UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1999
Common Stock, No Par Value 715,613,151 shares
1 of 40
<PAGE>
ENRON CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Income Statement - Three
Months Ended September 30, 1999 and 1998 and
Nine Months Ended September 30, 1999 and 1998 3
Consolidated Balance Sheet - September 30, 1999
and December 31, 1998 4
Consolidated Statement of Cash Flows - Nine
Months Ended September 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 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 39
ITEM 2. Sale of Unregistered Securities 39
ITEM 6. Exhibits and Reports on Form 8-K 39
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In Millions, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenues $11,835 $11,320 $29,139 $23,558
Costs and Expenses
Cost of gas, electricity and
other products 10,489 10,017 25,137 20,103
Operating expenses 661 614 2,085 1,621
Oil and gas exploration expenses 10 34 55 94
Depreciation, depletion and
amortization 225 215 676 587
Impairment of long-lived assets 441 - 441 -
Taxes, other than income taxes 45 50 163 153
11,871 10,930 28,557 22,558
Operating Income (Loss) (36) 390 582 1,000
Other Income and Deductions
Equity in earnings of unconsolidated
affiliates 38 8 269 161
Gains on sales of assets and
investments 456 (1) 468 3
Other income, net 62 8 203 57
Income Before Interest, Minority
Interests and Income Taxes 520 405 1,522 1,221
Interest and Related Charges, net 187 134 537 398
Dividends on Company-Obligated
Preferred Securities of Subsidiaries 19 19 57 58
Minority Interests 38 16 94 60
Income Tax Expense (Benefit) (14) 68 69 178
Net Income Before Cumulative Effect of
Accounting Changes 290 168 765 527
Cumulative Effect of Accounting Changes,
net of tax - - (131) -
Net Income 290 168 634 527
Preferred Stock Dividends 19 4 42 13
Earnings on Common Stock $ 271 $ 164 $ 592 $ 514
Earnings Per Share of Common Stock
Basic
Before Cumulative Effect of
Accounting Changes $ 0.38 $ 0.25 $ 1.03 $0.81
Cumulative Effect of Accounting
Changes - - (0.19) -
Basic Earnings per Share $ 0.38 $ 0.25 $ 0.84 $ 0.81
Diluted
Before Cumulative Effect of
Accounting Changes $ 0.35 $ 0.24 $ 0.96 $ 0.77
Cumulative Effect of Accounting
Changes - - (0.17) -
Diluted Earnings per Share $ 0.35 $ 0.24 $ 0.79 $ 0.77
Average Number of Common Shares
Used in Computation
Basic 714 659 702 636
Diluted 781 713 766 688
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
(Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 316 $ 111
Trade receivables 3,200 2,060
Other receivables 651 833
Assets from price risk management activities 2,156 1,904
Inventories 613 514
Other 631 511
Total Current Assets 7,567 5,933
Investments and Other Assets
Investments in and advances to unconsolidated
affiliates 4,968 4,433
Assets from price risk management activities 3,052 1,941
Goodwill 2,636 1,949
Other 5,578 4,437
Total Investments and Other Assets 16,234 12,760
Property, Plant and Equipment, at cost 12,924 15,792
Less accumulated depreciation, depletion
and amortization 3,149 5,135
Net Property, Plant and Equipment 9,775 10,657
Total Assets $33,576 $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>
September 30, December 31,
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 2,281 $ 2,380
Liabilities from price risk management
activities 2,829 2,511
Other 1,559 1,216
Total Current Liabilities 6,669 6,107
Long-Term Debt 8,592 7,357
Deferred Credits and Other Liabilities
Deferred income taxes 1,908 2,357
Liabilities from price risk management
activities 2,521 1,421
Other 1,718 1,916
Total 6,147 5,694
Minority Interests 1,822 2,143
Company-Obligated Preferred Securities
of Subsidiaries 1,001 1,001
Shareholders' Equity
Second preferred stock, cumulative, no par value 130 132
Mandatorily Convertible Junior Preferred Stock,
Series B, no par value 1,000 -
Common stock, no par value 6,640 5,117
Retained earnings 2,537 2,226
Accumulated other comprehensive income (853) (162)
Common stock held in treasury (1) (195)
Other (108) (70)
Total 9,345 7,048
Total Liabilities and Shareholders' Equity $33,576 $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>
Nine Months Ended
September 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 $ 634 $ 527
Cumulative effect of accounting changes 131 -
Depreciation, depletion and amortization 676 587
Oil and gas exploration expenses 55 94
Impairment of long-lived assets 441 -
Deferred income taxes (38) 109
Gains on sales of assets and investments (461) (31)
Changes in components of working capital (1,072) (372)
Net assets from price risk management
activities 55 (458)
Merchant assets and investments:
Realized gains on sales (252) (368)
Proceeds from sales 708 855
Additions (657) (515)
Other operating activities (263) (457)
Net Cash Used in Operating Activities (43) (29)
Cash Flows From Investing Activities
Capital expenditures (2,022) (1,231)
Equity investments (718) (1,470)
Proceeds from sales of investments and
other assets 245 59
Acquisition of subsidiary stock - (180)
Business acquisitions, net of cash acquired (213) (87)
Other investing activities (447) (262)
Net Cash Used in Investing Activities (3,155) (3,171)
Cash Flows From Financing Activities
Issuance of long-term debt 1,570 1,253
Repayment of long-term debt (1,417) (388)
Net increase in short-term borrowings 2,038 1,997
Issuance of common stock 889 867
Issuance of subsidiary equity 513 -
Dividends paid (346) (307)
Net disposition of treasury stock 223 6
Other financing activities (67) (15)
Net Cash Provided by Financing Activities 3,403 3,413
Increase in Cash and Cash Equivalents 205 213
Cash and Cash Equivalents, Beginning of Period 111 170
Cash and Cash Equivalents, End of Period $ 316 $ 383
Changes in Components of Working Capital
Receivables $ (994) $(1,317)
Inventories (112) (233)
Payables (45) 860
Other 79 318
Total $(1,072) $ (372)
<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.
The 1998 earnings per share amounts have been adjusted to
reflect the August 13, 1999 two-for-one stock split.
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. SALE OF INTERESTS IN ENRON OIL & GAS COMPANY
On August 16, 1999, Enron exchanged approximately 62.3
million shares (approximately 75 percent) of the Enron Oil &
Gas Company (EOG) common stock it held 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. Also in August,
Enron received net proceeds of approximately $190 million
for the sale of 8.5 million shares of EOG common stock in a
public offering and issued approximately $255 million of
public debt that is exchangeable in July 2002 into
approximately 11.5 million shares of EOG common stock. As a
result of the share exchange, Enron recorded a pre-tax gain
of $454 million ($345 million after tax, or $0.44 per
diluted share) in the third quarter of 1999. Enron retained
11.5 million shares of EOG stock (now EOG Resources, Inc.)
which will be exchanged at the maturity of the debt. As of
August 16, 1999, EOG is no longer included in Enron's
consolidated financial statements. EOGI-India, Inc. is
included in the consolidated financial statements within the Wholesale
Operations and Services segment beginning August 16, 1999.
3. IMPAIRMENT OF MTBE ASSETS
Continued significant changes in state and federal rules regarding
the use of MTBE as a gasoline additive have significantly impacted
Enron's view of the future prospects for this business. As a result,
Enron completed a reevaluation of its position and strategy with
respect to its operated MTBE assets which resulted in i) the purchase
of certain previously leased MTBE related assets, under provisions
within the lease, in order to facilitate future actions, including the
potential disposal of such assets and ii) a review of all MTBE related
assets for impairment considering the recent adverse changes and their
impact on recoverability. Based on this review, in September 1999,
Enron recorded a $441 million pre-tax charge ($278 million after tax,
or $0.36 per diluted share) for the impairment of its MTBE related
assets.
4. 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.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes for the first nine months of 1999
and 1998 was $23 million and $45 million, respectively. Cash paid for
interest for the same periods, net of amounts capitalized, was $544
million and $419 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.
On August 16, 1999, as a result of the share exchange agreement,
EOG's balance sheet is no longer consolidated by Enron (see Note 2).
As a result, net property, plant and equipment decreased by
approximately $2,400 million, short- and long-term debt decreased by
approximately $1,800 million and minority interests decreased by
approximately $600 million.
In March 1999, an Enron controlled joint venture, Whitewing
Associates, L.P. (Whitewing), that held 250,000 shares of Enron
Series A Junior Convertible Preferred Stock (Series A Preferred
Stock) was amended to allow, among other things, control to
be shared equally between Enron and the third party investor.
Consequently, Whitewing'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. In September 1999, Enron entered
into a series of transactions that resulted in the exchange of all
outstanding shares of Enron Series A Preferred Stock held by
Whitewing for 250,000 shares of Enron Mandatorily Convertible
Junior Preferred Stock, Series B (Series B Preferred Stock) with a
liquidation value of $1,000 million. Each share of Series B Preferred
Stock is mandatorily convertible into 200 shares of Enron common stock
on January 14, 2003 or earlier upon the occurrence of certain events
(together, the Settlement Date). In addition, Enron entered into a
Share Settlement Agreement under which Enron could be obligated, at
the Settlement Date, to deliver additional shares of common stock
or Series B Preferred Stock to Whitewing for the amount
that the market price of the converted Enron common shares is less
than $28 per share. As a part of the restructuring of Whitewing,
additional net outside capital of $922 million was received by
Whitewing.
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.
6. 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 OPUC's March 1995 order. Both PGE and the OPUC have separately
appealed the April 1996 ruling, which appeals were combined with the
appeal of the November 1994 ruling at the Oregon Court of Appeals. On
June 24, 1998, the Court of Appeals of the State of Oregon ruled that
the OPUC does not have the authority to allow PGE to recover a rate of
return on its undepreciated investment in the Trojan generating
facility. The court upheld the OPUC's authorization of PGE's recovery
of its undepreciated investment in Trojan.
PGE has filed a petition for review with the Oregon Supreme Court.
The OPUC has also filed such a petition for review. Also on August
26, 1998, the Utility Reform Project filed a petition for review with
the Oregon Supreme Court seeking review of that portion of the Oregon
Court of Appeals decision relating to PGE's recovery of its
undepreciated investment in Trojan. 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 and submitted to the Oregon Secretary of State sufficient
signatures in support of placing a referendum to negate the new
legislation on the November 2000 ballot. 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 (see Note 11).
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. The EPA has
confirmed through correspondence that all activities required by the
order are complete.
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.
7. EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as
follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
Nine Months Ended
Third Quarter September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Basic
Income before cumulative effect
of accounting changes $ 290 $ 168 $ 765 $ 527
Preferred stock dividends:
Second preferred stock (4) (4) (13) (13)
Series A Preferred Stock (14) - (28) -
Series B Preferred Stock (1) - (1) -
Income available to common
shareholders before cumulative
effect of accounting changes 271 164 723 514
Cumulative effect of accounting
changes - - (131) -
Income available to common
shareholders $ 271 $ 164 $ 592 $ 514
Diluted
Income available to common
shareholders before cumulative
effect of accounting changes $ 271 $ 164 $ 723 $ 514
Effect of assumed conversion
of dilutive securities:
Second preferred stock 4 4 13 13
Series A Preferred Stock(a) - - - -
Series B Preferred Stock(a) - - - -
Income before cumulative effect
of accounting changes 275 168 736 527
Cumulative effect of accounting
changes - - (131) -
Income available to common
shareholders after assumed
conversions $ 275 $ 168 $ 605 $ 527
Denominator:
Denominator for basic earnings per
share - weighted-average shares 714 659 702 636
Effect of assumed conversion of
dilutive securities:
Second preferred stock 36 36 36 36
Stock options 31 18 28 16
Dilutive potential common shares 67 54 64 52
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 781 713 766 688
Basic earnings per share:
Before cumulative effect of
accounting changes $0.38 $0.25 $1.03 $0.81
Cumulative effect of accounting
changes - - (0.19) -
Basic earnings per share $0.38 $0.25 $0.84 $0.81
Diluted earnings per share:
Before cumulative effect of
accounting changes $0.35 $0.24 $0.96 $0.77
Cumulative effect of accounting
changes - - (0.17) -
Diluted earnings per share $0.35 $0.24 $0.79 $0.77
<FN>
(a) The Series A Preferred Stock and the Series B Preferred
Stock were not included in the calculation of diluted earnings
per share because conversion of these shares would be
antidilutive. See Note 5 for a description of the Series B
Preferred Stock.
</TABLE>
8. COMPREHENSIVE INCOME
Comprehensive income includes the following (in
millions):
<TABLE>
<CAPTION>
Nine Months Ended
Third Quarter September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 290 $ 168 $ 634 $ 527
Other comprehensive income:
Foreign currency
translation adjustment (93) (11) (691) (22)
Total comprehensive income (loss) $ 197 $ 157 $ (57) $ 505
</TABLE>
Enron has investments in entities whose functional
currency is denominated in Brazilian Reals. In 1999,
primarily in the first quarter, the exchange rate for the
Brazilian Real to the U.S. dollar declined. Primarily as a
result of these investments, Enron recorded non-cash foreign
currency translation adjustments, reducing shareholders'
equity by $691 million in the first nine months of 1999.
9. 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
Transportation Energy Retail Exploration Corporate
and Operations Energy and and
(In Millions) Distribution and Services Services Production(c) Other(d) Total
Three Months Ended
September 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues(a) $ 567 $10,677 $ 345 $ 105 $ 141 $11,835
Intersegment revenues(b) 2 385 197 14 (598) -
Total revenues $ 569 $11,062 $ 542 $ 119 $ (457) $11,835
Income (loss) before interest,
minority interests and
income taxes $ 137 $ 378 $ (18) $ 33 $ (10) $ 520
Nine Months Ended
September 30, 1999
Unaffiliated revenues(a) $1,461 $25,751 $1,009 $ 429 $ 489 $29,139
Intersegment revenues(b) 13 600 243 97 (953) -
Total revenues $1,474 $26,351 $1,252 $ 526 $ (464) $29,139
Income (loss) before interest,
minority interests and
income taxes $ 483 $ 1,054 $ (75) $ 65 $ (5) $ 1,522
</TABLE>
<TABLE>
<CAPTION>
Wholesale
Transportation Energy Retail Exploration Corporate
and Operations Energy and and
(In Millions) Distribution and Services Services Production(c) Other(d) Total
Three Months Ended
September 30, 1998
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues(a) $ 425 $10,225 $ 400 $ 186 $ 84 $11,320
Intersegment revenues(b) 5 116 - 34 (155) -
Total revenues $ 430 $10,341 $ 400 $ 220 $ (71) $11,320
Income (loss) before interest,
minority interests and
income taxes $ 130 $ 277 $ (23) $ 25 $ (4) $ 405
Nine Months Ended
September 30, 1998
Unaffiliated revenues(a) $1,339 $20,737 $ 748 $ 560 $ 174 $23,558
Intersegment revenues(b) 13 370 2 94 (479) -
Total revenues $1,352 $21,107 $ 750 $ 654 $ (305) $23,558
Income (loss) before interest,
minority interests and
income taxes $ 469 $ 767 $ (93) $ 97 $ (19) $ 1,221
<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) Reflects results of EOG through August 16, 1999 (see Note 2).
(d) Includes consolidating eliminations.
</TABLE>
Total assets by segment are as follows (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Transportation and Distribution $ 8,115 $ 7,616
Wholesale Energy Operations
and Services 21,325 14,837
Retail Energy Services 801 747
Exploration and Production - 3,001
Corporate and Other 3,335 3,149
Total Assets $33,576 $29,350
</TABLE>
Wholesale's assets increased primarily as a result of the
consolidation of Jacare, previously an unconsolidated
affiliate (see Note 5), capital expenditures and investments
in equity affiliates. Assets of Exploration and Production
are no longer consolidated following the exchange of EOG
shares (see Note 2).
10. 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 engages 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.
11. SUBSEQUENT EVENT
On November 8, 1999, Enron announced that it has entered
into an agreement to sell Enron's wholly-owned electric
utility subsidiary, PGE, to Sierra Pacific Resources for
$2.1 billion, comprised of $2.02 billion in cash and the
assumption of Enron's approximately $80 million merger
payment obligation. Sierra Pacific Resources will also
assume $1 billion in PGE debt and preferred stock. The
proposed transaction, which is subject to customary
regulatory approvals, is expected to close in the second
half of 2000.
<PAGE>
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENRON CORP. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Third Quarter 1999
vs. Third 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 third quarter 1999 net income, including items
impacting comparability, was $290 million compared to $168
million in the third quarter of 1998. Enron's operating
segments include Transportation and Distribution (Gas
Pipeline Group and Portland General), Wholesale Energy
Operations and Services (Enron's North American, European
and international energy businesses and Enron
Communications), Retail Energy Services (Enron Energy
Services), Exploration and Production (Enron Oil & Gas
Company) through August 16, 1999 and Corporate and Other,
which includes certain other businesses. Items impacting
comparability are discussed in the respective segment
results.
Basic and diluted earnings (loss) per share of common
stock were as follows:
<TABLE>
<CAPTION>
Third Quarter
1999 1998
<S> <C> <C>
Basic earnings per share $ 0.38 $ 0.25
Diluted earnings (loss) per share:
Results before items impacting
comparability $ 0.27 $ 0.24
Items impacting comparability:
Gain on sale of Enron Oil & Gas Company 0.44 -
Charge to reflect impairment of
MTBE assets (0.36) -
Diluted earnings per share $ 0.35 $ 0.24
</TABLE>
Income Before Interest, Minority Interests and Income Taxes
The following table presents income (loss) before
interest, minority interests and income taxes (IBIT) for
each of Enron's operating segments (in millions):
<TABLE>
<CAPTION>
Third Quarter
1999 1998
<S> <C> <C>
Transportation and Distribution:
Gas Pipeline Group $ 85 $ 69
Portland General 52 61
Wholesale Energy Operations and Services 378 277
Retail Energy Services (18) (23)
Exploration and Production 33 25
Corporate and Other (10) (4)
Income before interest, minority
interests and taxes $ 520 $ 405
</TABLE>
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, and Enron's interest in EOTT
Energy Partners, L.P.
Gas Pipeline Group. The following table summarizes total
volumes transported for each of Enron's interstate natural
gas pipelines.
<TABLE>
<CAPTION>
Third Quarter
1999 1998
<S> <C> <C>
Total Volumes Transported (Bbtu/d)(a)
Northern Natural Gas 3,525 3,792
Transwestern Pipeline 1,575 1,564
Florida Gas Transmission 1,659 1,471
Northern Border Pipeline 2,407 1,723
<FN>
(a) Reflects 100% of each entity's throughput volumes.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Third Quarter
1999 1998
<S> <C> <C>
Net revenues $ 145 $144
Operating expenses 64 68
Depreciation and amortization 18 17
Equity in earnings 14 8
Other income, net 8 2
Income before interest and taxes $ 85 $ 69
</TABLE>
Operating Results
Revenues, net of cost of sales (net revenues) of Gas
Pipeline Group (GPG) increased $1 million and operating
expenses decreased $4 million in the third quarter of 1999
as compared to the same period in 1998. Net revenues
increased primarily as a result of sales of storage
inventory gas, partially offset by the expiration, in
October 1998, of certain transition cost recovery surcharges
which also resulted in a corresponding decrease in expenses.
Other income, net increased $6 million in the third quarter
of 1999 as compared to the same period in 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 third
quarter of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Third Quarter
1999 1998
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 1,440 1,449
Commercial 1,951 1,815
Industrial 1,162 834
Total Retail 4,553 4,098
Wholesale 4,921 2,675
Total Electricity Sales 9,474 6,773
Average Billed Revenue (cents per kWh)
Residential 6.04 6.45
Commercial 4.87 5.20
Industrial 3.96 4.34
Total Retail 5.01 5.47
Wholesale 3.37 2.61
Total Sales 4.15 4.34
Resource Mix
Coal 14% 19%
Combustion Turbine 8 17
Hydro 5 7
Total Generation 27 43
Firm Purchases 61 47
Secondary Purchases 12 10
Total Resources 100% 100%
Average Variable Power Cost (Mills/kWh)(b)
Generation 10.1 9.6
Firm Purchases 30.3 18.8
Secondary Purchases 22.0 32.1
Total Average Variable Power Cost 24.7 17.2
Retail Customers (end of period, thousands) 714 698
<FN>
(a) Thousand megawatt-hours.
(b) Mills (1/10 cent) per kilowatt-hour.
</TABLE>
For the third quarter of 1999, Portland General realized
IBIT of $52 million as compared to $61 million in the same
period in 1998. Significant components of IBIT are as
follows (in millions):
<TABLE>
<CAPTION>
Third Quarter
1999 1998
<S> <C> <C>
Revenues $407 $280
Purchased power and fuel 241 104
Operating expenses 74 76
Depreciation and amortization 43 47
Other income, net 3 8
Income before interest and taxes $ 52 $ 61
</TABLE>
Operating Results
Revenues and purchased power and fuel costs increased
$127 million and $137 million, respectively, in the third
quarter of 1999 as compared to the third quarter of 1998,
primarily as a result of an increase in the number of
customers served by Portland General and a significant
increase in wholesale sales. Revenue increases were offset
by higher power costs.
Wholesale Energy Operations and Services
Enron's wholesale energy operations and services business
(Enron Wholesale) operates in North America, Europe and
other countries. 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>
Third Quarter
1999 1998
<S> <C> <C>
Commodity Sales and Services $172 $152
Energy Assets and Investments 240 160
Unallocated expenses (34) (35)
Income before interest, minority
interests and taxes $378 $277
</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, transports and provides energy
commodities as reflected in the following table (including
intercompany amounts):
<TABLE>
<CAPTION>
Third Quarter
1999 1998
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 8,573 7,749
Canada 4,748 3,656
Europe 1,605 1,176
Other 35 17
14,961 12,598
Transport Volumes 537 643
Total Gas Volumes 15,498 13,241
Oil 3,972 2,596
Liquids 727 652
Electricity(c) 12,406 17,684
Total 32,603 34,173
Electricity Volumes Marketed (Thousand MWh)
United States 111,336 162,527
Europe and Other 2,795 165
Total 114,131 162,692
Financial Settlements (Notional) (BBtue/d) 109,351 83,653
<FN>
(a) Billion British thermal units equivalent per day.
(b) Includes third-party transactions by Enron Energy Services.
(c) Represents electricity transaction volumes marketed,
converted to BBtue/d.
</TABLE>
The earnings from commodity sales and services increased
to $172 million in the third quarter of 1999 as compared to
$152 million in the same period of 1998 primarily due to
increased earnings from long-term energy contracts,
commodity marketing activities and favorable changes in
credit markets worldwide. Increased earnings from other
commodity marketing, including coal, paper, liquids,
interest rate and foreign currency, were partially offset by
slightly decreased earnings from gas marketing.
Total power volumes for the third quarter of 1999
exceeded both first and second quarter levels but were down
from the unusually high third quarter level last year.
Third quarter 1998 volumes were unusually high primarily due
to high price volatility caused by shortages resulting from
scheduled maintenance and outages.
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
$240 million in the third quarter of 1999 as compared to
$160 million in the same period of 1998 primarily as a
result of the increased earnings from Enron Wholesale's
worldwide energy assets and increased market value of Enron
Wholesale's energy and communications investments, partially
offset by lower earnings from sales of interests in energy
assets.
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 third 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 $18 million
in the third quarter of 1999 compared to a loss of $23
million in the third 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.
Exploration and Production
Enron's exploration and production operations have been
conducted by Enron Oil & Gas Company (EOG). The operating
results of this segment reflect activity through August 16,
1999, the date of the share exchange transaction that
resulted in the sale of EOG (see Note 2 to the Consolidated
Financial Statements). IBIT of Exploration and Production
totaled $33 million and $25 million for the third quarter of
1999 and 1998, respectively.
Corporate and Other
Corporate and Other includes results of Azurix Corp.,
which provides water and wastewater services, Enron
Renewable Energy Corp. and the operations of Enron's
methanol and MTBE plants. Corporate and Other realized a
loss before interest, minority interests and taxes of $10
million in the third quarter of 1999 compared to $4 million
for the same period in 1998. Significant components of IBIT
are as follows:
<TABLE>
<CAPTION>
Third Quarter
1999 1998
<S> <C> <C>
IBIT before items impacting comparability $ (23) $ (4)
Items impacting comparability:
Gain on sale of EOG 454 -
Charge to reflect impairment of MTBE
assets (441) -
IBIT $ (10) $ (4)
</TABLE>
In September 1999, Enron recorded a pre-tax gain of $454
million ($345 million after tax) in the third quarter of
1999 related to the sale of interests in EOG (see Note 2 to
the Consolidated Financial Statements) and a $441 million
pre-tax charge ($278 million after tax) for the impairment
of its MTBE assets (see Note 3 to the Consolidated Financial
Statements).
Excluding items impacting comparability, Corporate and
Other realized a loss before interest, minority interests
and taxes of $23 million in the third quarter of 1999 as
compared to $4 million in the same period of 1998 primarily
as a result of the inclusion, in 1998, of earnings
associated with the increase in the market value of certain
corporate-managed financial instruments.
Interest and Related Charges, net
Interest and related charges, net is reported net of
interest capitalized of $16 million and $17 million for the
third quarter of 1999 and 1998, respectively. The net
expense increased $53 million in the third 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 (Jacare) (see Note 5 to the Consolidated Financial
Statements) and issuances of debt subsequent to September
30, 1998.
Dividends on Company-Obligated Preferred Securities of Subsidiaries
Dividends on company-obligated preferred securities of
subsidiaries was $19 million in the third quarter of 1999
and 1998.
Minority Interests
Minority interests increased $22 million to $38 million in
the third quarter of 1999 compared to the same period in
1998, primarily due to the formation of certain joint
ventures subsequent to the third quarter of 1998 and the
minority owner's share of the results of Jacare prior to the
purchase of additional shares of Elektro (see Note 5 to the
Consolidated Financial Statements). Included in 1998 is the
minority interest of a joint venture that is no longer
consolidated due to a change of control in March 1999 (see
Note 5 to the Consolidated Financial Statements).
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,
including the EOG share exchange (see Note 2 to the
Consolidated Financial Statements).
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999
vs. Nine Months Ended September 30, 1998
RESULTS OF OPERATIONS
Consolidated Net Income
Enron reported net income, including items impacting
comparability, of $634 million for the first nine months of
1999 compared to $527 million during the same period in
1998.
Basic and diluted earnings (loss) per share of common
stock were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Basic earnings per share $ 0.84 $ 0.81
Diluted earnings (loss) per share:
Results before items impacting
comparability $ 0.87 $ 0.77
Items impacting comparability:
Gain on sale of EOG 0.45 -
Charge to reflect impairment of
MTBE assets (0.36) -
Cumulative effect of accounting changes (0.17) -
Diluted earnings per share $ 0.79 $ 0.77
</TABLE>
Income Before Interest, Minority Interests and Income Taxes
The following table presents IBIT for each of Enron's
operating segments (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Transportation and Distribution:
Gas Pipeline Group $ 283 $ 267
Portland General 200 202
Wholesale Energy Operations and Services 1,054 767
Retail Energy Services (75) (93)
Exploration and Production 65 97
Corporate and Other (5) (19)
Income before interest, minority
interests and taxes $1,522 $1,221
</TABLE>
Transportation and Distribution
Gas Pipeline Group. The following table summarizes total
volumes transported for each of Enron's interstate natural
gas pipelines.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Total Volumes Transported (Bbtu/d)(a)
Northern Natural Gas 3,870 4,046
Transwestern Pipeline 1,508 1,646
Florida Gas Transmission 1,478 1,328
Northern Border Pipeline 2,432 1,766
<FN>
(a) Reflects 100% of each entity's throughput volumes.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Net revenues $450 $473
Operating expenses 190 205
Depreciation and amortization 52 50
Equity in earnings 30 28
Other income, net 45 21
Income before interest and taxes $283 $267
</TABLE>
Operating Results
Net revenues and operating expenses of GPG declined $23
million and $15 million, respectively, in the first nine
months 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. The decrease in net revenues was partially
offset by the third quarter 1999 sale of storage inventory
gas. Other income, net increased $24 million in the first
nine months of 1999 as compared to the same period in 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 Portland General for the
first nine months of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 5,400 5,049
Commercial 5,513 5,056
Industrial 3,265 2,641
Total Retail 14,178 12,746
Wholesale 9,312 8,632
Total Electricity Sales 23,490 21,378
Average Billed Revenue (cents per kWh)
Residential 5.91 6.21
Commercial 4.90 5.14
Industrial 3.71 3.61
Total Retail 5.01 5.25
Wholesale 2.72 2.04
Total Sales 4.10 3.95
Resource Mix
Coal 15% 15%
Combustion Turbine 6 9
Hydro 9 9
Total Generation 30 33
Firm Purchases 57 60
Secondary Purchases 13 7
Total Resources 100% 100%
Average Variable Power Cost (Mills/kWh)(b)
Generation 9.0 8.0
Firm Purchases 22.6 16.3
Secondary Purchases 18.4 21.8
Total Average Variable Power Cost 19.1 14.9
Retail Customers (end of period, thousands) 714 698
<FN>
(a) Thousand megawatt-hours.
(b) Mills (1/10 cent) per kilowatt-hour.
</TABLE>
For the first nine months of 1999, Portland General
realized IBIT of $200 million as compared to $202 million in
the same period in 1998, as follows (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Revenues $1,002 $ 869
Purchased power and fuel 460 322
Operating expenses 223 230
Depreciation and amortization 137 136
Other income, net 18 21
IBIT $ 200 $ 202
</TABLE>
Operating Results
Revenues and purchased power and fuel costs increased
$133 million and $138 million, respectively, in the first
nine months of 1999 as compared to the same period in 1998.
Revenues increased primarily as a result of an increase in
the number of customers served by Portland General and
increased wholesale sales in the third quarter of 1999.
Higher power costs offset the increase in revenues.
Wholesale Energy Operations and Services
The following table reflects IBIT for each of Enron
Wholesale's business lines (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Commodity Sales and Services $ 477 $ 304
Energy Assets and Investments 701 569
Unallocated expenses (124) (106)
Income before interest, minority
interests and taxes $1,054 $ 767
</TABLE>
The following discussion analyzes the contributions to
IBIT for each of the business lines.
Commodity Sales and Services. Enron Wholesale markets,
transports and provides energy commodities as reflected
in the following table (including intercompany amounts):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 8,564 7,242
Canada 4,395 3,279
Europe 1,531 1,121
Other 22 9
14,512 11,651
Transport Volumes 535 575
Total Gas Volumes 15,047 12,226
Oil 5,249 2,298
Liquids 688 619
Electricity(c) 10,889 11,838
Total 31,873 26,981
Electricity Volumes Marketed (Thousand MWh)
United States 292,264 322,874
Europe and Other 5,012 287
Total 297,276 323,161
Financial Settlements (Notional) (BBtue/d) 95,786 73,711
<FN>
(a) Billion British thermal units equivalent per day.
(b) Includes third-party transactions by Enron Energy Services.
(c) Represents electricity transaction volumes marketed,
converted to BBtue/d.
</TABLE>
The earnings from Commodity Sales and Services
increased to $477 million in the first nine months of 1999
as compared to $304 million in the same period of 1998
primarily due to increased earnings from long-term energy
contracts, other commodity marketing activities and
favorable changes in credit markets worldwide.
Energy Assets and Investments. Earnings from Energy
Assets and Investments increased to $701 million in the
first nine months of 1999 as compared to $569 million in the
same period of 1998 as a result of the increased market
value of Enron Wholesale's communications investments and
higher operating results from Enron Wholesale's worldwide
energy assets, partially offset by reductions in the market
value of certain energy investments and lower earnings from
sales of interests in energy assets.
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 $75 million in the
first nine months of 1999 compared to a loss of $93 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
earnings from energy management services.
Exploration and Production
Exploration and Production reported IBIT of $65 million
in the first nine months of 1999 compared to $97 million for
the same period in 1998 primarily as a result of increased
depreciation, depletion and amortization and increased
operating expenses, partially offset by decreased
exploration expense. The operating results of this segment
reflect activity through August 16, 1999, the date of the
share exchange transaction (see Note 2 to the Consolidated
Financial Statements).
Corporate and Other
Corporate and Other realized a loss before interest,
minority interests and taxes of $5 million in the first nine
months of 1999 compared to a loss of $19 million for the
same period in 1998. Significant components of IBIT are as
follows (in millions):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
IBIT before items impacting comparability $ (18) $ (19)
Items impacting comparability:
Gain on sale of EOG 454 -
Charge to reflect impairment of MTBE
assets (441) -
IBIT $ (5) $ (19)
</TABLE>
IBIT for Corporate and Other in the first nine months of
1999 include a pre-tax gain of $454 million on the sale of
Enron's interest in EOG (see Note 2 to the Consolidated
Financial Statements) and a $441 million pre-tax charge for
the impairment of its MTBE assets (see Note 3 to the
Consolidated Financial Statements).
Interest and Related Charges, net
Interest and related charges, net, is reported net of
interest capitalized of $45 million and $33 million for the
first nine months of 1999 and 1998, respectively. The net
expense increased $139 million in the first nine months 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 (see Note 5 to
the Consolidated Financial Statements) and issuances of debt
subsequent to September 30, 1998.
Minority Interests
Minority interests increased $34 million to $94 million
in the first nine months of 1999 compared to the same period
in 1998, primarily due to the formation of certain joint
ventures subsequent to the third quarter of 1998 and the
minority owner's share of the results of Jacare prior to the
purchase of additional shares of Elektro (see Note 5 to the
Consolidated Financial Statements). The first nine months
of 1998 include higher net income from EOG and the minority
interest of a joint venture that is no longer consolidated
due to a change of control in March 1999 (see Note 5 to the
Consolidated Financial Statements).
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,
including the EOG share exchange (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 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 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 has inventoried its
mission-critical computer hardware and software systems and
embedded chips (computer chips with date-related functions,
contained in a wide variety of devices); assessed the
effects of Year 2000 problems on the mission-critical
functions of Enron's business units; remedied systems,
software and embedded chips in an effort to avoid material
disruptions or other material adverse effects on mission-
critical functions, processes and systems; verified and
tested the mission-critical systems to which remediation
efforts have been applied; and attempted 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 continues to
coordinate with these Outside Entities in an ongoing effort
regarding the Outside Systems that are mission-critical to
Enron.
It is important to recognize that 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 called 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
was met in all material respects. (However, as explained
elsewhere in this statement, that does not ensure that these
systems do not continue to contain hidden Year 2000 defects
in computer code or in embedded devices.)
As of October 31, 1999, Enron and all its business units
were materially complete with mission critical items, 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 was 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>
Transportation
and
Distribution:
Gas Pipeline Group C C C C C C C
Portland General C C C C C C C
Wholesale:
North America C C C C C C C
Europe C C C C C C C
Other International C C C C C C C
Retail Energy Services C C C C C C C
Corporate and Other C C C C C C C
</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>
Transportation
and
Distribution:
Gas Pipeline Group C C C C C C C
Portland General C C C C C C C
Wholesale:
North America C C C C C C C
Europe C C C C C C C
Other International C C C C C C C
Retail Energy Services C C C C C C C
Corporate and Other C C C C C C C
<FN>
Legend: C = Complete IP = In Process TBI = To Be Initiated
</TABLE>
The following tables show, by business unit, completion dates 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)(a)
<TABLE>
<CAPTION>
Contingency
Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan
<S> <C> <C> <C> <C> <C> <C> <C>
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 10/99 6/99
Wholesale:
North America 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 10/99 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>
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:
North America 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 10/99 6/99
</TABLE>
Because Enron's Year 2000 Plan treats Year 2000 efforts
as an iterative process, Enron is continuing 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 believes that its mission-
critical systems, domestic and international, are
substantially Year 2000-ready. 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. Despite Enron's reasonable efforts to
identify, assess, and, where appropriate, replace devices
that contain embedded chips, 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 identified and 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 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. 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 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>
<CAPTION>
Cash Flows
Nine Months Ended
September 30,
(In Millions) 1999 1998
<S> <C> <C>
Cash provided by (used in):
Operating activities $ (43) $ (29)
Investing activities (3,155) (3,171)
Financing activities 3,403 3,413
</TABLE>
Cash used in operating activities totaled $43 million in
the first nine months of 1999 as compared to $29 million
used in the same period last year. Cash used in operating
activities in 1999 reflects increased working capital
requirements offset by improved earnings and distributions
received from unconsolidated affiliates.
Cash used in investing activities totaled $3,155 million
in the first nine months of 1999 as compared to $3,171
million in the same period of 1998. The 1999 amount
reflects increased cash used for capital expenditures,
primarily related to the purchase of certain MTBE operating
leases (see Note 3 to the Consolidated Financial
Statements), North American power plant construction and the
construction of Enron Communication's fiber optic network,
and equity investments, primarily in South Korea, India and
Panama, partially offset by proceeds from the sale of EOG
(see Note 2 to the Consolidated Financial Statements).
Cash provided by financing activities totaled $3,403
million in the first nine months of 1999 as compared to
$3,413 million during the same period of 1998. The 1999
amount 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
$2,191 million and proceeds from the issuance of equity by
subsidiaries. Proceeds were primarily used to fund
investment activities.
Enron is able to fund its normal working capital
requirements mainly through operations or, when necessary,
through the utilization of credit facilities and its ability
to sell commercial paper and accounts receivable.
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 September 30, 1999 was $20.8
billion. Debt as a percentage of total capitalization
decreased to 41.4% at September 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 and increased preferred stock
outstanding resulting from the deconsolidation of a joint
venture (see Note 5 to the Consolidated Financial
Statements), partially offset by increased debt levels, a
decreased balance in accumulated other comprehensive income
due to the devaluation of the Brazilian Real (see Note 8 to
the Consolidated Financial Statements) and a decrease in
minority interests following the sale of EOG (see Note 2 to
the Consolidated Financial Statements).
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 its non-trading commodity price
risk decreased to $2 million at September 30, 1999 as
compared to $10 million at December 31, 1998, primarily as a
result of decreased hedging activity due to Enron's sale of
its interest in EOG (see Note 2 to the Consolidated
Financial Statements).
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 6 to Consolidated Financial
Statements entitled "Litigation and Other Contingencies,"
which is incorporated herein by reference.
ITEM 2. Recent Sales of Unregistered Equity Securities
On September 24, 1999, Enron issued 250,000 shares of
Mandatorily Convertible Junion Preferred Stock, Series B (the
Series B Preferred Stock), to an existing security holder,
Whitewing Associates, L.P., a Delaware limited parthership
(Whitewing), in exchange for all the outstanding shares of a
then existing series of Enron convertible preferred stock held
by Whitewing. No commission or other remuneration was paid in
connection with the exchange, and the Series B Preferred Stock
was issued pursuant to the exemption provided by Section 3(a)(9)
of the Securities Act of 1933. See Part I, Item 2, Note 5 to
the Consolidated Financial Statements herein.
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: November 15, 1999 By: RICHARD A. CAUSEY
Richard A. Causey
Executive Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
<PAGE>
<TABLE>
Exhibit 12
ENRON CORP. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Dollars in Millions)
(Unaudited)
<CAPTION>
Nine Months
Ended Year Ended December 31,
9/30/99 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 $ 765 $ 703 $105 $ 584 $ 520 $ 453
Less:
Undistributed earnings and
losses of less than 50% owned
affiliates (19) (44) (89) (39) (14) (9)
Capitalized interest of
nonregulated companies (51) (66) (16) (10) (8) (9)
Add:
Fixed charges(a) 776 809 674 454 436 487
Minority interests 94 77 80 75 27 30
Income tax expense 99 204 (65) 297 310 190
Total $1,664 $1,683 $689 $1,361 $1,271 $1,142
Fixed Charges
Interest expense(a) $ 740 $ 760 $624 $ 404 $ 386 $ 445
Rental expense representative
of interest factor 36 49 50 50 50 42
Total $ 776 $ 809 $674 $ 454 $ 436 $ 487
Ratio of earnings to fixed charges 2.14 2.08 1.02 3.00 2.92 2.34
<FN>
(a) Amounts exclude costs incurred on sales of accounts receivables.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 316
<SECURITIES> 0
<RECEIVABLES> 3,777
<ALLOWANCES> 0
<INVENTORY> 613
<CURRENT-ASSETS> 7,567
<PP&E> 12,924
<DEPRECIATION> 3,149
<TOTAL-ASSETS> 33,576
<CURRENT-LIABILITIES> 6,669
<BONDS> 8,592
0
1,130
<COMMON> 6,640
<OTHER-SE> 1,575
<TOTAL-LIABILITY-AND-EQUITY> 33,576
<SALES> 25,626
<TOTAL-REVENUES> 29,139
<CGS> 25,137
<TOTAL-COSTS> 28,557
<OTHER-EXPENSES> (940)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 537
<INCOME-PRETAX> 834
<INCOME-TAX> 69
<INCOME-CONTINUING> 765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (131)
<NET-INCOME> 634
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.79
</TABLE>
