UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report: July 31, 1996
(Date of earliest event reported)
ENRON GLOBAL POWER & PIPELINES L.L.C.
(Exact name of registrant as specified in its charter)
DELAWARE 1-13584 76-0456366
(State or other jurisdiction (Commission File No.) (I.R.S. Employer
of incorporation or Identification No.)
organization)
ENRON BUILDING 77002
1400 SMITH STREET (Zip Code)
HOUSTON, TEXAS
(Address of principal
executive offices)
Registrant's telephone number,
including area code: (713) 853-1937
PAGE
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Acquired Business -
Compa<n~><i'>a de Inversiones de Energ<i'>a S.A. and Controlled Company
Consolidated Balance Sheet-
June 30, 1996 (Unaudited) 2
Consolidated Statements of Income -
Six Months Ended June 30, 1996 and 1995(Unaudited) 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995(Unaudited) 4
Notes to Consolidated Financial Statements 5
(b) Pro Forma Financial Statements - Enron Global Power & Pipelines L.L.C.
Pro Forma Consolidated Financial Statements (Unaudited) 17
Pro Forma Consolidated Balance Sheet -
June 30, 1996 18
Pro Forma Consolidated Statements of Income -
Year Ended December 31, 1995 19
Six Months Ended June 30, 1996 20
Notes to Pro Forma Consolidated Financial Statements 21
(c) Exhibits
23.1 Consent of Independent Public Accountants. 24
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF ACQUIRED BUSINESS
The financial statements of Compa<n~><i'>a de Inversiones de
Energ<i'>a S.A. and Controlled Company, as required by Rule 3-05 of
Regulation S-X and as included in the Annual Report on Form 10-K
for year ended December 31, 1995, of Enron Global Power &
Pipelines L.L.C., are incorporated herein by reference.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
CONSOLIDATED BALANCE SHEET
As of June 30, 1996
(Stated in Thousands of Argentine Pesos as described in Note 2(a))
JUNE 30,
1996
- --------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash 3,364
Investments 100,384
Trade receivables 40,584
Other receivables 10,974
Inventories 2,495
----------
Total current assets 157,801
----------
Investments 4,500
Property, plant and equipment, net 1,564,999
Intangible assets, net 29,694
----------
Total noncurrent assets 1,599,193
----------
Total 1,756,994
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Initial debt assumed under Transfer Contract 89,820
Accounts payable 13,734
Loans 77,452
Payroll and social security taxes 1,212
Taxes payable 32,949
Other liabilities 2,519
----------
Total current liabilities 217,686
----------
Initial debt assumed under Transfer Contract 29,426
Loans 669,217
----------
Total noncurrent liabilities 698,643
----------
Total liabilities 916,329
----------
Minority interest 318,042
Shareholders' equity 522,623
----------
Total 1,756,994
==========
The accompanying notes are an integral part of these financial statements.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the six-month periods ended June 30, 1996 and 1995
(Stated in Thousands of Argentine Pesos as described in Note 2(a), except for
Per Share and Share Amounts)
JUNE 30
-------------------------
1996 1995
- -----------------------------------------------------------------------------
(Unaudited)
Net Revenues 196,557 193,373
Operating Costs (51,370) (51,920)
-------------------------
Gross Operating Profit 145,187 141,453
Administrative Expenses (8,045) (8,319)
Selling Expenses (869) (1,103)
-------------------------
Operating Income 136,273 132,031
Other Income, net 1,042 718
Financial Income (Expense) and Holding
Gains (Losses) (31,375) (418)
-------------------------
Net Income Before Income Tax 105,940 132,331
Income Tax Expense (31,599) (34,686)
Minority Interest (25,345) (29,385)
-------------------------
Net Income 48,996 68,260
=========================
Earnings Per Common Share 0.13 0.18
Average Number Of Common Shares 374,122,880 374,122,880
=========================
The accompanying notes are an integral part of these financial statements.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six-month periods ended June 30, 1996 and 1995
(Stated in Thousands of Argentine Pesos as described in Note 2(a))
JUNE 30
---------------------
1996 1995
- ------------------------------------------------------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Reconciliation of net income to cash provided
by operating activities
Net income 48,996 68,260
Depreciation of property, plant and equipment 21,705 19,592
Amortization of intangible assets 817 679
Consumption of materials 2,674 3,049
Minority interest 25,345 29,385
Changes in assets and liabilities
Trade receivables (707) 6,289
Other receivables 102 605
Inventories (1,101) (184)
Accounts payable (3,166) (3,249)
Payroll and social security taxes (216) 48
Taxes payable 967 4,130
Other liabilities (3,006) (1,785)
Interest payable and other 11,778 (28,969)
---------------------
Net cash flows from operating activities 104,188 97,850
---------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property, plant and equipment (43,899) (77,162)
Purchase of investments - (7,530)
Cash from investment amortization 1,100 -
---------------------
Net cash flows used in investing activities (42,799) (84,692)
---------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from loans 407,483 41,608
Payment of loans (354,196) (12,539)
Net increase in short-term debt, less than
three months to maturity 3,315 39,694
Cash from treasury lock contracts settlement 5,968 -
Payment of initial debt assumed under
Transfer Contract (22,000) (22,087)
Common dividends paid (75,043) (75,497)
---------------------
Net cash flows used in financing activities (34,473) (28,821)
---------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 26,916 (15,663)
---------------------
Cash and cash equivalents at beginning of year 72,432 80,857
---------------------
Cash and cash equivalents at period end 99,348 65,194
=====================
The accompanying notes are an integral part of these financial statements.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
(AMOUNTS STATED IN THOUSANDS OF ARGENTINE PESOS AS DESCRIBED IN NOTE 2(A),
EXCEPT FOR PER SHARE AMOUNTS IN PESOS OR WHERE OTHERWISE INDICATED)
1. ORGANIZATION AND START-UP OF THE COMPANY
Compa<n~><i'>a de Inversiones de Energ<i'>a S.A. (CIESA or the Company) was
incorporated in Buenos Aires, Argentina, on December 14, 1992. Until recently,
CIESA was owned by Enron Pipeline Company-Argentina S.A.(EPCA); Perez Companc
S.A. (Perez Companc); Compa<n~><i'>a de Inversiones en Transporte de Gas S.A.
(CITGAS); and Argentina Private Development Trust Limited (APDT), each of which
owned 25% of CIESA's common stock.
Effective July 31, 1996, Enron Global Power & Pipelines L.L.C. (EPP), the
parent company of EPCA, together with Perez Companc, acquired through their
respective subsidiaries APDT's 25% interest in CIESA and EPP granted to Enron
Corp. the right to acquire a 4 1/6% interest in CIESA for approximately $39
million. On August 8, 1996, Enron Corp. and Perez Companc entered into a stock
purchase agreement with CITGAS which transfers all rights and obligations
deriving from CITGAS's 25% shareholding in CIESA to subsidiaries of Enron Corp.
and Perez Companc. The closing of the CITGAS transaction, which is subject to
regulatory approval and other requirements, is expected to occur by November
15, 1996. However, the respective voting and economic rights were transferred
effective August 1, 1996. As a result of the APDT and CITGAS transactions,
Perez Companc and its subsidiaries will have a 50% ownership in CIESA, EPCA
will own 33 1/3% and Enron Corp. will own 16 2/3%. CIESA holds 70% of the
capital stock of Transportadora de Gas del Sur S.A. (TGS or controlled
company).
On August 23, 1996, Enron Corp. exercised its right to acquire the 4 1/6%
interest in CIESA from EPP.
TGS is one of the companies created by the privatization of Gas del Estado S.E.
(GdE) and is engaged in the transportation and processing of natural gas in
Argentina. TGS's pipeline system connects major gas fields in southern and
western Argentina with distributors of gas in those areas and in the greater
Buenos Aires area. The gas transportation license (the License) was exclusively
granted for a period of 35 years with an extension of ten years, provided that
TGS has essentially met certain conditions. The General Cerri Gas Processing
Complex, where TGS processes natural gas by extracting natural gas liquids, was
transferred together with the gas transmission assets.
CIESA acquired 70% of the capital stock of TGS, which was transferred on
December 28, 1992, for US$561.2 million of which US$205 million was paid in
settlement of GdE's liabilities with the Federal Treasury. Those payments made
by CIESA were financed by shareholders' contributions, accounted for as an
irrevocable contribution against future subscription and a US$75 million bridge
loan received from Chase Manhattan Bank.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein have been prepared by
management without audit pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). The consolidated balance sheet of
CIESA as of June 30, 1996, and the related consolidated statements of income
and cash flows for the six-month periods ended June 30, 1996, and 1995 have
been prepared in accordance with generally accepted accounting principles in
Argentina (Argentine GAAP) for consolidated financial statements. Certain
financial statements, schedules and footnote disclosures normally included in
financial statements prepared in accordance with Argentine GAAP have been
condensed or omitted, pursuant to SEC rules and regulations. These unaudited
consolidated financial statements should be read in conjunction with CIESA's
audited consolidated financial statements and notes thereto included in EPP's
Form 10-K for the year ended December 31, 1995.
The unaudited consolidated financial statements included herein reflects all
adjustments, consisting only of normal recurring adjustments which are
necessary, in the opinion of management for a fair presentation of CIESA's
financial position, results of operations and cash flows for the interim
periods presented. The results of operations for the interim periods presented
herein are not necessarily indicative of the results to be expected for full
years.
(a) PRESENTATION OF FINANCIAL STATEMENTS IN CONSTANT ARGENTINE PESOS
The Executive Branch of the Argentine Government in Decree 316/95
provided for the discontinuance of inflation accounting. Based on such
decree, the inflation accounting, whereby historical peso nonmonetary
transactions and account balances are restated into constant Argentine
pesos (Ps.), has been discontinued effective as of September 1, 1995,
as stipulated by General Resolution No 8/95 of the Inspecci<o'>n
General de Justicia (IGJ). Consequently, the Company's financial
statements have been restated for the effects of inflation through
August 31, 1995. This restatement was performed as stipulated by the
restatement methodology established in Technical Resolution Number 6 of
the Argentine Federation of Professional Councils in Economic Sciences
(Argentine Federation).
All financial statements amounts for all the periods presented have
been subsequently restated up through August 31, 1995. This restatement
simply updates the financial statement amounts to constant pesos and
does not otherwise change the prior periods financial statements. In
accordance with inflation accounting, the conversion factor derived
from the general level wholesale price index (GLWPI) issued by the
National Institute of Statistics and Census (INDEC) has been used to
arrive at the financial statements stated in constant Argentine pesos.
The conversion factor used to restate the June 30,
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
1995, financial statements in constant pesos through August 31, 1995, was
1.004.
The Argentine Federation has issued resolution N* 140/96 wherein
financial statements are allowed to be presented on historical basis,
including the effects of inflation up through August 31, 1995, provided
that the annual variation in the GLWPI does not exceed 8%. For the six-
month period from January 1 to June 30, 1996, the change in the GLPWI was
2%.
(b) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of CIESA and
the financial statements of its controlled company.
The controlled company has been consolidated following the methodology
established in Technical Resolution Number 4 of the Argentine Federation.
The valuation methods used by TGS are consistent with those followed by
CIESA. All significant intercompany transactions have been eliminated in
consolidation.
(c) FINANCIAL INSTRUMENTS
TGS and CIESA have not used derivative financial instruments for trading
purposes, although both companies have used derivatives to mitigate the
exposure of a portion of their indebtedness to fluctuations in LIBOR
through certain interest rate swap agreements. The differences paid or
received under the interest rate swap agreements are charged or credited
to interest expense. Gains or losses resulting from swap agreements for
the purposes of hedging anticipated transactions are deferred until the
gain or the loss is recognized on the hedged item. As of June 30, 1996,
such differences were not significant.
3. ADDITIONAL INFORMATION ON THE STATEMENTS OF CASH FLOWS
In the preparation of the consolidated statements of cash flows, cash and cash
equivalents include investments with original maturities of three months or
less. Included in short-term investments at June 30, 1996, was approximately
$95,984 of cash equivalents. The Company uses the indirect method which
requires a series of adjustments to the year's income to obtain the cash flows
generated by operations.
Cash paid for income tax and interest during the six-month periods ended June
30, 1996, and 1995 is as follows:
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
JUNE 30
---------------------
1996 1995
- ---------------------------------------------------------------------------
Income tax 30,201 33,257
Interest (net of amounts capitalized) 24,029 29,918
Non-cash investing activities for the six-month periods ended June 30, 1996,
and 1995 include fixed assets acquisitions amounting to Ps.2,416 and Ps.3,705,
respectively, unpaid at the end of each period.
4. REGULATORY MATTERS
(a) GENERAL
TGS's natural gas transportation business is regulated by law No.
24.076, and by regulations issued by Ente Nacional Regulador del Gas
(ENARGAS), which among other things, sets the basis for the calculation
of tariffs and monitors such tariffs. Current transportation tariffs
are calculated in U.S. dollars and converted into Argentine pesos
pursuant to the Convertibility Law as of the billing date. The basic
gas transportation tariffs charged by TGS were established upon the
privatization and may be adjusted in the following cases: (i)
semiannually and automatically to reflect changes in the U.S. producer
price index-industrial commodities (PPI) and, (ii) every five years by
ENARGAS's review. Also, subject to ENARGAS's approval, tariffs may be
adjusted to reflect nonrecurring circumstances or tax changes (other
than income tax).
Effective January 1, 1996, transportation rates decreased by 0.16% as a
result of a decline in the PPI.
Effective July 1, 1996, transportation rates increased by 1.51% as a
result of an increase in PPI.
The License stipulates, among other restrictions, that TGS may not
assume the debts of CIESA, or grant credit, encumber its assets or
grant any other benefit to CIESA's creditors.
Under the Natural Gas Act, the regulations thereunder and the pertinent
provisions and formulas contained in the License, ENARGAS is
responsible for determining the rates that are to be effective during
each succeeding five-year period following the initial five-year period
ending December 28, 1997. This determination is to be made on the basis
of rules which ENARGAS was required to promulgate not later than
December 28, 1995. On March 12, 1996, ENARGAS sent a preliminary note
on such rules to the licensee companies, including TGS, partially
establishing the methodology for the calculation of the investment and
efficiency factors and requiring the licensees to file their
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
investment plans on June 28, 1996. In July 1996, ENARGAS issued a note
postponing the investment plan filing date to August 13, 1996, and
establishing the cost of capital for the calculation of the efficiency
and investment factors. TGS filed its investment plan on August 13,
1996. Such cost of capital (11.3%) is a weighted average cost of
capital and is net of an estimated future annual inflation rate of
1.9%.
The gas processing activity is not regulated by ENARGAS, and as
provided in the Transfer Contract between The National Government, Gas
del Estado Sociedad del Estado and TGS dated December 28, 1992
(Transfer Contract), is organized as a division within TGS and
maintains separate accounting information.
(b) MANDATORY INVESTMENT PROGRAM
As stipulated by the License, TGS is required to complete a
mandatory, five- year investment plan which began in 1993 on its
natural gas pipeline system totaling US$153 million, representing
US$30.6 million per year. This mandatory investment plan is related
to the operational capability and public safety of the pipeline system
and includes, among others, cathodic protection, internal
inspection and pipeline replacement and recoating. ENARGAS may in
its judgment levy a fine equal to any amount not actually invested.
In connection with 1993 mandatory investments, ENARGAS has completely
reimbursed the US$1.4 million deposit made by TGS as a guarantee of
works which were incomplete in ENARGAS's opinion.
ENARGAS has informed TGS that it will reimburse a US$4.5 million
deposit as a guarantee for the completion of certain 1994 mandatory
investments, which in ENARGAS's opinion had not been performed by TGS.
TGS has informed ENARGAS that it has exceeded the required amounts for
1995 mandatory investments and has completed all of the required work.
ENARGAS's opinion on this matter is still pending.
5. LEGAL MATTERS
In April 1996, GdE filed a claim seeking reimbursement from TGS of US$23
million paid by GdE under purchase orders issued in connection with two
compressor plants. TGS has recorded the cost of such plants as property, plant
and equipment valued at Ps.4.8 million based on the replacement cost of similar
compressor equipment. TGS's management believes that final resolution of this
matter will not have a material adverse effect on TGS's financial position or
results of operations.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
GdE has not fulfilled the obligations set forth in the Transfer Contract and in
the License in connection with its responsibility to register the easements
relating to the pipeline system, which have not been properly recorded, and for
related payments to property owners of any required royalties or fees. In
order to fulfill its investment program related to the system integrity and
public safety required by the License, TGS partially assumed such obligations
and has filed a claim against GdE to recover the amounts paid. The total paid
by TGS as of June 30, 1996, totaled approximately US$4.1 million.
In August 1994, Tierra del Fuego Province increased the turnover tax from 3% to
4.5% and reduced it to 3.5% in May 1996. As of June 30, 1996, the cumulative
effect of the increase amounted to approximately Ps.2.2 million.
According to the procedures stipulated in the License for rate adjustments, TGS
requested ENARGAS to provide adjustments to its tariffs which request was
denied. Subsequently, TGS appealed ENARGAS's resolution to the Federal Courts
of Argentina, which appeal was recently rejected. Consequently, TGS asked the
COMISION FEDERAL DE IMPUESTOS if the turnover tax increase stipulated by the
Provincial Government was in compliance with the Pacto Fiscal and is currently
waiting for a reply.
Also, effective July 1, 1996, the Neuqu<e'>n Province increased the turnover
tax from 2% to 3% which will generate a Ps.2.0 million projected decline in
annual net revenues. TGS has recently filed a claim before ENARGAS seeking an
adjustment to its rates.
In addition to the matters discussed above, TGS is a party to certain lawsuits
and administrative proceedings before various courts and governmental agencies
arising in the ordinary course of business. TGS's management believes that the
final outcome of such lawsuits and proceedings will not have a material adverse
effect on TGS's financial position and results of operations.
6. OTHER MATTERS
(a) DEBT ISSUANCE
In April 1996, TGS filed a US$350 million shelf registration with the
SEC in order to issue debt securities from time to time in the United
States. Under Argentine law, TGS established a Global Program approved
by the Comisi<o'>n Nacional de Valores. During April 1996, TGS issued
US$150 million of bonds with an effective annual interest rate of 9.6%
for a term of five years as part of its Global Program. Approximately
US$100 million of the proceeds were used to retire short-term debt and
the remainder for other corporate purposes.
In May 1996, CIESA entered into a bridge loan facility for US$220
million with a group of banks led by Goldman Sachs & Co. and
Soci<e'>t<e'> G<e'>n<e'>ral<e'> due in 18 months or to be repaid with
the proceeds of any
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
debt offering placed before such date. Interest is payable quarterly
based on the Eurodollar rate for deposits plus 2.4% for the first six
months increasing to a maximum of 3.5% for the last three months. The
proceeds were used to retire the US$215 million loan agreement with
Morgan Guaranty Company of New York together with the related TGS share
pledge and the interest rate swap contract, which expired in May 1996.
Under the terms of the US$220 million bridge loan facility, CIESA is
subject to certain restrictions, among others: total guarantees given
cannot exceed a certain amount, a minimum interest coverage, a level of
consolidated indebtedness (including TGS debt) not to exceed 60% of net
consolidated assets and the voting rights of at least 51% of TGS's stock
should be held by CIESA.
TGS believes that cash flows from operations supplemented with external
debt financing will provide sufficient liquidity to fund its capital
expenditures, pay dividends, cover its debt service and provide
sufficient working capital.
(b) SWAP AGREEMENTS
As of June 30, 1996, TGS had outstanding interest rate swap agreements,
with major financial institutions, which effectively convert US$191
million of floating LIBOR based debt to fixed rates (ranging from 4.89%
to 6.06%); US$88 million related to the YPF debt; US$53 million
covering the Eximbank credit facility and US$50 million related to the
syndicated loan agreement. As of June 30, 1996, amounts payable or
receivable under the existing swap agreements were not significant.
Furthermore, during the period, in contemplation of debt issuance, TGS
entered into swap agreements which effectively locked in the rate on
the five-year U.S. Treasury Bond at an average rate of 5.39% covering
US$150 million. Such Treasury lock agreements were executed upon the
issuance of the medium-term notes on April 25, 1996, generating an
approximate US$6 million deferred gain which will be amortized over the
term of this issuance (five years).
(c) DIVIDENDS
On August 26, 1996, CIESA paid a Ps.48 million interim cash dividend
based on first half of 1996 net income.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
7. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY
THE COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The accompanying financial statements which have been prepared on the basis
disclosed in Note 2 differ in certain respects from United States of America
Generally Accepted Accounting Principles (U.S. GAAP).
The differences have been reflected in the financial information provided below
and principally relate to the following items:
(a) RESTATEMENTS OF FINANCIAL STATEMENTS FOR GENERAL PRICE-LEVEL CHANGES
Argentine GAAP requires the restatement of all financial statements to
constant Argentine pesos. However, as described in Note 2(a), effective
September 1, 1995, the IGJ required the discontinuance of inflation
accounting. The effect of this discontinuance on net income and
shareholders' equity (as set forth in Note 2(a)) is not material.
This restatement merely updates the financial statement amounts for all
years presented to constant Argentine pesos, and does not change prior
period financial statements in any other way. Accordingly, all
nonmonetary assets and income statement amounts have been restated to
reflect changes in the Argentine GLWPI, from the date the assets were
acquired or the transaction took place, to August 31, 1995. The gain
(loss) on exposure to inflation included in income reflects the effect
of Argentine inflation on the monetary liabilities of the Company
during the period, net of the effect of inflation on monetary assets
held.
Under U.S. GAAP, account balances and transactions are stated in the
units of currency of the period when the transactions originated. This
accounting model is commonly known as the historical cost basis of
accounting. SEC rules establish that foreign private issuers that
prepare their financial statements in a reporting currency that
comprehensively includes the effects of price level changes are not
required to eliminate such effects in the reconciliation to U.S. GAAP.
Therefore, the U.S. GAAP reconciliation of net income and shareholders'
equity shown in paragraph (g) below does not reflect the effect of the
general price level restatement as a difference.
(b) INCOME TAXES
Argentine GAAP income tax expense is based upon the estimated current
income tax liability to the DIRECCI<o'>N GENERAL IMPOSITIVIA. When
income and expense recognition for income tax purposes does not occur
in the same period as income and expense recognition for financial
statement purposes, the recording of the resultant differences is not a
common practice among Argentine corporations. Under U.S. GAAP,
Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting
for Income
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Taxes," requires the liability method be used to account for deferred
taxes. Under this method, deferred taxes are recorded for temporary
differences that arise between the financial and tax basis of assets
and liabilities at each reporting date and for tax attributes. Under
current Argentine tax regulations, the effects of inflation are not
included in the determination of taxable income nor in the tax basis of
assets or liabilities. Accordingly, the net deferred tax liability or
asset included in the U.S. GAAP reconciliation contains the effects of
inflation on nonmonetary assets.
On September 27, 1996, the Argentine Government increased the income
tax rate from 30% to 33%, applicable for companies with year end
financial statement closing dates after September 28, 1996, retroactive
to the beginning of such fiscal years.
(c) INTANGIBLE ASSETS
Under Argentine GAAP, costs such as organization and pre-operating
expenses, costs associated with voluntary retirement programs and
cancellation costs of commitments assumed incurred in the acquisition
and start-up of a privatized company, may be deferred and amortized
over the resultant period of benefit. Under U.S. GAAP, Accounting
Principles Board (APB) Opinion No. 16 "Business Combinations," (APB 16)
provides that, for the acquisition of stock or assets under the
purchase method, the cost of an acquired company should be allocated to
the assets acquired and liabilities assumed. The only difference
between U.S. and Argentine GAAP related to qualifying liabilities
assumed is that for Argentine GAAP, the offsetting purchase price is
allocated to intangible assets and for U.S. GAAP, the offsetting
purchase price is allocated to the acquired assets which, in this case,
is property, plant and equipment.
Therefore, the U.S. GAAP reconciliation of net income and shareholders'
equity shown in paragraph (g) below does not reflect any differences
related to assumed liabilities in the acquisition of the capital stock
of TGS.
(d) VACATION ACCRUAL
Under Argentine GAAP, there are no specific requirements governing the
recognition of the accrual for vacations. The acceptable practice in
Argentina is to charge vacations to expense when taken and to accrue
only the amount of vacation in excess of the normal remuneration. Under
U.S. GAAP, vacation expense is fully accrued in the period the employee
renders service to earn such vacation.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
(e) VALUATION OF PROPERTY, PLANT AND EQUIPMENT
Under Argentine GAAP transferred assets were valued as described in
Note 2(a). Under U.S. GAAP, APB 16 provides guidance for the valuation
of property, plant and equipment in connection with an acquisition. As
CIESA acquired 70% of the capital stock of TGS, the fixed assets
transferred should have been valued at the price effectively paid for
such 70%, plus the inflation adjusted historical cost carried by GdE
for the remaining 30%. The condition of GdE's books and records
(specifically that no separate financial statements or financial
information was kept with respect to transportation operations or the
operation of assets transferred to TGS) and the unavailability of any
1992 GdE financial information made it impossible to determine
historical cost. Management believes, based on information maintained
by the Argentine Government Public Notary, that the fair value of the
transferred assets recorded on its books was significantly below the
1991 GdE historical book values brought forward to 1992 and restated in
constant Argentine pesos at December 28, 1992, adjusted for applying
purchase accounting for the transaction under APB 16. Part of the
acquisition price for TGS's capital stock included a fixed face value
of bonds issued by the Argentine Government. At the offer for bids in
1992, the Argentine Government fixed a discount rate on such bonds in
determining the total purchase price and as the ultimate basis used in
assigning the book values to the fixed assets. On the date of payments
the market value of such bonds was generally below the values fixed by
the Argentine Government. As required by U.S. GAAP under APB 16 the
cost of an asset is the fair value of assets distributed. Accordingly,
CIESA's investment in TGS and CIESA's interest in the underlying assets
have been adjusted by the difference in the fixed versus fair value of
such bonds. Therefore, no adjustment has been recorded in the U.S. GAAP
reconciliation related to the valuation of property, plant and
equipment except for the effects of applying purchase accounting to
CIESA in valuing the bonds under APB 16 as discussed above.
(f) REGULATORY MATTERS
TGS provides the public service of natural gas transportation through
the Southern Gas Pipeline System and is therefore subject to the
regulatory control of ENARGAS.
Argentine Law No. 24,076 (the Natural Gas Act) and its regulatory
decree (No. 1,738/92) state that TGS's tariffs shall provide an
opportunity to collect revenues sufficient to recover all proper
operating costs reasonably applicable to the service, taxes,
depreciation and a reasonable rate of return, and that such return
shall be similar to the return in businesses having equivalent or
comparable risks, and shall be related to the degree of efficiency and
satisfactory performance of the services.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
The License states that the new maximum tariffs will be established
every five years calculated by applying the existing tariff to an
investment factor and efficiency factor.
Until the specific regulations mentioned are issued, the Company will
not be in a position to determine whether the conditions for the
applicability of SFAS No. 71 "Accounting for the Effects of certain
Types of Regulation," (SFAS No. 71) would be met by TGS (specifically,
whether the tariff rates are designed to recover TGS's cost of
providing services). If applicable, SFAS No. 71 would allow a company
to capitalize all or part of incurred costs that would otherwise be
charged to expense if it is probable that future revenues will result
from the inclusion of those costs in the rate-making process and will
be provided to permit recovery of the increased cost rather than to
provide for expected levels of similar future costs. Additionally, if
rates are based on allowable costs that include an allowance for the
cost of funds used during construction (consisting of an equity
component and a debt component), a company should capitalize and
increase net income by the amount used for rate-making purposes rather
than capitalizing interest in accordance with SFAS No. 34
"Capitalization of Interest Cost."
However, if the provisions of SFAS No. 71 were applicable to TGS, the
Company's management believes that they would not have a significant
effect on the U.S. GAAP reconciliation of net income and shareholders'
equity shown in paragraph (g) below.
(g) RECONCILIATION OF NET INCOME AND SHAREHOLDERS' EQUITY TO U.S. GAAP
The following is a summary of the significant adjustments to net income
for the six-month periods ended June 30, 1996, and 1995 and to
shareholders' equity as of June 30, 1996, which would be required if
U.S. GAAP had been applied instead of Argentine GAAP in the
accompanying financial statements.
These adjustments have been calculated based on financial information
restated to reflect changes in the Argentine GLWPI as described in
Note 2(a) and may not reflect the adjustments necessary to conform with
U.S. GAAP under the historical cost basis of accounting required by the
SEC for U.S. registrants.
COMPA<N~>IA DE INVERSIONES DE ENERGIA S.A.
AND CONTROLLED COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
JUNE 30,
-----------------------
1996 1995
- ------------------------------------------------------------------------------
Net income in accordance with Argentine
GAAP 48,996 68,260
U.S. GAAP adjustments (decrease) increase
due to:
Deferred income taxes (2,493) (27,462)
Change in minority interest 578 5,868
Others, not individually significant 516 516
----------------------
Approximate net income in accordance
with U.S. GAAP 47,597 47,182
=========================
Earnings per common share
Amounts per accompanying financial
statements 0.13 0.18
Approximate amounts under U.S. GAAP 0.13 0.13
Average number of common shares 374,122,880 374,122,880
=========================
JUNE 30,
1996
- ------------------------------------------------------------------------------
Shareholders' equity in accordance with
Argentine GAAP 522,623
U.S. GAAP adjustments (decrease) increase due to:
Adjustment for difference in market value
and Government parity of acquisition
Bonds, net (32,631)
Provision for vacation accrual (2,730)
Deferred income taxes (82,475)
Change in minority interest 18,519
----------
Approximate shareholders' equity in
accordance with U.S. GAAP 423,306
==========
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma consolidated financial statements reflect the
acquisition by Enron Global Power & Pipelines L.L.C. (EPP) of an additional net
8 1/3% equity interest in the net assets of Compa<n~>ia de Inversiones de
Energ<i'>a S.A. (CIESA) on July 31, 1996, as more fully discussed in the
related notes. The pro forma consolidated financial statements should be read
in conjunction with the financial statements of EPP and CIESA included in EPP's
Annual Report on Form 10-K for the year ended December 31, 1995, EPP's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996, and June
30, 1996, and the financial statements of CIESA included elsewhere in this
Current Report on Form 8-K. The pro forma consolidated financial statements
are not intended to be indicative of actual operating results or financial
position had the transaction occurred earlier, nor do they purport to indicate
operating results or financial position which may be attained in the future.
ENRON GLOBAL POWER & PIPELINES L.L.C.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(In Thousands of United States Dollars)
(Unaudited)
HISTORICAL ADJUSTMENTS PRO FORMA
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 32,024 $ - $ 32,024
Accounts receivable 4,709 - 4,709
Current portion of notes receivable 987 - 987
------------------------------------------
Total Current Assets 37,720 - 37,720
------------------------------------------
Investments in and Advances to
Unconsolidated Subsidiaries 220,528 78,333 (A) 298,861
Note receivable 7,526 - 7,526
Other 1,109 - 1,109
------------------------------------------
Total Assets $ 266,883 $ 78,333 $ 345,216
==========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 6,437 $ - $ 6,437
Accrued taxes 1,562 - 1,562
Short-term debt - 78,333 (A) 78,333
------------------------------------------
Total Current Liabilities 7,999 78,333 86,332
------------------------------------------
Other 1,686 - 1,686
Deferred Income Taxes 3,531 - 3,531
Shareholders' Equity
Common shares 219,478 - 219,478
Retained earnings 34,189 - 34,189
------------------------------------------
Total Shareholders' Equity 253,667 - 253,667
------------------------------------------
Total Liabilities and Shareholders'
Equity $ 266,883 $ 78,333 $ 345,216
==========================================
The accompanying notes are an integral part of these consolidated financial
statements.
ENRON GLOBAL POWER & PIPELINES L.L.C.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
HISTORICAL ADJUSTMENTS PRO FORMA
- --------------------------------------------------------------------------------
Technical Assistance Fees $ 10,033 $ 393 (B) $ 10,426
Equity in Earnings of
Unconsolidated Subsidiaries:
Pipeline operations 22,154 6,232 (C) 28,386
Power operations 11,274 - 11,274
---------------------------------------------
Technical Assistance Fees and
Equity in Earnings 43,461 6,625 50,086
General and Administrative Expenses (6,036) - (6,036)
Taxes Other Than Income (600) (24) (D) (624)
Other Income (Expense), net 1,773 (5,277) (E) (3,504)
--------------------------------------------
Income Before Income Taxes 38,598 1,324 39,922
Income Taxes 3,571 (1,472) (F) 2,099
--------------------------------------------
Net Income $ 35,027 $ 2,796 $ 37,823
============================================
Net Income Per Common Share $ 1.68 $ 1.81
========== =========
Average Number of Common Shares
Used in Computation 20,842 20,842
============================================
The accompanying notes are an integral part of these consolidated financial
statements.
ENRON GLOBAL POWER & PIPELINES L.L.C.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS OF UNITED STATES DOLLARS,
EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
HISTORICAL ADJUSTMENTS PRO FORMA
- -------------------------------------------------------------------------------
Technical Assistance Fees $ 5,308 $ 204 (B) $ 5,512
Equity in Earnings of
Unconsolidated Subsidiaries:
Pipeline operations 16,529 3,474 (C) 20,003
Power operations 7,855 - 7,855
-----------------------------------------
Technical Assistance Fees and
Equity in Earnings 29,692 3,678 33,370
General and Administrative Expenses (2,911) - (2,911)
Taxes Other Than Income (293) (12) (D) (305)
Other Income (Expense), net (1,079) (2,428) (E) (3,507)
-----------------------------------------
Income Before Income Taxes 25,409 1,238 26,647
Income Taxes 2,313 (738) (F) 1,575
-----------------------------------------
Net Income $ 23,096 $ 1,976 $ 25,072
=========================================
Net Income Per Common Share $ 0.96 $ 1.04
========= =========
Average Number of Common Shares
Used in Computation 24,024 24,024
=========================================
The accompanying notes are an integral part of these consolidated financial
statements.
ENRON GLOBAL POWER & PIPELINES L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 30, 1996, Enron Global Power & Pipelines L.L.C. (EPP), through its
wholly owned subsidiary, Enron Pipeline Company - Argentina S.A. (EPCA),
entered into a Stock Purchase Agreement among Argentina Private Development
Trust Company Limited (APDT), EPCA and Maip<u'> Inversora S.A. (Maip<u'>), a
subsidiary of Perez Companc S.A. (Perez), whereby EPP and Perez agreed to
acquire an additional 25% interest and other rights in CIESA for $235 million.
The acquisition closed on July 31, 1996, with EPP and Perez each buying a
12 1/2% interest in CIESA. CIESA owns 70% of the common stock of Transportadora
de Gas del Sur (TGS), a 4,104-mile gas pipeline system in Argentina. The
pipeline is the largest in South America, with a capacity of 1.9 billion cubic
feet of gas per day.
Additionally, on July 31, 1996, EPP entered into an agreement among Enron
Corp., Enron Holding Company L.L.C. (EHC), EPCA and EPP, whereby (a) Enron
Corp. agreed to loan up to $117.5 million to EPP or a subsidiary thereof in
connection with the acquisition of the additional interest in CIESA, (b) EPP
granted to EHC an option to acquire up to $47 million of EPP common shares
(proceeds of which will be used to repay debt to Enron) and (c) EPP granted to
Enron Corp. the right to acquire a 4 1/6% interest in CIESA from EPP for
approximately $39 million (proceeds of which will be used to repay debt to
Enron Corp.).
On August 8, 1996, Enron Corp. and Perez entered into a stock purchase
agreement to acquire from Citicorp Equity Investments S.A. (CEI) a 25% interest
and other rights in CIESA for a total of approximately $249 million. Perez,
through Maip<u'>, will acquire 12 1/2% of CIESA and Enron Corp. will acquire 12
1/2%. The transaction is expected to close in mid-November 1996.
On August 23, 1996, Enron Corp. exercised its right to acquire the 4 1/6%
interest in CIESA from EPP.
EPP and Perez each currently owns a 37 1/2% interest in CIESA. As a result of
the acquisition of the CEI interest in CIESA and the exercise of Enron Corp.'s
right to acquire a 4 1/6% CIESA interest from EPP, which are subject to the
approval of ENARGAS, the Argentine regulatory authority, and the fulfillment of
certain requirements, Perez will hold 50% interest in CIESA, EPP will
indirectly own 33 1/3% and Enron Corp. will beneficially indirectly own 16
2/3%. Voting rights with respect to the CIESA interests will be divided equally
between Perez and EPP.
The pro forma consolidated financial statements illustrate the effects of EPP's
acquisition of an additional 8 1/3% equity interest in CIESA and the related
financing of the transaction. The subsequent sale to Enron Corp. of the 4 1/6%
interest was between entities under common control and, accordingly, the
activity between the date of acquisition and subsequent sale to Enron Corp. has
been eliminated. The pro forma consolidated financial statements have been
prepared as if the transactions had taken place on June 30, 1996, in the case
of the pro forma consolidated balance sheet, or as of January 1, 1995, in the
case of the pro forma consolidated statements of income.
ENRON GLOBAL POWER & PIPELINES L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
The acquisition will be accounted for as a purchase. The difference between the
acquisition price and proportionate share of the underlying U.S. GAAP equity of
CIESA ($46.1 million) will be amortized over the remaining life of the License.
(A) Reflects the purchase of an additional 8 1/3% interest in CIESA with
funds borrowed from Enron Corp. due September 30, 1997, bearing interest
at LIBOR plus 0.75%. A 1/8% change in the interest rate would change the
annual interest expense by $98 thousand.
(B) Reflects the additional technical assistance fees associated with the
8 1/3% interest in CIESA. APDT was entitled to receive less than a
proportionate share of the total technical assistance fees received by
EPCA.
(C) Reflects the additional equity in earnings net of amortization of excess
investment.
(D) Reflects additional turnover tax in Argentina related to the additional
technical assistance fees.
(E) Reflects interest expense resulting from the financing of the purchase.
(F) Reflects the net tax benefit resulting from interest expense partially
offset by increased income taxes resulting from increased technical
assistance fees.
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 GLOBAL POWER & PIPELINES L.L.C.
Date: October 11, 1996 By: /S/ PAULA H. RIEKER
-----------------------------------------
Paula H. Rieker
Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NO. METHOD OF FILING
- ------- ----------------
23.1 -Consent of Independent Public Accountants Filed herewith
electronically
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Form 8-K of our report dated February 6, 1996, on the
financial statements of Compa<n~><i'>a de Inversions de Energ<i'>a S.A.
included in Enron Global Power & Pipelines L.L.C.'s Form 10-K for the year
ended December 31, 1995.
Pistrelli, Diaz y Asociados
Buenos Aires, Argentina
October 7, 1996
