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, 2000
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,
2000
Common Stock, No Par Value 738,916,647 shares
1 of 34
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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, 2000 and 1999 and
Six Months Ended June 30, 2000 and 1999 3
Consolidated Balance Sheet - June 30, 2000
and December 31, 1999 4
Consolidated Statement of Cash Flows - Six
Months Ended June 30, 2000 and 1999 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 32
ITEM 2. Recent Sales of Unregistered Equity Securities 32
ITEM 4. Submission of Matters to a Vote of Security
Holders 32
ITEM 6. Exhibits and Reports on Form 8-K 33
<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,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues $16,886 $9,672 $30,031 $17,304
Costs and Expenses
Cost of gas, electricity and
other products 15,324 8,347 27,212 14,647
Operating expenses 892 800 1,639 1,470
Depreciation, depletion and amortization 192 236 364 451
Taxes, other than income taxes 59 56 125 118
16,467 9,439 29,340 16,686
Operating Income 419 233 691 618
Other Income and Deductions
Equity in earnings of unconsolidated
affiliates 55 163 319 231
Gains on sales of assets and investments 72 - 90 12
Other income, net 63 73 133 141
Income Before Interest, Minority Interests
and Income Taxes 609 469 1,233 1,002
Interest and Related Charges, net 196 175 357 350
Dividends on Company-Obligated Preferred
Securities of Subsidiaries 21 19 39 38
Minority Interests 39 23 74 56
Income Tax Expense 64 30 136 83
Net Income Before Cumulative Effect of
Accounting Changes 289 222 627 475
Cumulative Effect of Accounting Changes,
net of tax - - - (131)
Net Income 289 222 627 344
Preferred Stock Dividends 21 19 41 23
Earnings on Common Stock $ 268 $ 203 $ 586 $ 321
Earnings Per Share of Common Stock
Basic
Before Cumulative Effect of Accounting
Changes $ 0.37 $ 0.29 $ 0.80 $ 0.65
Cumulative Effect of Accounting Changes - - - (0.19)
Basic Earnings per Share $ 0.37 $ 0.29 $ 0.80 $ 0.46
Diluted
Before Cumulative Effect of Accounting
Changes $ 0.34 $ 0.27 $ 0.73 $ 0.61
Cumulative Effect of Accounting Changes - - - (0.18)
Diluted Earnings per Share $ 0.34 $ 0.27 $ 0.73 $ 0.43
Average Number of Common Shares Used in
Computation
Basic 733 708 728 696
Diluted 862 771 857 758
<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,
2000 1999
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 718 $ 288
Trade receivables (net of allowance for doubtful
accounts of $31 and $40, respectively) 5,314 3,030
Other receivables 955 518
Assets from price risk management activities 5,696 2,205
Inventories 571 598
Other 1,116 616
Total Current Assets 14,370 7,255
Investments and Other Assets
Investments in and advances to unconsolidated
equity affiliates 5,621 5,036
Assets from price risk management activities 5,228 2,929
Goodwill 3,408 2,799
Other 5,728 4,681
Total Investments and Other Assets 19,985 15,445
Property, Plant and Equipment, at cost
Natural gas transmission 6,922 6,948
Electric generation and distribution 3,713 3,552
Construction in progress 1,847 1,491
Oil and gas, successful efforts method 713 690
Other 1,487 1,231
14,682 13,912
Less accumulated depreciation, depletion
and amortization 3,471 3,231
Net Property, Plant and Equipment 11,211 10,681
Total Assets $45,566 $33,381
<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,
2000 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 4,400 $2,154
Liabilities from price risk management
activities 4,292 1,836
Short-term debt 1,486 1,001
Other 2,044 1,768
Total Current Liabilities 12,222 6,759
Long-Term Debt 10,211 7,151
Deferred Credits and Other Liabilities
Deferred income taxes 1,678 1,894
Liabilities from price risk management
activities 5,525 2,990
Other 2,369 1,587
Total Deferred Credits and Other
Liabilities 9,572 6,471
Minority Interests 1,893 2,430
Company-Obligated Preferred Securities
of Subsidiaries 899 1,000
Shareholders' Equity
Second preferred stock, cumulative,
no par value 127 130
Manditorily Convertible Junior
Preferred Stock, Series B, no par value 1,000 1,000
Common stock, no par value 7,665 6,637
Retained earnings 3,101 2,698
Accumulated other comprehensive income (861) (741)
Common stock held in treasury (84) (49)
Restricted stock and other (179) (105)
Total Shareholders' Equity 10,769 9,570
Total Liabilities and Shareholders' Equity $45,566 $33,381
<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,
2000 1999
<S> <C> <C>
Cash Flows From Operating Activities
Reconciliation of net income to net cash
provided by (used in) operating activities
Net income $ 627 $ 344
Cumulative effect of change in accounting principle - 131
Depreciation, depletion and amortization 364 451
Deferred income taxes 31 (11)
Equity in earnings of unconsolidated affiliates (319) (230)
Gains on sales of assets and investments (90) (12)
Changes in components of working capital (524) (909)
Net assets from price risk management activities (799) 247
Merchant assets and investments:
Realized gains and losses on sales 29 (161)
Proceeds from sales 553 561
Additions and unrealized gains and losses (1,095) (829)
Other operating activities 676 380
Net Cash Used in Operating Activities (547) (38)
Cash Flows From Investing Activities
Capital expenditures (1,009) (969)
Equity investments (390) (648)
Proceeds from sales of investments and other assets 105 138
Acquisitions of subsidiary stock (743) -
Business acquisitions, net of cash acquired (100) (40)
Other investing activities (117) (340)
Net Cash Used in Investing Activities (2,254) (1,859)
Cash Flows From Financing Activities
Issuance of long-term debt 2,479 1,301
Repayment of long-term debt (431) (645)
Net increase in short-term borrowings 1,301 128
Net redemption of preferred securities
of subsidiaries (95) -
Issuance of subsidiary equity - 513
Issuance of common stock 264 889
Dividends paid (265) (227)
Net (acquisition) disposition of treasury stock (129) 181
Other financing activities 107 (68)
Net Cash Provided by Financing Activities 3,231 2,072
Increase in Cash and Cash Equivalents 430 175
Cash and Cash Equivalents, Beginning of Period 288 111
Cash and Cash Equivalents, End of Period $ 718 $ 286
Changes in Components of Working Capital
Receivables $(2,615) $ (644)
Inventories 36 (37)
Payables 2,319 120
Other (264) (348)
Total $ (524) $ (909)
<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, 1999 (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 1999
amounts to conform with the 2000 presentation.
"Enron" is used from time to time herein as a collective
reference to Enron Corp. and its subsidiaries and
affiliates. The businesses of Enron are conducted by Enron
Corp.'s subsidiaries and affiliates whose operations are
managed by their respective officers.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes for the first half of 2000
and 1999 was $33 million and $39 million, respectively.
Cash paid for interest for the same periods, net of amounts
capitalized, was $376 million and $360 million,
respectively.
Non-Cash Activity. In the second quarter of 2000, Enron
acquired all minority shareholders' interests in Enron
Energy Services LLC. Enron issued 4.9 million shares of
Enron Corp. common stock, contributed common stock and
warrants of an unconsolidated equity affiliate and paid cash
in exchange for the Enron Energy Services LLC shares held by
the minority shareowners. As a result of these
transactions, Enron recorded goodwill of approximately $470
million.
On May 15, 2000, Enron acquired WarpSpeed Communications, a
provider of on-demand switched connectivity to business enterprises,
for 617,000 shares of Enron Corp. common stock valued at approximately
$42 million.
In the first half of 2000, Enron entered into various transactions
with related parties and a third party which resulted in the non-cash
exchange of certain assets and an increase in common stock of $171
million. See Note 7.
3. 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 certified a
class action with respect to ratability claims. On March 9, 2000, the
Texas Supreme Court ruled that the trial court's class certification
was improper and remanded the case to the trial court. 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 Gas), an Enron affiliate, operated a
propane/air distribution system in the vicinity, but did not
provide service to the building. Enron, San Juan Gas, four
affiliates and their insurance carriers were named as
defendants, along with several third parties, including The
Puerto Rico Aqueduct and Sewer Authority, Puerto Rico
Telephone Company, Heath Consultants Incorporated, Humberto
Vidal, Inc. and their insurance carriers, in numerous
lawsuits filed in U.S. District Court for the District of
Puerto Rico and the Superior Court of Puerto Rico. These
suits seek damages for wrongful death, personal injury,
business interruption and property damage allegedly caused
by the explosion. After nearly four years without
determining the cause of the explosion, all parties have
agreed not to litigate further that issue, but to move these
suits toward settlements or trials to determine whether each
plaintiff was injured as a result of the explosion and, if
so, the lawful damages attributable to such injury. The
defendants have agreed on a fund for settlements or final
awards. Numerous suits have been settled and 20 cases have
been set for trial in the federal court beginning in
February 2001. 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 power generating facility (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 March 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 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 Trojan. The court upheld the OPUC's authorization of
PGE's recovery of its undepreciated investment in Trojan.
PGE and the OPUC each filed petitions for review with the Oregon
Supreme Court. 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. 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 Trojan.
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. The Oregon Supreme Court has
indicated it will defer hearing the matter until after the November
2000 elections. 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 any additional 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.
4. 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,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Numerator:
Basic
Income before cumulative effect
of accounting changes $ 289 $ 222 $627 $ 475
Preferred stock dividends:
Second preferred stock (4) (5) (8) (9)
Series B Preferred Stock (17) (14) (33) (14)
Income available to common
shareholders before cumulative
effect of accounting changes 268 203 586 452
Cumulative effect of accounting
changes - - - (131)
Income available to common
shareholders $ 268 $ 203 $ 586 $ 321
Diluted
Income available to common
shareholders before cumulative
effect of accounting changes $ 268 $ 203 $ 586 $ 452
Effect of assumed conversion
of dilutive securities:
Second preferred stock 4 5 8 9
Series B Preferred Stock 17 - 33 -
Income before cumulative effect
of accounting changes 289 208 627 461
Cumulative effect of accounting
changes - - - (131)
Income available to common
shareholders after assumed
conversions $ 289 $ 208 $627 $ 330
Denominator:
Denominator for basic earnings per
share - weighted-average shares 733 708 728 696
Effect of assumed conversion of
dilutive securities:
Preferred Stock:
Second Preferred Stock 35 35 35 36
Series B Preferred Stock 50 - 50 -
Stock options 44 28 44 26
Dilutive potential common shares 129 63 129 62
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 862 771 857 758
Basic earnings per share:
Before cumulative effect of
accounting changes $0.37 $0.29 $0.80 $0.65
Cumulative effect of accounting
changes - - - (0.19)
Basic earnings per share $0.37 $0.29 $0.80 $0.46
Diluted earnings per share:
Before cumulative effect of
accounting changes $0.34 $0.27 $0.73 $0.61
Cumulative effect of accounting
changes - - - (0.18)
Diluted earnings per share $0.34 $0.27 $0.73 $0.43
</TABLE>
5. COMPREHENSIVE INCOME
Comprehensive income includes the following (in
millions):
<TABLE>
<CAPTION>
Six Months Ended
Second Quarter June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net income $ 289 $ 222 $ 627 $ 344
Other comprehensive income:
Foreign currency
translation adjustment (99) (49) (101) (598)
Change in value of available-
for-sale investments (6) - (19) -
Total comprehensive income (loss) $ 184 $ 173 $ 507 $(254)
</TABLE>
6. 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
Office of the Chairman, which serves as the chief operating
decision making group.
Beginning in the first quarter of 2000, Enron's
communications business is being managed as a separate
operating segment named Broadband Services and therefore,
based on criteria set by Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," is reported separately.
Enron's broadband services business includes the
construction and management of the Enron Intelligent
Network, a nationwide fiber optic network, the marketing and
management of bandwidth and the delivery of high-bandwidth
media rich content such as video streaming, high capacity
data transport and video conferencing.
<TABLE>
<CAPTION>
Wholesale
Transportation Energy Retail Corporate
and Operations Energy Broadband and
(In Millions) Distribution and Services Services Services Other(c) Total
Three Months Ended
June 30, 2000
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues(a) $ 545 $15,272 $ 769 $ 151 $ 149 $16,886
Intersegment revenues(b) 52 275 71 - (398) -
Total revenues $ 597 $15,547 $ 840 $ 151 $(249) $16,886
Income (loss) before interest,
minority interests and
income taxes $ 139 $ 437 $ 24 $ (8) $ 17 $ 609
Six Months Ended
June 30, 2000
Unaffiliated revenues(a) $1,144 $27,119 $1,372 $ 210 $ 186 $30,031
Intersegment revenues(b) 56 429 110 - (595) -
Total revenues $1,200 $27,548 $1,482 $ 210 $(409) $30,031
Income (loss) before interest,
minority interests and
income taxes $ 372 $ 856 $ 40 $ (8) $ (27) $ 1,233
</TABLE>
<TABLE>
<CAPTION>
Wholesale
Transportation Energy Retail Exploration Corporate
and Operations Energy and and
(In Millions) Distribution and Services Services Production(d) Other(c) Total
Three Months Ended
June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
Unaffiliated revenues(a) $417 $ 8,558 $301 $175 $ 221 $ 9,672
Intersegment revenues(b) 7 136 39 29 (211) -
Total revenues $424 $ 8,694 $340 $204 $ 10 $ 9,672
Income (loss) before interest,
minority interests and
income taxes $128 $ 356 $(26) $ 20 $ (9) $ 469
Six Months Ended
June 30, 1999
Unaffiliated revenues(a) $894 $15,074 $664 $324 $ 348 $17,304
Intersegment revenues(b) 11 215 46 83 (355) -
Total revenues $905 $15,289 $710 $407 $ (7) $17,304
Income (loss) before interest,
minority interests and
income taxes $346 $ 676 $(57) $ 32 $ 5 $ 1,002
<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.
(d) Reflects results through August 16, 1999, when Enron completed the
exchange and sale of shares in Enron Oil & Gas Company (EOG).
</TABLE>
Total assets by segment are as follows (in millions):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
<S> <C> <C>
Transportation and Distribution $ 8,174 $ 7,959
Wholesale Energy Operations
and Services 30,617 20,674
Retail Energy Services 1,744 956
Broadband Services 1,158 511
Corporate and Other 3,873 3,281
Total Assets $45,566 $33,381
</TABLE>
The increase in the assets of the Wholesale Energy
Operations and Services segment is primarily a result of an
increase in price risk management assets and trade
receivables related to increased activity in Enron's gas and
power marketing business.
7. RELATED PARTY TRANSACTIONS
In the first half of 2000, Enron entered into
transactions with limited partnerships (the Related Party),
whose general partner's managing member is a senior officer
of Enron. The limited partners of the Related Party are
unrelated to Enron.
During the first quarter of 2000, Enron and the Related
Party entered into an agreement to terminate certain
financial instruments that had been entered into during
1999. In connection with this agreement, Enron received
approximately 3.1 million shares of Enron common stock held
by the Related Party. A put option, which was originally
entered into in the first quarter of 2000 and gave the
Related Party the right to sell shares of Enron common stock
to Enron at a strike price of $71.31 per share, was
terminated under this agreement. In return, Enron paid
approximately $26.8 million to the Related Party. The
agreement closed in April 2000. Additionally, in the first
quarter of 2000, Enron advanced to the Related Party $10
million, at a market rate of interest, which was repaid in
April 2000.
In the second quarter of 2000, Enron entered into
transactions with the Related Party to hedge certain merchant
investments. As part of the transactions, Enron contributed
to newly-formed entities (the Entities) assets valued at
approximately $800 million, including 3.7 million restricted
shares of outstanding Enron common stock, $100 million in Enron
notes payable and the right to receive up to 11.7 million shares
of outstanding Enron common stock in March 2003 (subject to certain
conditions). In return, Enron received non-voting interests in the
Entities and a special distribution from the Entities in the
form of $800 million in notes receivable, convertible into
derivative instruments. In addition, Enron paid $82 million
to purchase share-settled options from the Entities on 14.6
million shares of Enron common stock.
In June 2000 Enron sold a portion of its excess dark
fiber inventory to the Related Party in exchange for $30
million cash and a $70 million note receivable that matures
in seven years and bears a market rate of interest. Enron
recognized gross margin of $53 million on the sale.
Management believes that the terms of the transactions
with related parties were reasonable and are representative
of terms that would be negotiated with unrelated third
parties.
8. SUBSEQUENT EVENTS
On May 22, 2000, Enron, through a wholly-owned
subsidiary, announced a cash offer to acquire the shares of
London-based MG plc for 3.00 pounds sterling (approximately
$4.46) per share, or approximately $446 million. MG plc is
a leading independent international metals market-making
business providing financial and marketing services to the
global metals industry. On July 17, 2000, Enron's offer to
acquire MG plc had been accepted by holders of approximately
89% of the issued shares. Combined with the 6% of MG plc
already owned by Enron, the 89% of acceptances enabled Enron
to declare the offer to be wholly unconditional. This gives
Enron the right, under United Kingdom securities law, to
acquire compulsorily, all remaining outstanding shares of MG
plc. The transaction is expected to close in the third
quarter 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
Second Quarter 2000
vs. Second Quarter 1999
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 2000 net income was $289 million
compared to $222 million in the second quarter of 1999.
Enron's operating segments include Transportation and
Distribution (Gas Pipeline Group and Portland General),
Wholesale Energy Operations and Services (Enron's North
America, Europe and international energy businesses), Retail
Energy Services (Enron Energy Services), Broadband Services
(Enron Broadband Services), Exploration and Production
(through August 16, 1999) 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
2000 1999
<S> <C> <C>
Basic earnings per share $0.37 $0.29
Diluted earnings per share $0.34 $0.27
</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
2000 1999
<S> <C> <C>
Transportation and Distribution:
Gas Pipeline Group $ 77 $ 72
Portland General 62 56
Wholesale Energy Operations
and Services 437 356
Retail Energy Services 24 (26)
Broadband Services (8) -
Exploration and Production - 20
Corporate and Other 17 (9)
Income before interest, minority
interests and taxes $ 609 $ 469
</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 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>
Second Quarter
2000 1999
<S> <C> <C>
Total Volumes Transported (BBtu/d)(a)
Northern Natural Gas 3,237 3,553
Transwestern Pipeline 1,606 1,419
Florida Gas Transmission 1,591 1,546
Northern Border Pipeline 2,429 2,404
<FN>
(a) Billion British thermal units per day. Reflects
100% of each entity's throughput volumes. Florida Gas
and Northern Border Pipeline are unconsolidated equity
affiliates.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Second Quarter
2000 1999
<S> <C> <C>
Net revenues $148 $124
Operating expenses 76 65
Depreciation and amortization 17 17
Equity in earnings 10 8
Other income, net 12 22
Income before interest and taxes $ 77 $ 72
</TABLE>
Revenues, net of cost of sales, of Gas Pipeline Group
(GPG) increased $24 million in the second quarter of 2000 as
compared to the same period in 1999. The increase in net
revenues is primarily due to the sale in 2000 of gas from
Northern's gas storage inventory, partially offset by lower
transport rates resulting from a rate case settlement. The
rate case, which was settled in June 1999 and implemented in
November 1999, requires Northern to charge higher rates
during the winter season and lower rates during the summer
months. Operating expenses increased $11 million primarily
as a result of higher overhead costs and costs related to
increased regulatory amortization. Other income, net
decreased $10 million in the second quarter of 2000 as
compared to the same period of 1999. Included in the second
quarter of 2000 was a gain related to an energy commodity
contract while the second quarter of 1999 included interest
earned in connection with the financing of an acquisition by
an unconsolidated affiliate.
Portland General. Statistics for PGE for the second
quarter of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Second Quarter
2000 1999
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 1,480 1,618
Commercial 1,769 1,746
Industrial 1,235 1,083
Total Retail 4,484 4,447
Wholesale 4,909 3,053
Total Electricity Sales 9,393 7,500
Average Billed Revenue (cents per kWh) 4.51 3.81
Resource Mix
Coal 7% 12%
Combustion Turbine 6 6
Hydro 7 10
Total Generation 20 28
Firm Purchases 74 61
Secondary Purchases 6 11
Total Resources 100% 100%
Average Variable Power Cost
(Mills/kWh)(b) 26.9 15.5
Retail Customers (end of period,
thousands) 726 711
<FN>
(a) Thousand megawatt-hours.
(b) Mills (1/10 cent) per kilowatt-hour.
</TABLE>
Portland General realized IBIT of $62 million and $56
million for the second quarter of 2000 and 1999,
respectively. Significant components of IBIT are as follows
(in millions):
<TABLE>
<CAPTION>
Second Quarter
2000 1999
<S> <C> <C>
Revenues $431 $296
Purchased power and fuel 252 119
Operating expenses 76 79
Depreciation and amortization 46 48
Other income, net 5 6
Income before interest and taxes $ 62 $ 56
</TABLE>
Revenues and purchased power and fuel costs increased
$135 million and $133 million, respectively, in the second
quarter of 2000 as compared to the second quarter of 1999.
The increase in revenue is primarily a result of increases
in the price of power and increases in wholesale sales and
sales to industrial and commercial customers. Higher
purchased power and fuel costs partially offset the revenue
increase.
On November 8, 1999, Enron announced that it had entered
into an agreement to sell PGE to Sierra Pacific Resources
for $2.1 billion. The proposed transaction, which is
subject to regulatory approval, is expected to close in late
2000 or early 2001.
Wholesale Energy Operations and Services
Enron's wholesale business (Enron Wholesale) includes its
wholesale energy businesses around the world. Enron
Wholesale operates in developed and deregulated markets such
as North America and Europe, as well as developing or newly
deregulating markets including South America, India and
Japan.
Enron builds its wholesale businesses through the
creation of networks involving asset ownership, contractual
access to third-party assets and market-making activities.
Each market in which Enron Wholesale operates utilizes these
components in a slightly different manner and is at a
different stage of development. This network strategy has
enabled Enron Wholesale to establish a leading position in
its markets. Enron Wholesale's activities are categorized
into two business lines: (a) Commodity Sales and Services
and (b) Assets and Investments. Activities are often
integrated into a bundled product offering for Enron's
customers.
Enron Wholesale manages its portfolio of contracts and
assets in order to maximize value, minimize the associated
risks and provide overall liquidity. In doing so, Enron
Wholesale uses portfolio and risk management disciplines,
including offsetting or hedging transactions, to manage
exposures to market price movements (commodities, interest
rates, foreign currencies and equities). Additionally,
Enron Wholesale manages its liquidity and exposure to third-
party credit risk through monetization of its contract
portfolio or third-party insurance contracts. Enron
Wholesale also sells interests in certain investments and
other assets to improve liquidity and overall return, the
timing of which is dependent on market conditions and
management's expectations of the investments' value.
The following table reflects IBIT for each business line
(in millions):
<TABLE>
<CAPTION>
Second Quarter
2000 1999
<S> <C> <C>
Commodity Sales and Services $442 $ 81
Assets and Investments 55 325
Unallocated expenses (60) (50)
Income before interest, minority
interests and taxes $437 $356
</TABLE>
The following discussion analyzes the contributions to
IBIT for each business line.
Commodity Sales and Services. Enron Wholesale provides
reliable commodity delivery and predictable pricing to its
customers through forward contracts. This market-making
activity includes the purchase, sale, marketing and delivery
of natural gas, electricity, liquids and other commodities,
as well as the management of Enron Wholesale's own portfolio
of contracts. Enron Wholesale's market-making activity is
facilitated through a network of capabilities including
asset ownership. Accordingly, certain assets involved in
the delivery of these services are included in this business
(such as intrastate natural gas pipelines, power plants and
gas storage facilities).
Enron Wholesale markets, transports and provides energy
commodities as reflected in the following table (including
intercompany amounts):
<TABLE>
<CAPTION>
Second Quarter
2000 1999
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 15,851 8,038
Canada 6,587 4,475
Europe and Other 3,593 1,223
26,031 13,736
Transport Volumes 595 513
Total Gas Volumes 26,626 14,249
Crude Oil and Liquids 5,048 8,822
Electricity(c) 15,056 10,637
Total 46,730 33,708
Electricity Volumes Marketed
(Thousand MWh)
United States 124,089 94,966
Europe and Other 12,912 1,833
Total 137,001 96,799
Financial Settlements (Notional)
(BBtue/d) 152,627 82,699
<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
by $361 million in the second quarter of 2000 as compared to
the same period of 1999. Earnings from commodity marketing
were favorably impacted by increased profits from North
American operations attributable to significant increases
in natural gas prices combined with price volatility in
both the gas and power markets, European power marketing and
other marketing activities. Gas and power volumes, which
increased 87% and 42%, respectively, were positively
impacted in the second quarter of 2000 by EnronOnline, an
internet-based eCommerce system which allows customers to
transact with Enron as the principal.
Assets and Investments. Enron's Wholesale businesses
make investments in various energy-related assets as a part
of its network strategy. Enron Wholesale either purchases
the asset from a third party or develops and constructs the
asset. In most cases, Enron Wholesale operates and manages
such assets. Earnings from these investments principally
result from operations of the assets or sales of ownership
interests.
Additionally, Enron Wholesale invests in debt and equity
securities of energy and certain communications-related
businesses, which may also utilize Enron Wholesale's
products and services. With these merchant investments,
Enron's influence is much more limited relative to assets
Enron develops or constructs. Earnings from these
activities result from changes in the market value of the
security.
Earnings from assets and investments decreased to $55
million in the second quarter of 2000 as compared to $325
million in the same period of 1999, due to a decline in the
value of Enron Wholesale's merchant investments and lower
earnings from sales of interests in international energy
assets, partially offset by increased earnings from
international energy asset operations.
Retail Energy Services
Enron Energy Services (Energy Services) is extending
Enron's energy expertise and capabilities to end-use retail
customers in the industrial and commercial business sectors
to manage their energy requirements and reduce their total
energy costs. Energy Services sells or manages the delivery
of natural gas, electricity, liquids and other commodities
to industrial and commercial customers located throughout
the United States and the United Kingdom. Energy Services
also provides outsourcing solutions to customers for full
energy management. This integrated product includes the
management of commodity delivery, energy information and
energy assets, and price risk management activities.
Significant components of Energy Services' results are as
follows (in millions):
<TABLE>
<CAPTION>
Second Quarter
2000 1999
<S> <C> <C>
Revenues $840 $340
Gross margin $121 $ 34
IBIT $ 24 $(26)
</TABLE>
Revenues and gross margin increased $500 million and $87
million, respectively, in the second quarter of 2000
compared to the second quarter of 1999, primarily resulting
from long-term energy contracts originated in the second
quarter of 2000 and the commencement, in the second half of
1999, of operations in the United Kingdom. Also included in
Energy Services' second quarter 2000 results were gains
associated with the securitization of equity instruments,
offset by equity losses of an unconsolidated equity
affiliate and certain compensation expenses.
Broadband Services
Enron's broadband services business (Broadband Services)
provides customers with a single source for broadband
services. In implementing Enron's network strategy,
Broadband Services is constructing the Enron Intelligent
Network (EIN), a nationwide fiber optic network that
consists of both fiber deployed by Enron and acquired
capacity on non-Enron networks. The EIN, managed by Enron's
Broadband Operating System software, provides a bandwidth-on-
demand platform allowing Broadband Services to deliver high-
bandwidth media rich content such as video streaming, high
capacity data transport and video conferencing. In
addition, Enron is extending its market-making and risk
management skills from its energy business to develop the
bandwidth intermediation business to help customers manage
unexpected fluctuation in the price, supply and demand of
bandwidth. Broadband Services also makes investments in
companies with related technologies and with the potential
for capital appreciation. Earnings from these merchant
investments result from changes in the market value of the
securities.
The components of Broadband Services' businesses include
the development and construction of the EIN and the sales of
excess fiber capacity and software, the marketing and
management of bandwidth and the delivery of content. The
second quarter 2000 loss before interest, minority interests
and taxes of $8 million included earnings from sales of
excess fiber capacity offset by expenses related to building
the business.
Corporate and Other
Corporate and Other realized IBIT of $17 million in the
second quarter of 2000 compared to a loss of $9 million in
the same period of 1999. Results of the current year
quarter reflect a gain on the sale of certain assets,
earnings from Enron Renewable Energy Corp. related to the
completion and sale of a wind project and earnings from
Enron's methanol and MTBE operations, partially offset by
equity losses of an unconsolidated equity affiliate.
Interest and Related Charges, net
Interest and related charges, net, is reported net of
interest capitalized of $13 million and $16 million for the
second quarter of 2000 and 1999, respectively. The net
expense increased $21 million in the second quarter of 2000
as compared to the same period of 1999, primarily due to
increased long-term debt levels, increased average short-
term borrowings and higher interest rates resulting from
general market conditions within the U.S. The increase was
partially offset by the replacement of debt related to a
Brazilian subsidiary with lower interest rate debt.
Minority Interests
Minority interests increased $16 million to $39 million
in the second quarter of 2000 compared to the same period in
1999, primarily due to the minority owner's share of the
results of a limited partnership formed in the second
quarter of 1999 and the minority owner's share of the
results of Enron's South American operations.
Income Tax Expense
The projected effective tax rate for 2000 is lower than
the statutory rate mainly due to equity earnings and
differences between the book and tax basis of certain assets
and stock sales. Income taxes increased during the second
quarter of 2000 as compared to the second quarter of 1999
primarily as a result of increased pretax earnings.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2000
vs. Six Months Ended June 30, 1999
RESULTS OF OPERATIONS
Consolidated Net Income
Enron reported net income of $627 million for the first
six months of 2000 compared to $475 million, excluding the
cumulative effect of accounting changes, during the same
period in 1999.
Basic and diluted earnings (loss) per share of common
stock were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
Basic earnings per share:
Before cumulative effect of
accounting changes $0.80 $ 0.65
Cumulative effect of accounting changes - (0.19)
Reported basic earnings per share $0.80 $ 0.46
Diluted earnings per share:
Before cumulative effect of
accounting changes $0.73 $ 0.61
Cumulative effect of accounting changes - (0.18)
Reported diluted earnings per share $0.73 $ 0.43
</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,
2000 1999
<S> <C> <C>
Transportation and Distribution:
Gas Pipeline Group $ 205 $ 198
Portland General 167 148
Wholesale Energy Operations and
Services 856 676
Retail Energy Services 40 (57)
Broadband Services (8) -
Exploration and Production - 32
Corporate and Other (27) 5
Income before interest, minority
interests and taxes $1,233 $1,002
</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>
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
Total Volumes Transported (BBtu/d)(a)
Northern Natural Gas 3,691 4,046
Transwestern Pipeline 1,584 1,475
Florida Gas Transmission 1,571 1,386
Northern Border Pipeline 2,447 2,444
<FN>
(a) Billion British thermal units per day. Reflects
100% of each entity's throughput volumes. Florida Gas
and Northern Border Pipeline are unconsolidated equity
affiliates.
</TABLE>
Significant components of IBIT are as follows (in
millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
Net revenues $349 $305
Operating expenses 141 126
Depreciation and amortization 33 34
Equity in earnings 17 16
Other income, net 13 37
Income before interest and taxes $205 $198
</TABLE>
Revenues, net of cost of sales increased in the first
half of 2000 as compared to the same period in 1999
primarily due to the sale in 2000 of gas from Northern's gas
storage inventory. Operating expenses increased $15 million
primarily as a result of higher overhead costs and costs
related to increased regulatory amortization. Other income,
net decreased $24 million in the first half of 2000 as
compared to the same period of 1999. Included in the first
half of 2000 was a gain related to an energy commodity
contract while the 1999 period included interest earned in
connection with the financing of an acquisition by an
unconsolidated affiliate and the early settlement of an
interest rate contract.
Portland General. Statistics for PGE for the first half
of 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
Electricity Sales (Thousand MWh)(a)
Residential 3,841 3,960
Commercial 3,641 3,562
Industrial 2,404 2,103
Total Retail 9,886 9,625
Wholesale 9,190 4,391
Total Electricity Sales 19,076 14,016
Average Billed Revenue (cents per kWh) 4.25 4.06
Resource Mix
Coal 10% 16%
Combustion Turbine 8 6
Hydro 8 11
Total Generation 26 33
Firm Purchases 68 53
Secondary Purchases 6 14
Total Resources 100% 100%
Average Variable Power Cost
(Mills/kWh)(b) 23.8 15.2
Retail Customers (end of period,
thousands) 726 711
<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,
2000 1999
<S> <C> <C>
Revenues $828 $595
Purchased power and fuel 454 219
Operating expenses 154 149
Depreciation and amortization 92 94
Other income, net 39 15
Income before interest and taxes $167 $148
</TABLE>
Revenues and purchased power and fuel costs increased
$233 million and $235 million, respectively, in the first
six months of 2000 as compared to the same period in 1999.
The increase in revenue is primarily the result of an increase
in the price of power and a significant increase in wholesale
sales and increased sales to industrial and commercial customers.
Higher purchased power and fuel costs offset the revenue increase.
Other income, net increased $24 million in the first half of 2000
primarily due to the impact of an OPUC order allowing
certain deregulation costs to be deferred and recovered
through rate cases.
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,
2000 1999
<S> <C> <C>
Commodity Sales and Services $ 688 $305
Assets and Investments 275 461
Unallocated expenses (107) (90)
Income before interest, minority
interests and taxes $ 856 $676
</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>
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 16,035 8,560
Canada 5,488 4,216
Europe and Other 3,031 1,510
24,554 14,286
Transport Volumes 526 534
Total Gas Volumes 25,080 14,820
Crude Oil and Liquids 5,591 6,565
Electricity(c) 13,613 10,119
Total 44,284 31,504
Electricity Volumes Marketed
(Thousand MWh)
United States 226,992 180,928
Europe and Other 20,756 2,221
Total 247,748 183,149
Financial Settlements (Notional)
(BBtue/d) 147,247 88,803
<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
by $383 million in the first half of 2000 as compared to the
same period of 1999. Earnings from commodity marketing were
favorably impacted by increased profits from North American
operations attributable to significant increases in
natural gas prices combined with price volatility in both
the gas and power markets, European power marketing and
other marketing activities. Gas and power volumes, which
increased 70% and 35%, respectively, were positively
impacted in the first half of 2000 by EnronOnline.
Assets and Investments. Earnings from assets and
investments decreased to $275 million in the first half of
2000 as compared to $461 million in the same period of 1999,
due to lower earnings from sales of interests in
international energy assets and a decline in the value of
Enron Wholesale's merchant investments, partially offset by
increased earnings from international energy asset
operations.
Unallocated Expenses. Net unallocated expenses such as
rent, systems expenses and other support group costs
increased in 2000 due to continued expansion into new
markets and system upgrades.
Retail Energy Services
Energy Services reported IBIT of $40 million in the first
half of 2000 compared to a loss of $57 million for the same
period of 1999.
Significant components of Energy Services' results are as
follows (in millions):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
Revenues $1,482 $710
Gross margin $ 224 $ 78
IBIT $ 40 $(57)
</TABLE>
Revenues and gross margin increased $772 million and $146
million, respectively, in the first half 2000 compared to
the first half of 1999, primarily resulting from long-term
energy contracts originated in 2000, increased values of
Energy Services' contract portfolio and the commencement, in
the second half of 1999, of operations in the United
Kingdom. Also included in Energy Services' results were
gains recognized in 2000 associated with the securitization
of equity instruments, offset by losses of an unconsolidated
equity affiliate and certain compensation expenses.
Broadband Services
Broadband Services reported a loss before interest,
minority interests and taxes for the first half of 2000 of
$8 million. Included in the loss were earnings from sales
of excess fiber capacity offset by expenses related to building
the business.
Corporate and Other
Corporate and Other realized a loss before interest
expense, minority interests and income taxes of $27 million
in the first half of 2000 compared to IBIT of $5 million in
the same period of 1999. Results in 2000 include a gain on
the sale of certain assets, earnings from Enron Renewable
Energy Corp. related to the completion and sale of a wind
project and earnings from Enron's methanol and MTBE
operations, offset by equity losses of an unconsolidated
equity affiliate and increased expenses related to
information technology and advertising.
Interest and Related Charges, net
Interest and related charges, net, is reported net of
interest capitalized of $26 million and $29 million for the
first half of 2000 and 1999, respectively. The net expense
increased $7 million in the first half of 2000 as compared
to the same period of 1999, primarily due to increased long-
term debt levels, increased average short-term borrowings
and higher interest rates resulting from general market
conditions within the U.S. The increase was partially
offset by the replacement of debt related to a Brazilian
subsidiary with lower interest rate debt.
Minority Interests
Minority interests increased $18 million to $74 million
in the first half of 2000 compared to the same period in
1999, primarily due to the minority owner's share of the
results of a limited partnership formed in the second
quarter of 1999, the minority owner's share of the results
of Enron's South American operations and the elimination of
minority interest attributable to losses of EOG, partially
offset by amounts related to Whitewing Associates, L.P.
which is no longer consolidated.
Income Tax Expense
The projected effective tax rate for 2000 is lower than
the statutory rate mainly due to equity earnings and
differences between the book and tax basis of certain assets
and stock sales. Income taxes increased during the first
half of 2000 as compared to the first half of 1999 primarily
as a result of increased pretax earnings.
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,
the AICPA Statement of Position 98-5 (SOP 98-5), "Reporting
on the Costs of Start-Up Activities," and the Emerging
Issues Task Force Issue No. 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities."
The first quarter 1999 charge was primarily related to the
adoption of SOP 98-5.
NEW ACCOUNTING PRONOUNCEMENT
In 1998, the Financial Accounting Standards Board issued
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 does not plan to effect the early
adoption of SFAS No. 133, as important interpretations
regarding implementation continue to be made. In June 2000,
the FASB issued SFAS No. 138, which amended certain guidance
within SFAS No. 133. Enron believes that SFAS No. 133 (as
amended) will not have a material impact on its accounting
for price risk management activities but has not yet
quantified the effect on its hedging activities or physical
based contracts.
FINANCIAL CONDITION
<TABLE>
<CAPTION>
Cash Flows
Six Months Ended
June 30,
(In Millions) 2000 1999
<S> <C> <C>
Cash provided by (used in):
Operating activities $ (547) $ (38)
Investing activities (2,254) (1,859)
Financing activities 3,231 2,072
</TABLE>
Cash used in operating activities totaled $547 million in
the first half of 2000 as compared to $38 million in the
same period last year. Net cash used in operating
activities in the first half of 2000 primarily reflects net
cash used in price risk management activities, net cash used
in acquiring merchant assets and investments and working
capital requirements. Higher volatility in the gas and power
markets in the second quarter of 2000 and higher prices of
commodities purchased and sold by Enron resulted in
increased working capital requirements and cash used in
price risk management activities. In addition, the change
in working capital includes $350 million of cash paid for
brokerage deposits related to the higher commodity activity.
Management anticipates a reduction in cash requirements in
the second half of 2000 as planned sales and monetizations
of certain assets are completed.
Cash used in investing activities totaled $2,254 million
in the first six months of 2000 as compared to $1,859
million in the same period of 1999. The 2000 amount
reflects cash used for capital expenditures, equity
investments, the acquisition of certain minority owners'
interests and the acquisition of a minority owner's
interests in Enron Energy Services LLC.
Cash provided by financing activities totaled $3,231
million in the first half of 2000 as compared to $2,072
million during the same period of 1999. The first half of
2000 includes the net issuances of short- and long-term debt
of $3,349.
Enron is able to fund its normal working capital
requirements mainly through operations or, when necessary,
through the utilization of credit facilities and its ability
to sell commercial paper and accounts receivable.
CAPITALIZATION
Total capitalization at June 30, 2000 was $25.3 billion.
Debt as a percentage of total capitalization increased to
46.3% at June 30, 2000 as compared to 38.5% at December 31,
1999. The increase in the ratio reflects increased debt
levels, the first quarter 2000 acquisition of certain
minority owners' interests and the retirement of certain
company-obligated preferred securities of a subsidiary,
partially offset by the issuances, in the first half of
2000, of Enron common stock and company-obligated preferred
securities of subsidiaries and the contribution of common shares
(see Note 7). The issuances of Enron common stock related to the
acquisition of a minority owner's interest in Enron Energy
Services LLC and the exercise of employee stock options.
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. Enron utilizes value at risk measures that
assume a one-day holding period and a 95% confidence level.
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,
1999.
Enron's value at risk for trading commodity price risk
increased to $53 million at June 30, 2000 as compared to $21
million at December 31, 1999. This increase is attributable
to increased natural gas prices, combined with increased
price volatility in the power and gas markets related to the
peak summer season.
In addition, value at risk for non-trading foreign
currency exchange rate risk increased to $10 million at June
30, 2000, compared to $4 million at December 31, 1999. This
increase is a result of contracts to hedge currency
translation risks associated with Yen-denominated notes
issued by Enron during 2000.
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. All statements other than statements
of historical facts contained in this document are forward-
looking statements. Forward-looking statements include, but
are not limited to, statements relating to expansion
opportunities for the Gas Pipeline Group, demand in the
market for broadband services and high bandwidth
applications, transaction volumes in the U.S. power market,
commencement of commercial operations of new power plants
and pipeline projects, and growth in the demand for retail
energy outsourcing solutions. When used in this document,
the words "anticipate," "believe," "estimate," "except,"
"intend," "may," "project," "plan," "should" and similar
expressions are intended to be among the statements that
identify forward-looking statements. Although
Enron believes that its expectations reflected in these
forward-looking statements are based on reasonable
assumptions, such statements involve risks and uncertainties
and no assurance can be given that actual results will be
consistent with these forward-looking statements. 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 (including energy outsourcing markets) in the United
States and Europe; the ability to penetrate the broadband
services market; 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 and other infrastructure projects; the
effectiveness of Enron's risk management activities; the
ability of counterparties to financial risk management
instruments and other contracts with Enron to meet their
financial commitments to Enron; 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.
PART II. OTHER INFORMATION
ENRON CORP. AND SUBSIDIARIES
ITEM 1. Legal Proceedings
See Part I. Item 1, Note 3 to Consolidated Financial
Statements entitled "Litigation and Other Contingencies,"
which is incorporated herein by reference.
ITEM 2. Recent Sales of Unregistered Equity Securities
During the second quarter of 2000, pursuant to private
placement exemptions from the registration requirements of
the Securities Act of 1933, Enron (i) sold 4.9 million
shares of common stock in connection with the acquisition of
shares of Enron Energy Services LLC held by minority
shareholders and (ii) sold 617,000 shares of common stock in
connection with the acquisition of WarpSpeed Communications.
See Part I, Item 1, Note 2 to the Consolidated Financial
Statements herein.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Enron Corp. was
held on May 2, 2000 in Houston, Texas, for the purposes of
electing a board of directors, the appointment of auditors
and voting on certain shareholder 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 658,191,323 10,395,617
Norman P. Blake, Jr. 662,059,377 6,477,563
Ronnie C. Chan 661,894,262 6,642,678
John H. Duncan 661,655,934 6,881,006
Wendy L. Gramm 661,881,396 6,655,544
Ken L. Harrison 662,019,809 6,517,131
Robert K. Jaedicke 661,678,677 6,858,263
Kenneth L. Lay 661,912,033 6,624,907
Charles A. LeMaistre 661,525,573 7,011,367
Rebecca Mark-Jusbasche 581,113,925 87,423,015
John Mendelsohn 661,852,975 6,683,965
Jerome J. Meyer 662,071,275 6,465,665
Paulo V. Ferraz Pereira 662,020,913 6,516,027
Frank Savage 661,803,387 6,733,553
Jeffrey K. Skilling 662,143,620 6,393,320
John A. Urquhart 658,049,726 10,487,214
John Wakeham 648,702,580 19,834,360
Herbert S. Winokur, Jr. 658,482,006 10,054,934
</TABLE>
(b) The appointment of Arthur Andersen LLP as independent
auditor was approved by the following vote:
Shares FOR Shares AGAINST Shares ABSTAINING
663,693,175 1,990,565 2,853,200
(c) The votes cast for the shareholder proposal from Brent
Blackwelder, President, Friends of the Earth Action were as
follows:
Shares FOR Shares AGAINST Shares ABSTAINING
48,244,307 493,792,453 24,939,903
(d) The votes cast for the shareholder proposal from Dr.
Julia M. Wershing were as follows:
Shares FOR Shares AGAINST Shares ABSTAINING
31,714,847 524,732,408 10,529,409
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 12 Computation of Ratio of Earnings to
Fixed Charges
(b) Reports on Form 8-K
Current Report on Form 8-K filed May 19, 2000,
containing exhibits relating to Enron's registered offering
from time to time of medium-term notes.
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 14, 2000 By: RICHARD A. CAUSEY
Richard A. Causey
Executive Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
