales (161) (252)
Proceeds from sales 561 629
Additions (490) (282)
Other operating activities (181) (252)
Net Cash Used in Operating Activities (38) (251)
Cash Flows From Investing Activities
Capital expenditures (969) (585)
Equity investments (648) (151)
Proceeds from sales of investments and
other assets 138 58
Acquisition of subsidiary stock - (180)
Business acquisitions, net of cash acquired (40) (25)
Other investing activities (340) (254)
Net Cash Used in Investing Activities (1,859) (1,137)
Cash Flows From Financing Activities
Issuance of long-term debt 1,301 305
Repayment of long-term debt (645) (341)
Net increase in short-term borrowings 128 769
Issuance of common stock 889 844
Issuance of subsidiary equity 513 -
Dividends paid (227) (204)
Net disposition of treasury stock 181 7
Other, net (68) 13
Net Cash Provided by Financing Activities 2,072 1,393
Increase in Cash and Cash Equivalents 175 5
Cash and Cash Equivalents, Beginning of Period 111 170
Cash and Cash Equivalents, End of Period $ 286 $ 175
Changes in Components of Working Capital
Receivables $ (644) $(1,345)
Inventories (37) (155)
Payables 120 691
Other (348) 149
Total $ (909) $ (660)
<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 all material respects, the businesses of
Enron are conducted by the subsidiaries and affiliates.
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," requiring energy trading contracts to be
recorded at fair value on the balance sheet, with the
changes in fair value included in earnings. The first
quarter 1999 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 half of 1999 and 1998
was $39 million and $51 million, respectively. Cash paid for interest
for the same periods, net of amounts capitalized, was $360 million and
$295 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. On June 16, 1999, Oregon House Bill 3220
authorizing the OPUC to allow recovery of a return on the
undepreciated investment in property retired from service was signed.
One of the effects of the bill is to affirm retroactively the OPUC's
authority to allow PGE's recovery of a return on its undepreciated
investment in the Trojan generating facility.
Relying on the new legislation, on July 2, 1999, PGE requested the
Oregon Supreme Court to vacate the June 24, 1998 adverse ruling of the
Oregon Court of Appeals, affirm the validity of the OPUC's order
allowing PGE to recover a return on its undepreciated investment in
Trojan and to reverse its decision accepting the Utility Reform
Project's petition for review. The Utility Reform Project and the
Citizens Utility Board, another party to the proceeding, opposed such
request on the ground that an effort is underway to gather signatures
to place on the November 2000 ballot a referendum to negate the new
legislation. 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. Under the terms of administrative orders, Enron replaced
affected topsoil and removed 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
concluded all remaining site activities in the spring of 1999. Enron
submitted a final report on the work conducted at the site to the EPA.
Enron does not expect to incur material expenditures in connection
with this site.
Enron 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 the 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 on 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>
Six Months Ended
Second Quarter June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Basic
Income before cumulative effect
of accounting changes $ 222 $ 145 $ 475 $ 359
Preferred stock dividends:
Second preferred stock (5) (5) (9) (9)
Series A Junior Voting
Convertible Preferred Stock (14) - (14) -
Income available to common
shareholders before cumulative
effect of accounting changes 203 140 452 350
Cumulative effect of accounting
changes - - (131) -
Income available to common
shareholders $ 203 $ 140 $ 321 $ 350
Diluted
Income available to common
shareholders before cumulative
effect of accounting changes $ 203 $ 140 $ 452 $ 350
Effect of assumed conversion
of dilutive securities:
Second preferred stock 5 5 9 9
Series A Junior Voting
Convertible Preferred Stock(a) - - - -
Income before cumulative effect
of accounting changes 208 145 461 359
Cumulative effect of accounting
changes - - (131) -
Income available to common
shareholders after assumed
conversions $ 208 $ 145 $ 330 $ 359
Denominator:
Denominator for basic earnings per
share - weighted-average shares 354 319 348 312
Effect of assumed conversion of
dilutive securities:
Second preferred stock 18 18 18 18
Stock options 14 9 13 8
Dilutive potential common shares 32 27 31 26
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 386 346 379 338
Basic earnings per share:
Before cumulative effect of
accounting changes $0.57 $0.44 $1.30 $1.12
Cumulative effect of accounting
changes - - (0.38) -
Basic earnings per share $0.57 $0.44 $0.92 $1.12
Diluted earnings per share:
Before cumulative effect of
accounting changes $0.54 $0.42 $1.22 $1.06
Cumulative effect of accounting
changes - - (0.35) -
Diluted earnings per share $0.54 $0.42 $0.87 $1.06
<FN>
(a) The Series A Junior Voting Convertible Preferred Stock
was not included in the calculation of diluted earnings
per share because conversion of these shares would be
antidilutive.
</TABLE>
6. COMPREHENSIVE INCOME
Comprehensive income includes the following (in
millions):
<TABLE>
<CAPTION>
Six Months Ended
Second Quarter June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 222 $ 145 $ 344 $ 359
Other comprehensive income:
Foreign currency
translation adjustment (49) (12) (598) (11)
Total comprehensive income (loss) $ 173 $ 133 $(254) $ 348
</TABLE>
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
Executive 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
June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues(a) $175 $417 $ 8,558 $301 $ 221 $ 9,672
Intersegment revenues(b) 29 7 136 39 (211) -
Total revenues $204 $424 $ 8,694 $340 $ 10 $ 9,672
Income (loss) before interest,
minority interests and
income taxes $ 20 $128 $ 356 $(26) $ (9) $ 469
Six Months Ended
June 30, 1999
Unaffiliated revenues(a) $324 $894 $15,074 $664 $ 348 $17,304
Intersegment revenues(b) 83 11 215 46 (355) -
Total revenues $407 $905 $15,289 $710 $ (7) $17,304
Income (loss) before interest,
minority interests and
income taxes $ 32 $346 $ 676 $(57) $ 5 $ 1,002
</TABLE>
<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
June 30, 1998
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues(a) $176 $410 $ 5,774 $154 $ 43 $ 6,557
Intersegment revenues(b) 27 4 121 (10) (142) -
Total revenues $203 $414 $ 5,895 $ 144 $ (99) $ 6,557
Income (loss) before interest,
minority interests and
income taxes $ 29 $134 $ 241 $ (43) $ (16) $ 345
Six Months Ended
June 30, 1998
Unaffiliated revenues(a) $374 $914 $10,512 $ 349 $ 90 $12,239
Intersegment revenues(b) 60 8 255 1 (324) -
Total revenues $434 $922 $10,767 $ 350 $(234) $12,239
Income (loss) before interest,
minority interests and
income taxes $ 72 $339 $ 490 $ (70) $ (15) $ 816
<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>
June 30, December 31,
1999 1998
<S> <C> <C>
Exploration and Production $ 2,976 $ 3,001
Transportation and Distribution 8,059 7,616
Wholesale Energy Operations
and Services 18,583 14,837
Retail Energy Services 744 747
Corporate and Other 3,785 3,149
Total Assets $34,147 $29,350
</TABLE>
The increase in assets is primarily a result of the
consolidation of Jacare, previously an unconsolidated
affiliate (see Note 3), capital expenditures and investments
in equity affiliates.
8. RELATED PARTY TRANSACTIONS
In June 1999, Enron entered into a series of transactions
involving a third party and LJM Cayman, L.P. (LJM). LJM is
a private investment company which egnages in acquiring or
investing primarily in energy related investments. A senior
officer of Enron is managing member of LJM's general partner.
The effect of the transactions was i) Enron amended with the
third party certain forward contracts to purchase shares of
Enron common stock, resulting in Enron having forward contracts
to purchase 3.3 million Enron common shares at the market
price on that day, ii) LJM received 3.4 million shares of Enron
common stock subject to certain restrictions and iii) Enron received
a note receivable and a put option related to an investment held by
Enron. Enron recorded the assets received and equity issued
at estimated fair value. In connection with the
transactions, LJM agreed that the Enron officer would have
no pecuniary interest in such Enron common shares and would
be restricted from voting on matters related to such shares
or to any future transactions with Enron. In the future,
LJM may participate with Enron in investments or may acquire
investments from Enron, although it is not obligated to do so.
Management believes that the terms of the transactions were
reasonable and no less favorable than the terms of similar
arrangements with unrelated third parties.
9. SUBSEQUENT EVENT
On July 20, 1999, Enron announced an agreement with its
54 percent owned exploration and production subsidiary,
Enron Oil & Gas Company (EOG), whereby Enron will exchange
approximately 75 percent of the EOG common stock it owns for
all of the stock of EOG's subsidiary, EOGI - India, Inc.,
which holds EOG's India and China operations, and a $600
million cash contribution by EOG to EOGI - India, Inc. The
completion of the Share Exchange Agreement (the Share
Exchange) is subject to specific conditions and is expected
to be finalized prior to August 31, 1999. Subsequent to the
completion of the Share Exchange, EOG's concurrent offering
of 27 million shares of its common stock and Enron's
offering of 8.5 million shares of EOG common stock, Enron's
ownership stake in EOG will be approximately 9.7 percent.
On July 13, 1999, Enron announced a two-for-one common
stock split that will be effective August 13, 1999, to
shareholders of record July 23, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENRON CORP. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Second Quarter 1999
vs. Second 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 second quarter 1999 net income was $222 million
compared to $145 million in the second 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, Enron International and Enron
Communications), Retail Energy Services (Enron Energy
Services) and Corporate and Other, which includes certain
other businesses.
Basic and diluted earnings per share of common stock were
as follows:
<TABLE>
<CAPTION>
Second Quarter
1999 1998
<S> <C> <C>
Basic earnings per share $ 0.57 $ 0.44
Diluted earnings per share $ 0.54 $ 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>
Second Quarter
1999 1998
<S> <C> <C>
Exploration and Production $ 20 $ 29
Transportation and Distribution:
Gas Pipeline Group 72 72
Portland General 56 62
Wholesale Energy Operations
and Services 356 241
Retail Energy Services (26) (43)
Corporate and Other (9) (16)
Income before interest, minority
interests and taxes $ 469 $ 345
</TABLE>
Exploration and Production
Enron's exploration and production operations are
conducted by Enron Oil & Gas Company (EOG). IBIT of
Exploration and Production totaled $20 million and $29
million for the second quarter of 1999 and 1998,
respectively.
Wellhead volume and price statistics (including
intercompany amounts) are as follows:
<TABLE>
<CAPTION>
Second Quarter
1999 1998
<S> <C> <C>
Natural gas volumes (MMcf/d)(a)
North America 754 722
Trinidad 130 132
India 75 53
Total 959 907
Average natural gas prices ($/Mcf)
North America $1.93 $1.96
Trinidad 1.07 1.08
India 1.95 2.57
Composite 1.82 1.87
Crude oil/condensate volumes (MBbl/d)(a)
North America 15.8 14.7
Trinidad 2.3 2.9
India 6.4 4.8
Total 24.5 22.4
Average crude oil/condensate prices ($/Bbl)
North America $16.10 $12.82
Trinidad 14.46 13.31
India 14.03 13.41
Composite 15.41 13.01
<FN>
(a) Million cubic feet per day or thousand barrels per day,
as applicable.
</TABLE>
The following analyzes the significant changes in the
various components of IBIT for Exploration and Production
(in millions):
<TABLE>
<CAPTION>
Second Quarter
1999 1998
<S> <C> <C>
Net revenues $191 $179
Operating expenses 50 38
Exploration expenses 20 26
Depreciation, depletion and amortization 89 73
Taxes, other than income taxes 12 13
Income before interest, minority
interests and taxes $ 20 $ 29
</TABLE>
Net Revenues
Exploration and Production's revenues, net of sales in
connection with natural gas marketing, increased $12 million
in the second quarter of 1999 as compared to the same period
in 1998. The increase is primarily a result of increased
production volumes of natural gas and crude oil and
condensate and higher wellhead crude oil and condensate
prices partially offset by decreased results from sales of
reserves and related assets, net and lower wellhead natural
gas prices. Net reserve and asset sales activity decreased
net revenues by $6 million in the second quarter of 1999 as
compared to an increase of $3 million in the same period of
1998.
Costs and Expenses
Operating expenses increased in the second quarter of
1999 compared to the same period in 1998 primarily as a
result of non-recurring personnel expenses. Depreciation,
depletion and amortization increased primarily as a result
of a one-time charge related to offshore operations and
increased production.
Exploration expenses decreased primarily due to decreased
exploratory drilling and other exploration activities.
Subsequent Event
On July 20, 1999, Enron entered into an agreement with
EOG to exchange approximately 75% of the EOG common stock
held by Enron for the stock of certain of its international
subsidiaries (see Note 8 to the Consolidated Financial
Statements).
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>
Second Quarter
1999 1998
<S> <C> <C>
Total Volumes Transported (Bbtu/d)(a)
Northern Natural Gas 3,553 3,879
Transwestern Pipeline 1,419 1,707
Florida Gas Transmission 1,546 1,328
Northern Border Pipeline 2,404 1,737
<FN>
(a) Reflects 100% of each entity's throughput volumes.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Second Quarter
1999 1998
<S> <C> <C>
Net revenues $124 $137
Operating expenses 65 68
Depreciation and amortization 17 17
Equity in earnings 8 9
Other income, net 22 11
Income before interest and taxes $ 72 $ 72
</TABLE>
Operating Results
Revenues, net of cost of sales, and operating expenses
of Gas Pipeline Group (GPG) declined $13 million and $3
million, respectively, in the second 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 that caused a reduction
in revenues and a corresponding decrease in expenses. Other
income, net increased $11 million in the second quarter of
1999 as compared to the same period of 1998 primarily as a
result of interest earned by GPG in connection with the
financing of an acquisition by an unconsolidated affiliate.
Portland General. Statistics for PGE for the second
quarter of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Second Quarter
1999 1998
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 1,618 1,524
Commercial 1,746 1,587
Industrial 1,083 916
Total Retail 4,447 4,027
Wholesale 3,053 2,382
Total Electricity Sales 7,500 6,409
Average Billed Revenue (cents per kWh)
Residential 6.08 6.40
Commercial 4.92 5.15
Industrial 3.63 3.18
Total Retail 5.03 5.17
Wholesale 2.03 1.72
Total Sales 3.81 3.89
Resource Mix
Coal 12% 12%
Combustion Turbine 6 6
Hydro 10 11
Total Generation 28 29
Firm Purchases 61 64
Secondary Purchases 11 7
Total Resources 100% 100%
Average Variable Power Cost (Mills/kWh)(b)
Generation 8.7 6.6
Firm Purchases 16.8 14.3
Secondary Purchases 18.5 12.4
Total Average Variable Power Cost 15.5 13.2
Retail Customers (end of period, thousands) 711 694
<FN>
(a) Thousand megawatt-hours.
(b) Mills (1/10 cent) per kilowatt-hour.
</TABLE>
Portland General realized IBIT of $56 million and $62
million for the second quarter of 1999 and 1998,
respectively. Significant components of IBIT are as follows
(in millions):
<TABLE>
<CAPTION>
Second Quarter
1999 1998
<S> <C> <C>
Revenues $296 $269
Purchased power and fuel 119 94
Operating expenses 79 78
Depreciation and amortization 48 45
Other income, net 6 10
Income before interest and taxes $ 56 $ 62
</TABLE>
Operating Results
Revenues and purchased power and fuel costs increased $27
million and $25 million, respectively, in the second quarter
of 1999 as compared to the second quarter of 1998, primarily
as a result of an increase in the number of customers served
by PGE. Higher power costs partially offset the revenue
increase resulting from the higher customer count.
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, Enron International and
Enron Communications. Enron Wholesale is categorized into
two business lines: (a) Commodity Sales and Services and
(b) Energy Assets and Investments. Integrated products and
services related to these business lines are offered to
wholesale energy and communications customers in each of
Enron Wholesale's markets.
Enron Wholesale manages its commodity and asset
portfolios in order to maximize value, minimize the
associated risks and provide overall liquidity. In this
process, Enron Wholesale 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>
Second Quarter
1999 1998
<S> <C> <C>
Commodity Sales and Services $ 81 $ 23
Energy Assets and Investments 325 258
Unallocated expenses (50) (40)
Income before interest, minority
interests and taxes $356 $241
</TABLE>
The following discussion analyzes the contributions to
IBIT for each business line.
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, the
restructuring of existing long-term contracts and the
management of Enron Wholesale's commodity contract
portfolios. In addition, Enron Wholesale provides risk
management products and services to energy customers that
hedge movements in price and location-based price
differentials. Enron Wholesale'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>
Second Quarter
1999 1998
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 8,038 6,696
Canada 4,475 3,295
Europe 1,198 1,062
Other 26 9
13,737 11,062
Transport Volumes 513 630
Total Gas Volumes 14,250 11,692
Oil 8,068 2,534
Liquids 754 550
Electricity(c) 10,638 9,463
Total 33,710 24,239
Electricity Volumes Marketed (Thousand MWh)
United States 94,966 86,075
Europe and Other 1,837 40
Total 96,803 86,115
Financial Settlements (Notional) (BBtue/d) 82,699 67,411
<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 to $81 million in the second quarter of 1999 as
compared to $23 million in the same period of 1998 primarily
due to increased earnings from long-term contracts,
partially offset by lower earnings from marketing
activities.
Energy Assets and Investments. Enron Wholesale's energy
assets and investments activities include investments in
debt and equity securities related to natural gas,
electricity and communications. 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 increased to
$325 million in the second quarter of 1999 as compared to
$258 million in the same period of 1998 primarily as a
result of the increased market value of Enron Wholesale's
communications investments, partially offset by reductions
in the market value of certain energy investments, lower
earnings from sales of interests in power plants and costs
associated with developing the communications business.
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 second 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 $26 million
in the second quarter of 1999 compared to a loss of $43
million in the second quarter of 1998. The results
primarily reflect the costs associated with developing the
commodity, capital and services capability to deliver on
contracts signed to date by Energy Services, partially
offset by increased earnings from energy management
services.
Corporate and Other
Corporate and Other includes results of Azurix Corp.,
which provides water and wastewater services, Enron
Renewable Energy Corp. (EREC) and the operations of Enron's
methanol and MTBE plants. Corporate and Other realized a
loss before interest, minority interests and taxes of $9
million in the second quarter of 1999 compared to $16
million for the same period in 1998. The second quarter
1999 results includes earnings from EREC related to the
completion and sale of certain projects and gains related to
the Azurix stock offering, partially offset by higher
expenses.
Interest and Related Charges, net
Interest and related charges, net is reported net of
interest capitalized of $16 million and $9 million for the
second quarter of 1999 and 1998, respectively. The net
expense increased $44 million in the second quarter of 1999
as compared to the same period of 1998, primarily due to an
increase in debt of approximately $900 million resulting
from the consolidation of Jacare Electrical Distribution
Trust (see Note 3 to the Consolidated Financial Statements)
and issuances of debt subsequent to June 30, 1998.
Minority Interests
Minority interests increased $4 million to $23 million in
the second 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 second
quarter of 1999.
Income Tax Expense
The projected effective tax rate for 1999 is lower than
the statutory rate mainly due to equity earnings,
consolidated foreign earnings and differences between the
book and tax basis of certain assets and stock sales.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999
vs. Six Months Ended June 30, 1998
RESULTS OF OPERATIONS
Consolidated Net Income
Excluding the cumulative effect of accounting changes
reported in the first quarter, Enron reported net income of
$475 million for the first six months of 1999 compared to
$359 million during the same period in 1998.
Basic and diluted earnings (loss) per share of common
stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Basic earnings per share:
Before cumulative effect of accounting
changes $ 1.30 $ 1.12
Cumulative effect of accounting changes (0.38) -
Reported basic earnings per share $ 0.92 $ 1.12
Diluted earnings per share:
Before cumulative effect of accounting
changes $ 1.22 $ 1.06
Cumulative effect of accounting changes (0.35) -
Reported diluted earnings per share $ 0.87 $ 1.06
</TABLE>
Income Before Interest, Minority Interests and Income Taxes
The following table presents IBIT for each of Enron's
operating segments (in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Exploration and Production $ 32 $ 72
Transportation and Distribution:
Gas Pipeline Group 198 198
Portland General 148 141
Wholesale Energy Operations and
Services 676 490
Retail Energy Services (57) (70)
Corporate and Other 5 (15)
Income before interest, minority
interests and taxes $1,002 $816
</TABLE>
Exploration and Production
IBIT of Exploration and Production totaled $32 million
for the first six months of 1999 as compared to $72 million
for the same period in 1998.
Wellhead volume and price statistics (including
intercompany amounts) are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Natural gas volumes (MMcf/d)(a)
North America 767 733
Trinidad 141 121
India 74 50
Total 982 904
Average natural gas prices ($/Mcf)
North America $1.76 $1.94
Trinidad 1.07 1.08
India 1.95 2.63
Composite 1.67 1.87
Crude oil/condensate volumes (MBbl/d)(a)
North America 15.8 15.0
Trinidad 2.6 2.8
India 6.7 4.5
Total 25.1 22.3
Average crude oil/condensate prices ($/Bbl)
North America $13.76 $13.70
Trinidad 11.83 13.66
India 11.80 14.31
Composite 13.04 13.82
<FN>
(a) Million cubic feet per day or thousand barrels per day,
as applicable.
</TABLE>
The following analyzes the significant changes in the
various components of IBIT for Exploration and Production
(in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Net revenues $373 $385
Operating expenses 98 79
Exploration expenses 45 60
Depreciation, depletion and
amortization 171 145
Taxes, other than income taxes 26 28
Other income (expense), net (1) (1)
Income before interest, minority
interests and taxes $ 32 $ 72
</TABLE>
Net Revenues
Exploration and Production's revenues, net of sales in
connection with natural gas marketing, decreased $12 million
in the first half of 1999 as compared to the same period in
1998. The decrease is primarily a result of lower wellhead
prices for natural gas and crude oil and condensate,
decreased gains on sales of reserves and related assets and
decreased revenues from other marketing activities,
partially offset by increased production volumes of natural
gas and crude oil and condensate. In the first six months
of 1999, activities related to sales of reserves and related
assets and other, net reduced revenues by $4 million as
compared to an increase of $17 million in 1998. Other
marketing activities resulted in a net decrease in revenues
of $11 million in the first half of 1999 compared to a
decrease of less than $1 million in the same period in 1998.
Costs and Expenses
Operating expenses increased in the first half of 1999
compared to the same period in 1998 primarily as a result of
expanded operations, settlement of certain commercial
disputes with third parties and non-recurring personnel
expenses. Depreciation, depletion and amortization
increased primarily as a result of a one-time charge related
to offshore operations and increased production.
Exploration expenses decreased primarily due to decreased
exploratory drilling and other exploration activities.
Transportation and Distribution
Gas Pipeline Group. The following table summarizes total
volumes transported for each of Enron's interstate natural
gas pipelines.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Total Volumes Transported (Bbtu/d)(a)
Northern Natural Gas 4,046 4,176
Transwestern Pipeline 1,475 1,688
Florida Gas Transmission 1,386 1,255
Northern Border Pipeline 2,444 1,788
<FN>
(a) Reflects 100% of each entity's throughput volumes.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Net revenues $305 $329
Operating expenses 126 137
Depreciation and amortization 34 33
Equity in earnings 16 20
Other income, net 37 19
Income before interest and taxes $198 $198
</TABLE>
Operating Results
Revenues, net of cost of sales, and operating expenses
of Gas Pipeline Group (GPG) declined $24 million and $11
million, respectively, in the first half 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 that caused a reduction in revenues
and a corresponding decrease in expenses. Other income, net
increased $18 million in the first half of 1999 as compared
to the same period of 1998. The 1999 results include
interest earned by GPG in connection with the financing of
an acquisition by an unconsolidated affiliate.
Portland General. Statistics for PGE for the first half
of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 3,960 3,600
Commercial 3,562 3,241
Industrial 2,103 1,807
Total Retail 9,625 8,648
Wholesale 4,391 5,957
Total Electricity Sales 14,016 14,605
Average Billed Revenue (cents per kWh)
Residential 5.87 6.12
Commercial 4.92 5.11
Industrial 3.56 3.25
Total Retail 5.01 5.15
Wholesale 1.98 1.78
Total Sales 4.06 3.78
Resource Mix
Coal 16% 13%
Combustion Turbine 6 6
Hydro 11 10
Total Generation 33 29
Firm Purchases 53 65
Secondary Purchases 14 6
Total Resources 100% 100%
Average Variable Power Cost (Mills/kWh)(b)
Generation 8.4 6.8
Firm Purchases 16.8 15.4
Secondary Purchases 16.4 13.2
Total Average Variable Power Cost 15.2 13.9
Retail Customers (end of period, thousands) 711 694
<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>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Revenues $595 $589
Purchased power and fuel 219 218
Operating expenses 149 154
Depreciation and amortization 94 89
Other income, net 15 13
Income before interest and taxes $148 $141
</TABLE>
Operating Results
Revenues and purchased power and fuel costs increased $6
million and $1 million, respectively, in the first six
months of 1999 as compared to the same period in 1998. The
increases were primarily the result of an increase in the
number of customers served by PGE and colder weather during
the first quarter of 1999, partially offset by higher power
costs.
Wholesale Energy Operations and Services
The following table reflects IBIT for each of Enron
Wholesale's business lines (in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Commodity Sales and Services $305 $152
Energy Assets and Investments 461 409
Unallocated expenses (90) (71)
Income before interest, minority
interests and taxes $676 $490
</TABLE>
The following discussion analyzes the contributions to
IBIT for each of the business lines.
Commodity Sales and Services. Enron Wholesale markets
and transports a substantial quantity of energy commodities
as reflected in the following table (including intercompany
amounts):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 8,560 6,984
Canada 4,216 3,087
Europe 1,493 1,093
Other 17 5
14,286 11,169
Transport Volumes 534 540
Total Gas Volumes 14,820 11,709
Oil 5,898 2,147
Liquids 667 602
Electricity(c) 10,119 8,866
Total 31,504 23,324
Electricity Volumes Marketed (Thousand MWh)
United States 180,928 160,347
Europe and Other 2,221 122
Total 183,149 160,469
Financial Settlements (Notional) (BBtue/d) 88,803 68,658
<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 using the input method.
</TABLE>
The earnings from Commodity Sales and Services
increased in the first half of 1999 as compared to the same
period of 1998 primarily due to increased earnings from long-
term contracts and increased profits from gas and power
marketing where volumes showed continued strength in the
growing deregulated market, partially offset by higher
expenses.
Energy Assets and Investments. Earnings from Energy
Assets and Investments increased to $461 million in the
first half of 1999 as compared to $409 million in the same
period of 1998 as a result of the increased market value
of Enron Wholesale's communications investments and
increased construction profits, partially offset by
reductions in the market value of certain energy investments,
lower earnings from sales of interests in power plants and costs
associated with developing the communications business.
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
Energy Services reported an operating loss before
interest, minority interest and taxes of $57 million in the
first half of 1999 compared to a loss of $70 million for the
same period of 1998. The results primarily reflect the
costs associated with developing the commodity, capital and
services capability to deliver on contracts signed to date
by Energy Services, partially offset by increased earings
from energy management services.
Corporate and Other
Corporate and Other realized IBIT of $5 million in the
first half of 1999 compared to a loss of $15 million for the
same period in 1998. The 1999 results include earnings from
EREC related to the completion and sale of certain projects
and gains related to the Azurix stock offering, partially
offset by higher expenses.
Interest and Related Charges, net
Interest and related charges, net, is reported net of
interest capitalized of $29 million and $15 million for the
first half of 1999 and 1998, respectively. The net expense
increased $86 million in the first half of 1999 as compared
to the same period of 1998, primarily due to an increase in
debt of approximately $900 million resulting from the
consolidation of Jacare Electrical Distribution Trust (see
Note 3 to the Consolidated Financial Statements) and
issuances of debt subsequent to June 30, 1998.
Minority Interests
Minority interests increased $12 million to $56 million
in the first half 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 half of
1999.
Income Tax Expense
The projected effective tax rate for 1999 is lower than
the statutory rate mainly due to equity earnings,
consolidated foreign earnings and differences between the
book and tax basis of certain assets and stock sales.
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 an Executive 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.
Enron's Year 2000 Plan calls for most business units to
have completed initial rounds of inventory, assessment,
remediation and validation testing of its mission critical
internal items by June 30, 1999. At Enron, that deadline
has been met in all material respects. (However, as
explained elsewhere in this statement, that does not insure
that these systems do not continue to contain hidden Year
2000 defects in computer code or in embedded devices.)
Remaining mission critical items are expected to be
completed for purposes of initial remediation and validation
testing prior to September 30, 1999.
As of July 31, 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.
<TABLE>
Year 2000 Plan Readiness by Enron Business Unit
(Mission-Critical Internal Items)
<CAPTION>
Contingency
Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan
<S> <C> <C> <C> <C> <C> <C> <C>
Exploration and
Production C C C C IP IP IP
Transportation
and Distribution:
Gas Pipeline Group C C C C C IP C
Portland General C C C C IP IP C
Wholesale:
Domestic C C C C C IP IP
Europe C C C C IP IP IP
Other International C C C IP IP IP C
Retail Energy Services C C C C IP IP C
Corporate and Other C C C C IP IP C
</TABLE>
<TABLE>
Year 2000 Plan Readiness by Enron Business Unit
(Mission-Critical Outside Entities)
<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 C C C C
Portland General C C C C C C C
Wholesale:
Domestic C C C C IP IP IP
Europe C C C IP IP IP IP
Other International C C C IP IP IP C
Retail Energy Services C C C C C IP IP
Corporate and Other C C C C IP IP C
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.
<TABLE>
Year 2000 Plan Completion Dates by Enron Business Unit
(Mission-Critical Internal Items)(a)
<CAPTION>
Contingency
Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan
<S> <C> <C> <C> <C> <C> <C> <C>
Exploration and
Production 12/98 3/99 3/99 6/99 9/99 9/99 9/99
Transportation and
Distribution:
Gas Pipeline Group 12/98 1/99 4/99 6/99 7/99 8/99 6/99
Portland General 12/97 10/98 10/98 6/99 8/99 9/99 6/99
Wholesale:
Domestic 6/98 8/98 12/98 6/99 7/99 8/99 8/99
Europe 7/98 8/98 8/98 4/99 8/99 9/99 8/99
Other International 3/99 3/99 4/99 8/99 9/99 9/99 6/99
Retail Energy Services 1/99 2/99 3/99 4/99 8/99 9/99 7/99
Corporate and Other 2/99 2/99 3/99 6/99 8/99 8/99 6/99
</TABLE>
<TABLE>
Year 2000 Plan Completion Dates by Enron Business Unit
(Mission-Critical Outside Entities)
<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 4/99 8/99 8/99 8/99 6/99
Retail Energy Services 1/99 1/99 3/99 4/99 5/99 8/99 8/99
Corporate and Other 10/98 3/99 3/99 6/99 8/99 8/99 6/99
<FN>
(a) Substantially all items with a completion date of 6/30/99 have been
finalized.
</TABLE>
Because Enron's Year 2000 Plan treats Year 2000 effort as
an iterative process, Enron will commence additional cycles
of inventory, assessment, remediation and validation
testing, which will be conducted in parallel with and in
coordination with Enron's Year 2000 contingency planning.
Enron continues to focus on hidden defects in computer
code, including re-coding errors in remediated code;
sabotage of remediated code; embedded devices with Year 2000
defects; and the potential failure of mission-critical
external entities, both domestic and international and
including foreign governments. Enron is developing
reasonable contingency plans to prepare to the extent
practicable to avoid substantial Year 2000-related
disruptions that may have a material adverse effect on Enron
and its business. Because of the imponderable nature of
potential Year 2000 deficiencies, their impact cannot be
quantified. None of these problems is unique to Enron.
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.
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.
U.S. Y2K Act. Enron may face additional risk as a result
of the uncertainties, and probable additional litigation,
resulting from the enactment of the U.S. federal "Y2K Act."
Because experience with this recently enacted legislation is
very limited, Enron cannot at this time quantify the
financial impact or potential business disruption that may
result from this legislation. However, the adverse impact
on Enron's business might be material.
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.
Additionally, there may be sustained interruption of the
capital markets. 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, or that may be subject to re-
coding errors or sabotage; 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
(FASB) 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.
In June 1999, the FASB issued SFAS No. 137 which deferred
the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. A company may implement SFAS No. 133
as of the beginning of any fiscal quarter after issuance,
however, the statement cannot be applied retroactively.
Enron has not yet determined the timing of or method of
adoption of SFAS No. 133. Enron believes that SFAS No. 133
will not have an impact on its accounting for price risk
management activities but has not yet quantified the effect
on its hedging activities or physical base contracts.
FINANCIAL CONDITION
<TABLE>
Cash Flows
<CAPTION>
Six Months Ended
June 30,
(In Millions) 1999 1998
<S> <C> <C>
Cash provided by (used in):
Operating activities $ (38) $ (251)
Investing activities (1,859) (1,137)
Financing activities 2,072 1,393
</TABLE>
Cash used in operating activities totaled $38 million in
the first half of 1999 as compared to $251 million in the
same period last year. The change in cash from operating
activities in 1999 reflects increased cash from net assets
from price risk management activities, partially offset by
higher working capital requirements.
Cash used in investing activities totaled $1,859 million
in the first six months of 1999 as compared to $1,137
million in the same period of 1998. The 1999 amount
reflects increased cash used for capital expenditures,
primarily related to North America power plant construction
and the construction of Enron Communication's fiber optic
network, and equity investments, primarily in South Korea,
India and Panama.
Cash provided by financing activities totaled $2,072
million in the first half of 1999 as compared to $1,393
million during the same period of 1998. The first half of
1999 includes net proceeds of approximately $839 million
from the public offering of 13.8 million shares of Enron
common stock, net issuances of short- and long-term debt
of $784 million and proceeds from the issuance of equity
by subsidiaries. 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.
Because of the potential interruption to the capital
markets due to Year 2000 problems, Enron's liquidity could
be impacted. See "Year 2000" for a discussion of the
potential problems and Enron's Year 2000 Plan. Enron has
expanded its borrowing capacity which should provide adequate
liquidity in the event of any short-term market disruptions.
CAPITALIZATION
Total capitalization at June 30, 1999 was $21.7 billion.
Debt as a percentage of total capitalization decreased to
41.5% at June 30, 1999 as compared to 41.9% at December 31,
1998. The decrease primarily reflects the issuance in
February 1999 of approximately 13.8 million shares of common
stock, partially offset by increased debt levels.
On July 13, 1999, Enron announced a two-for-one common
stock split that will be effective August 13, 1999 to
shareholders of record as of July 23, 1999.
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 to $36 million at June 30, 1999
as compared to $20 million at December 31, 1998. The
increase is attributable to seasonal dynamics in the U.S.
power markets where summer prices and associated price
volatility has increased estimated market risk. Subsequent
to June 30, 1999, the value at risk for commodity price risk
has declined, but remains somewhat higher than year-end 1998
levels. Enron's value at risk for its non-trading commodity
price risk increased to $17 million at June 30, 1999 as
compared to $10 million at December 31, 1998, primarily as a
result of increased hedging activity. The non-trading
market risk includes only the risk related to the financial
instruments that serve as hedges and does not include the related
underlying hedged item.
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 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Enron Corp. was
held on May 4, 1999 in Houston, Texas, for the purpose of
electing a board of directors, the appointment of auditors
and voting on certain proposals described below. Proxies
for the meeting were solicited pursuant to Section 14(a) of
the Securities Exchange Act of 1934 and there was no
solicitation in opposition to management's nominees.
(a) All of management's nominees for directors as listed in
the proxy statement were elected with the following vote:
<TABLE>
<CAPTION>
Nominee Shares FOR Shares WITHHELD
<S> <C> <C>
Robert A. Belfer 312,007,483 4,086,235
Norman P. Blake, Jr. 313,136,343 2,957,375
Ronnie C. Chan 313,107,802 2,985,916
John H. Duncan 312,916,899 3,176,819
Joe H. Foy 310,848,876 5,244,842
Wendy L. Gramm 313,053,255 3,040,463
Ken L. Harrison 312,244,651 3,849,067
Robert K. Jaedicke 312,924,106 3,169,612
Kenneth L. Lay 312,140,912 3,952,806
Charles A. LeMaistre 312,809,080 3,284,638
John Mendelsohn 313,126,768 2,966,950
Jerome J. Meyer 313,164,685 2,929,033
Jeffrey K. Skilling 312,215,239 3,878,479
John A. Urquhart 311,885,176 4,208,542
John Wakeham 312,007,183 4,086,535
Herbert S. Winokur, Jr. 313,179,479 2,914,239
</TABLE>
(b) The appointment of Arthur Andersen LLP as independent
auditor was approved by the following vote:
<TABLE>
<CAPTION>
Shares FOR Shares AGAINST Shares ABSTAINING
<C> <C> <C>
313,586,813 873,475 1,633,430
</TABLE>
(c) The Enron Corp. Annual Incentive Plan was approved by
the following vote:
<TABLE>
<CAPTION>
Shares FOR Shares AGAINST Shares ABSTAINING
<C> <C> <C>
293,617,022 19,921,983 2,554,713
</TABLE>
(d) The Amended and Restated Enron Corp. 1991 Stock Plan
was approved by the following vote:
<TABLE>
<CAPTION>
Shares FOR Shares AGAINST Shares ABSTAINING
<C> <C> <C>
238,827,491 74,716,916 2,549,311
</TABLE>
(e) The amendment to Enron's Amended and Restated Articles
of Incorporation to increase the total number of authorized
shares of Common Stock from 600,000,000 to 1,200,000,000 was
approved by the following vote:
<TABLE>
<CAPTION>
Shares FOR Shares AGAINST Shares ABSTAINING
<C> <C> <C>
309,750,986 4,738,094 1,604,638
</TABLE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
ENRON CORP.
(Registrant)
Date: August 13, 1999 By: RICHARD A. CAUSEY
Richard A. Causey
Executive Vice President and
Chief Accounting Officer
(Principal Accounting
Officer)
<PAGE>
Exhibit 12
<TABLE>
ENRON CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Dollars in Millions)
(Unaudited)
<CAPTION>
Six Months
Ended Year Ended December 31,
6/30/99 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Earnings available for fixed charges
Net income before cumulative effect
of accounting changes $ 475 $ 703 $105 $ 584 $ 520 $ 453
Less:
Undistributed earnings and
losses of less than 50% owned
affiliates (13) (44) (89) (39) (14) (9)
Capitalized interest of
nonregulated companies (35) (66) (16) (10) (8) (9)
Add:
Fixed charges(1) 490 809 674 454 436 487
Minority interest 56 77 80 75 27 30
Income tax expense 101 204 (65) 297 310 190
Total $1,074 $1,683 $689 $1,361 $1,271 $1,142
Fixed Charges
Interest expense(1) $ 465 $ 760 $624 $ 404 $ 386 $ 445
Rental expense representative
of interest factor 25 49 50 50 50 42
Total $ 490 $ 809 $674 $ 454 $ 436 $ 487
Ratio of earnings to fixed charges 2.19 2.08 1.02 3.00 2.92 2.34
<FN>
(1) Amounts exclude costs incurred on sales of accounts receivables.
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 286
<SECURITIES> 0
<RECEIVABLES> 3,463
<ALLOWANCES> 0
<INVENTORY> 557
<CURRENT-ASSETS> 6,893
<PP&E> 17,507
<DEPRECIATION> 5,691
<TOTAL-ASSETS> 34,147
<CURRENT-LIABILITIES> 6,446
<BONDS> 8,979
0
1,131
<COMMON> 6,588
<OTHER-SE> 1,487
<TOTAL-LIABILITY-AND-EQUITY> 34,147
<SALES> 14,899
<TOTAL-REVENUES> 17,304
<CGS> 14,647
<TOTAL-COSTS> 16,686
<OTHER-EXPENSES> (384)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 350
<INCOME-PRETAX> 558
<INCOME-TAX> 83
<INCOME-CONTINUING> 476
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (131)
<NET-INCOME> 344
<EPS-BASIC> 0.92
<EPS-DILUTED> 0.87
</TABLE>
