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: February 27, 2001
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)
1 of 63
ENRON CORP. AND SUBSIDIARIES
Item 5. Other Events.
(a) Management's Discussion and Analysis of Financial
Condition and Results of Operations
(b) Financial Risk Management
(c) Financial Statements of Enron Corp. and its
Consolidated Subsidiaries for the fiscal year ended
December 31, 2000, including Report of Arthur Andersen
LLP, Independent Public Accountants
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
Exhibit 23 Consent of Arthur Andersen LLP
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 hereunto duly authorized.
ENRON CORP.
Date: February 27, 2001 By: RICHARD A. CAUSEY
Richard A. Causey
Executive Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
ENRON CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
Management's Discussion and Analysis of Financial 4
Condition and Results of Operations
Financial Risk Management 19
Information Regarding Forward-Looking Statements 22
Report of Independent Public Accountants 23
Consolidated Income Statement for the years ended
December 31, 2000, 1999 and 1998 24
Consolidated Statement of Comprehensive Income for
the years ended December 31, 2000, 1999 and 1998 24
Consolidated Balance Sheet as of December 31, 2000
and 1999 25
Consolidated Statement of Cash Flows for the years
ended December 31, 2000, 1999 and 1998 27
Consolidated Statement of Changes in Shareholders'
Equity for the years ended December 31, 2000,
1999 and 1998 28
Notes to Consolidated Financial Statements 29
Exhibits
Exhibit 12 - Computation of Ratio of Earnings to
Fixed Charges 62
Exhibit 23 - Consent of Arthur Andersen LLP 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following review of the results of operations and
financial condition of Enron Corp. and its subsidiaries and
affiliates (Enron) should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Consolidated Net Income
Enron's net income for 2000 was $979 million compared to $893
million in 1999 and $703 million in 1998. Items impacting
comparability are discussed in the respective segment results.
Net income before items impacting comparability was $1,266
million, $957 million and $698 million, respectively, in 2000,
1999 and 1998. Enron's business is divided into five segments
and Exploration and Production (Enron Oil & Gas Company) through
August 16, 1999 (see Note 2 to the Consolidated Financial
Statements). Enron's operating segments include:
Transportation and Distribution. Transportation and
Distribution consists of Enron Transportation Services and
Portland General. Transportation Services 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 interests in Northern Border Partners, L.P. and
EOTT Energy Partners, L.P. (EOTT).
Wholesale Services. Wholesale Services includes Enron's
wholesale businesses around the world. Wholesale Services
operates in developed markets such as North America and Europe,
as well as developing or newly deregulating markets including
South America, India and Japan.
Retail Energy Services. Enron, through its subsidiary Enron
Energy Services, LLC (Energy Services), is extending its 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.
Broadband Services. Enron's broadband services business
(Broadband Services) provides customers with a single source for
broadband services, including bandwidth intermediation and the
delivery of premium content.
Corporate and Other. Corporate and Other includes Enron's
investment in Azurix Corp. (Azurix), which provides water and wastewater
services, results of Enron Renewable Energy Corp. (EREC), which
develops and constructs wind-generated power projects, and the
operations of Enron's methanol and MTBE plants as well as overall
corporate activities of Enron.
Net income includes the following:
(In millions) 2000 1999 1998
After-tax results before items impacting
comparability $1,266 $ 957 $ 698
Items impacting comparability:(a)
Charge to reflect impairment by Azurix (326) - -
Gain on TNPC, Inc. (The New Power
Company), net 39 - -
Gains on sales of subsidiary stock - 345 45
MTBE-related charges - (278) (40)
Cumulative effect of accounting
changes - (131) -
Net income $ 979 $ 893 $ 703
<FN>
(a) Tax affected at 35%, except where a specific tax rate
applied.
Diluted earnings per share of common stock were as follows:
2000 1999 1998
Diluted earnings per share(a):
After-tax results before items
impacting comparability $1.47 $1.18 $1.00
Items impacting comparability:
Charge to reflect impairment by Azurix (0.40) - -
Gain on The New Power Company, net 0.05 - -
Gains on sales of subsidiary stock - 0.45 0.07
MTBE-related charges - (0.36) (0.06)
Cumulative effect of accounting changes - (0.17) -
Diluted earnings per share $1.12 $1.10 $1.01
<FN>
(a) Restated to reflect the two-for-one stock split effective
August 13, 1999.
Income Before Interest, Minority Interests and Income Taxes
The following table presents income before interest, minority
interests and income taxes (IBIT) for each of Enron's operating
segments (see Note 20 to the Consolidated Financial Statements):
(In millions) 2000 1999 1998
Transportation and Distribution:
Transportation Services $ 391 $ 380 $ 351
Portland General 341 305 286
Wholesale Services 2,260 1,317 968
Retail Energy Services 165 (68) (119)
Broadband Services (60) - -
Exploration and Production - 65 128
Corporate and Other (615) (4) (32)
Income before interest,
minority interests and taxes $2,482 $1,995 $1,582
Transportation and Distribution
Transportation Services. The following table summarizes total
volumes transported by each of Enron's interstate natural gas
pipelines.
2000 1999 1998
Total volumes transported (BBtu/d)(a)
Northern Natural Gas 3,529 3,820 4,098
Transwestern Pipeline 1,657 1,462 1,608
Florida Gas Transmission 1,501 1,495 1,324
Northern Border Pipeline 2,443 2,405 1,770
<FN>
(a) Billion British thermal units per day. Amounts reflect
100% of each entity's throughput volumes. Florida Gas and
Northern Border Pipeline are unconsolidated equity affiliates.
Significant components of IBIT are as follows:
(In millions) 2000 1999 1998
Net revenues $650 $626 $640
Operating expenses 280 264 276
Depreciation and amortization 67 66 70
Equity earnings 63 38 32
Other, net 25 46 25
Income before interest and taxes $391 $380 $351
Net Revenues
Revenues, net of cost of sales, of Transportation Services
increased $24 million (4%) during 2000 and declined $14 million
(2%) during 1999 as compared to 1998. In 2000, Transportation
Services' interstate pipelines produced strong financial results.
The volumes transported by Transwestern increased 13 percent in
2000 as compared to 1999. Northern's 2000 gross margin was
comparable to 1999 despite an 8 percent decline in volumes
transported. Net revenues in 2000 were favorably impacted by
transportation revenues from Transwestern's Gallup, New Mexico
expansion and by sales from Northern's gas storage inventory. The
decrease in net revenue in 1999 compared to 1998 was primarily
due to the expiration, in October 1998, of certain transition
cost recovery surcharges, partially offset by a Northern sale of
gas storage inventory in 1999.
Operating Expenses
Operating expenses, including depreciation and amortization,
of Transportation Services increased $17 million (5%) during 2000
primarily as a result of higher overhead costs related to
information technology and employee benefits. Operating expenses
decreased $16 million (5%) during 1999 primarily as a result of
the expiration of certain transition cost recovery surcharges
which had been recovered through revenues.
Equity Earnings
Equity in earnings of unconsolidated equity affiliates
increased $25 million and $6 million in 2000 and 1999,
respectively. The increase in equity earnings in 2000 as
compared to 1999 primarily relates to Enron's investment in
Florida Gas. The increase in earnings in 1999 as compared to
1998 was primarily a result of higher earnings from Northern
Border Pipeline and EOTT.
Other, Net
Other, net decreased $21 million in 2000 as compared to
1999 after increasing $21 million in 1999 as compared to 1998.
Included in 2000 were gains related to an energy commodity
contract and the sale of compressor-related equipment, while the
1999 amount included interest income earned in connection with
the financing of an acquisition by EOTT. The 1998 amount
included gains from the sale of an interest in an equity
investment, substantially offset by charges related to litigation.
Portland General. Portland General realized IBIT as follows:
(In millions) 2000 1999 1998
Revenues $2,256 $1,379 $1,196
Purchased power and fuel 1,461 639 451
Operating expenses 321 304 295
Depreciation and amortization 211 181 183
Other, net 78 50 19
Income before interest and taxes $ 341 $ 305 $ 286
Revenues, net of purchased power and fuel costs, increased $55
million in 2000 as compared to 1999. The increase is primarily
the result of a significant increase in the price of power sold
and an increase in wholesale sales, partially offset by higher
purchased power and fuel costs. Operating expenses increased
primarily due to increased plant maintenance costs related to
periodic overhauls. Depreciation and amortization increased in
2000 primarily as a result of increased regulatory amortization.
Other, net in 2000 included the impact of an Oregon Public
Utility Commission (OPUC) order allowing certain deregulation costs
to be deferred and recovered through rate cases, the settlement of
litigation related to the Trojan nuclear power generating facility
and gains on the sale of certain generation-related assets.
Revenues, net of purchased power and fuel costs, decreased $5
million in 1999 as compared to 1998. Revenues increased
primarily as a result of an increase in the number of customers
served by Portland General. Higher purchased power and fuel
costs, which increased 42 percent in 1999, offset the increase in
revenues. Other income, net increased $31 million in 1999 as
compared to 1998 primarily as a result of a gain recognized on
the sale of certain assets.
In 1999, Enron entered into an agreement to sell Portland
General Electric Company to Sierra Pacific Resources. See Note 2
to the Consolidated Financial Statements.
Statistics for Portland General are as follows:
2000 1999 1998
Electricity sales (thousand MWh)(a)
Residential 7,433 7,404 7,101
Commercial 7,527 7,392 6,781
Industrial 4,912 4,463 3,562
Total retail 19,872 19,259 17,444
Wholesale 18,548 12,612 10,869
Total electricity sales 38,420 31,871 28,313
Resource mix
Coal 11% 15% 16%
Combustion turbine 12 8 12
Hydro 6 9 9
Total generation 29 32 37
Firm purchases 63 57 56
Secondary purchases 8 11 7
Total resources 100% 100% 100%
Average variable power cost (Mills/KWh)(b)
Generation 14.5 11.3 8.6
Firm purchases 34.9 23.2 17.3
Secondary purchases 123.6 19.7 23.6
Total average variable power cost 37.2 20.0 15.6
Retail customers (end of period, thousands) 725 719 704
<FN>
(a) Thousand megawatt-hours.
(b) Mills (1/10 cent) per kilowatt-hour.
Outlook
Enron Transportation Services is expected to provide stable
earnings and cash flows during 2001. The four major natural gas
pipelines have strong competitive positions in their respective
markets as a result of efficient operating practices, competitive
rates and favorable market conditions. Enron Transportation
Services expects to continue to pursue demand-driven expansion
opportunities. Florida Gas expects to complete an expansion that
will increase throughput by 198 million cubic feet per day (MMcf/d)
by mid-2001. Florida Gas has received preliminary approval from the
Federal Energy Regulatory Commission for an expansion of 428 MMcf/d,
expected to be completed by early 2003, and is also pursuing an
expansion of 150 MMcf/d that is expected to be completed in mid-2003.
Transwestern completed an expansion of 140 MMcf/d in May 2000 and
is pursuing an expansion of 50 MMcf/d that is expected to be
completed in 2001 and an additional expansion of up to 150 MMcf/d
that is expected to be completed in 2002. Northern Border
Partners is evaluating the development of a 325 mile pipeline
with a range of capacity from 375 MMcf/d to 500 MMcf/d to connect
natural gas production in Wyoming to the Northern Border Pipeline
in Montana.
In 2001, Portland General anticipates purchased power and
fuel costs to remain at historically high levels. Portland
General has submitted a request with the OPUC to recover the
anticipated cost increase through a rate adjustment.
Wholesale Services
Enron builds its wholesale businesses through the creation of
networks involving selective asset ownership, contractual access
to third-party assets and market-making activities. Each market
in which Wholesale Services operates utilizes these components in
a slightly different manner and is at a different stage of
development. This network strategy has enabled Wholesale
Services to establish a leading position in its markets.
Wholesale Services' activities are categorized into two business
lines: (a) Commodity Sales and Services and (b) Assets and
Investments. Activities may be integrated into a bundled product
offering for Enron's customers.
Wholesale Services manages its portfolio of contracts and
assets in order to maximize value, minimize the associated risks
and provide overall liquidity. In doing so, Wholesale Services
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, Wholesale Services manages its
liquidity and exposure to third-party credit risk through
monetization of its contract portfolio or third-party insurance
contracts. Wholesale Services 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 investment's value.
The following table reflects IBIT for each business line:
(In millions) 2000 1999 1998
Commodity sales and services $1,630 $ 628 $ 411
Assets and investments 889 850 709
Unallocated expenses (259) (161) (152)
Income before interest,
minority interests and taxes $2,260 $1,317 $ 968
The following discussion analyzes the contributions to IBIT
for each business line.
Commodity Sales and Services. Wholesale Services provides
reliable commodity delivery and predictable pricing to its
customers through forwards and other 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 Wholesale Services' own
portfolio of contracts. Contracts associated with this activity
are accounted for using the mark-to-market method of accounting.
See Note 1 to the Consolidated Financial Statements. Wholesale
Services' market-making activity is facilitated through a network
of capabilities including selective asset ownership. Accordingly,
certain assets involved in the delivery of these services are
included in this business (such as intrastate natural gas pipelines,
gas storage facilities and certain electric generation assets).
Wholesale Services markets, transports and provides energy
commodities as reflected in the following table (including
intercompany amounts):
2000 1999 1998
Physical volumes (BBtue/d)(a)(b)
Gas:
United States 17,674 8,982 7,418
Canada 6,359 4,398 3,486
Europe and Other 3,637 1,572 1,251
27,670 14,952 12,155
Transportation volumes 649 575 559
Total gas volumes 28,319 15,527 12,714
Crude oil and Liquids 6,088 6,160 3,570
Electricity(c) 17,308 10,742 11,024
Total physical volumes (BBtue/d) 51,715 32,429 27,308
Electricity volumes (thousand MWh)
United States 578,787 380,518 401,843
Europe and Other 54,670 11,576 529
Total 633,457 392,094 402,372
Financial settlements (notional, BBtue/d) 196,148 99,337 75,266
<FN>
(a) Billion British thermal units equivalent per day.
(b) Includes third-party transactions by Enron Energy Services.
(c) Represents electricity volumes, converted to BBtue/d.
Earnings from commodity sales and services increased $1.0
billion (160%) in 2000 as compared to 1999. Increased profits
from North American gas and power marketing operations, European
power marketing operations as well as the value of new
businesses, such as pulp and paper, contributed to the earnings
growth of Enron's commodity sales and services business.
Continued market leadership in terms of volumes transacted,
significant increases in natural gas prices and price volatility
in both the gas and power markets were the key contributors to
increased profits in the gas and power intermediation businesses.
In late 1999, Wholesale Services launched an Internet-based
Ecommerce system, EnronOnline, which allows wholesale customers
to view Enron's real time pricing and to complete commodity
transactions with Enron as principal, with no direct interaction.
In its first full year of operation, EnronOnline positively
impacted wholesale volumes, which increased 59 percent over 1999
levels.
Earnings from commodity sales and services increased $217
million (53%) in 1999 as compared to 1998, reflecting strong
results from the intermediation businesses in both North America
and Europe, which include delivery of energy commodities and
associated risk management products. Wholesale Services also
successfully managed its overall portfolio of contracts,
particularly in minimizing credit exposures utilizing third-party
contracts. New product offerings in coal and pulp and paper
markets also added favorably to the results.
Assets and Investments. Enron's Wholesale businesses make
investments in various energy and certain related assets as a
part of its network strategy. Wholesale Services either
purchases the asset from a third party or develops and constructs
the asset. In most cases, Wholesale Services operates and
manages such assets. Earnings from these investments principally
result from operations of the assets or sales of ownership
interests.
Additionally, Wholesale Services invests in debt and equity
securities of energy and technology-related businesses, which may
also utilize Wholesale Services' 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, which are accounted for on a
fair value basis and are included in revenues, result from
changes in the market value of the securities. Wholesale Services
uses risk management disciplines, including hedging transactions,
to manage the impact of market price movements on its merchant
investments. See Note 4 to the Consolidated Financial Statements
for a summary of these investments.
Earnings from assets and investments increased $39 million
(5%) in 2000 as compared to 1999 as a result of an increase in
the value of Wholesale Services' merchant investments, partially
offset by lower gains from sales of energy assets. Earnings from
asset operations were comparable to 1999 levels. Earnings from
merchant investments were positively impacted by power-related
and energy investments, partially offset by the decline in value
of technology-related and certain energy-intensive industry
investments. Gains on sales of energy assets in 2000 included
the monetization of certain European energy operations.
Earnings from assets and investments increased $141 million
(20%) in 1999 as compared to 1998. During 1999, earnings from
Wholesale Services' energy-related assets increased, reflecting
the operation of the Dabhol Power Plant in India, ownership in
Elektro Eletricidade e Servicos S.A. (Elektro), a Brazilian
electric utility, and assets in various other developing markets.
Wholesale Services' merchant investments increased in value
during the year due to the expansion into certain technology-
related investments, partially offset by a decline in the value
of certain energy investments. In addition, Wholesale Services'
1999 earnings increased due to development and construction
activities, while gains on sales of energy assets declined.
Unallocated Expenses. Net unallocated expenses such as
systems expenses and performance-related costs increased in 2000
due to growth of Wholesale Services' existing businesses and
continued expansion into new markets.
Outlook
In 2000, Wholesale Services reinforced its leading positions
in the natural gas and power markets in both North America and
Europe. In the coming year, Wholesale Services plans to continue
to expand and refine its existing energy networks and to extend
its proven business model to new markets and industries.
In 2001, Wholesale Services plans to continue to fine-tune its
already successful existing energy networks. In North America,
Enron expects to complete the sale of five of its peaking power
plants located in the Midwest and its intrastate natural gas
pipeline. In each case, market conditions, such as increased
liquidity, have diminished the need to own physical assets. For
energy networks in other geographical areas where liquidity may
be an issue, Enron will evaluate whether its existing network
will benefit from additional physical assets. The existing networks
in North America and Europe should continue to provide opportunities
for sustained volume growth and increased profits.
The combination of knowledge gained in building networks in
key energy markets and the application of new technology, such as
EnronOnline, is expected to provide the basis to extend Wholesale
Services' business model to new markets and industries. In key
international markets, where deregulation is underway, Enron
plans to build energy networks by using the optimum combination
of acquiring or constructing physical assets and securing
contractual access to third party assets. Enron also plans to
replicate its business model to new industrial markets such as
metals, pulp, paper and lumber, coal and steel. Enron expects to
use its Ecommerce platform, EnronOnline, to accelerate the
penetration into these industries.
Earnings from Wholesale Services are dependent on the
origination and completion of transactions, some of which are
individually significant and which are impacted by market
conditions, the regulatory environment and customer
relationships. Wholesale Services' transactions have
historically been based on a diverse product portfolio, providing
a solid base of earnings. Enron's strengths, including its
ability to identify and respond to customer needs, access to
extensive physical assets and its integrated product offerings,
are important drivers of the expected continued earnings growth.
In addition, significant earnings are expected from Wholesale
Services' commodity portfolio and investments, which are subject
to market fluctuations. External factors, such as the amount of
volatility in market prices, impact the earnings opportunity
associated with Wholesale Services' business. Risk related to
these activities is managed using naturally offsetting
transactions and hedge transactions. The effectiveness of
Enron's risk management activities can have a material impact on
future earnings. See "Financial Risk Management" for a
discussion of market risk related to Wholesale Services.
Retail Energy Services
Energy Services sells or manages the delivery of natural gas,
electricity, liquids and other commodities to industrial and
commercial customers located in North America and Europe. 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. The commodity portion
of the contracts associated with this business are accounted for
using the mark-to-market method of accounting. See Note 1 to
the Consolidated Financial Statements.
(In millions) 2000 1999 1998
Revenues $4,615 $1,807 $1,072
Cost of sales 4,028 1,551 955
Operating expenses 449 308 210
Depreciation and amortization 38 29 31
Equity losses (60) - (2)
Other, net 63 13 7
IBIT before items impacting
comparability 103 (68) (119)
Items impacting comparability:
Gain on The New Power Company
stock issuance 121 - -
Retail Energy Services charges (59) - -
Income (loss) before interest, minority
interests and taxes $ 165 $ (68) $ (119)
Operating Results
Revenues and gross margin increased $2,808 million and $331
million, respectively, in 2000 compared to 1999, primarily
resulting from execution of commitments on its existing customer
base, long-term energy contracts originated in 2000 and the
increase in the value of Energy Services' contract portfolio.
Operating expenses increased as a result of costs incurred in
building the capabilities to deliver services on existing
customer contracts and in building Energy Services' outsourcing
business in Europe. Other, net in 2000 consisted primarily of
gains associated with the securitization of non-merchant equity
instruments. Equity losses reflect Energy Services' portion of
losses of The New Power Company.
Items impacting comparability in 2000 included a pre-tax gain
of $121 million related to the issuance of common stock by The
New Power Company and a charge of $59 million related to the
write-off of certain information technology and other costs.
The New Power Company, which is approximately 45 percent owned
by Enron, was formed to provide electricity and natural gas to
residential and small commercial customers in deregulated
energy markets in the United States.
Outlook
During 2001, Energy Services anticipates continued growth in
the demand for retail energy outsourcing solutions. Energy
Services will deliver these services to its existing customers,
while continuing to expand its commercial and industrial customer
base for total energy outsourcing. Energy Services also plans to
continue integrating its service delivery capabilities,
extend its business model to related markets and offer new
products.
Broadband Services
In implementing Enron's network strategy, Broadband Services
is constructing the Enron Intelligent Network, a nationwide
fiber optic network that consists of both fiber deployed by Enron
and acquired capacity on non-Enron networks and is managed by
Enron's Broadband Operating System software. 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. Enron's bandwidth-on-demand platform allows
delivery of high-bandwidth media-rich content such as video
streaming, high capacity data transport and video conferencing.
Broadband Services also makes investments in companies with
related technologies and with the potential for capital
appreciation. Earnings from these merchant investments, which
are accounted for on a fair value basis and are included in
revenues, result from changes in the market value of the
securities. Broadband Services uses risk management disciplines,
including hedging transactions, to manage the impact of market
price movements on its merchant investments. Broadband Services
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 investment's value.
The components of Broadband Services' businesses include the
development and construction of the Enron Intelligent Network,
sales of excess fiber and software, bandwidth intermediation
and the delivery of content. Significant components of Broadband
Services' results are as follows:
(In millions) 2000
Gross margin $318
Operating expenses 305
Depreciation and amortization 77
Other, net 4
Loss before interest, minority
interests and taxes $(60)
Broadband Services recognized a loss before interest, minority
interests and taxes of $60 million in 2000. Gross margin
included earnings from sales of excess fiber capacity, a
significant increase in the market value of Broadband Services'
merchant investments and the monetization of a portion of Enron's
broadband content delivery platform. Expenses incurred during
the period include expenses related to building the business and
depreciation and amortization.
Outlook
Broadband Services is extending Enron's proven business model
to the communications industry. In 2001, Enron expects to
further develop the Enron Intelligent Network, a global broadband
network with broad connectivity potential to both buyers and
sellers of bandwidth through Enron's pooling points. In
addition, Enron expects to further deploy its proprietary
Broadband Operating System across the Enron Intelligent Network,
enabling Enron to manage bandwidth capacity independent of owning
the underlying fiber. Broadband Services expects its
intermediation transaction level to increase significantly in
2001 as more market participants connect to the pooling points
and transact with Enron to manage their bandwidth needs. The
availability of Enron's bandwidth intermediation products and
prices on EnronOnline are expected to favorably impact the volume
of transactions. In 2001, Broadband Services expects to continue
to expand the commercial roll-out of its content service
offerings including video-on-demand. Enron expects the volume of
content delivered over its network to increase as more content
delivery contracts are signed and as more distribution partner
locations are connected.
Corporate and Other
Significant components of Corporate and Other's IBIT are as
follows:
(In millions) 2000 1999 1998
IBIT before items impacting comparability $(289) $(17) $ 7
Items impacting comparability:
Charge to reflect impairment by Azurix (326) - -
Gains on exchange and sales of Enron Oil
& Gas Company (EOG) stock - 454 22
Charge to reflect impairment of MTBE assets
and losses on contracted MTBE production - (441) (61)
Loss before interest, minority interests
and taxes $(615) $ (4) $(32)
Results for Corporate and Other in 2000 reflect operating
losses from Enron's investment in Azurix (excluding the
impairments discussed below) and increased information technology,
employee compensation and corporate-wide expenses.
Results for Corporate and Other in 1999 were impacted by
higher corporate expenses, partially offset by increased earnings
from EREC resulting from increased sales volumes from its German
manufacturing subsidiary and from the completion and sale of
certain domestic wind projects. Enron also recognized higher
earnings related to Azurix. Results in 1998 were favorably
impacted by increases in the market value of certain corporate-
managed financial instruments, partially offset by higher
corporate expenses.
Items impacting comparability in 2000 included a $326 million
charge reflecting Enron's portion of impairments recorded by
Azurix related to assets in Argentina. Items impacting comparability
in 1999 included a pre-tax gain of $454 million on the exchange and
sale of Enron's interest in EOG (see Note 2 to the Consolidated
Financial Statements) and a $441 million pre-tax charge for the
impairment of its MTBE assets (see Note 17 to the Consolidated
Financial Statements).
During 1998, Enron recognized a pre-tax gain of $22 million on
the delivery of 10.5 million shares of EOG stock held by Enron as
repayment of mandatorily exchangeable debt. Enron also recorded
a $61 million charge to reflect losses on contracted MTBE
production.
Interest and Related Charges, Net
Interest and related charges, net of interest capitalized
which totaled $38 million, $54 million and $66 million for 2000,
1999 and 1998, respectively, increased to $838 million in 2000
from $656 million in 1999 and $550 million in 1998. The increase
in 2000 as compared to 1999 was primarily a result of increased
long-term debt levels, increased average short-term borrowings,
short-term debt assumed as a result of the acquisition of MG plc
and higher interest rates in the U.S. The increase was partially
offset by the replacement of debt related to a Brazilian subsidiary
with lower interest rate debt.
The increase in 1999 as compared to 1998 was primarily due to
debt issuances and debt related to a Brazilian subsidiary, partially
offset by a decrease in debt related to EOG following the sale and
exchange of Enron's interests in August 1999. See Note 2 to the
Consolidated Financial Statements.
Minority Interests
Minority interests include the following:
(In millions) 2000 1999 1998
Elektro(a) $ 33 $ 39 $ -
Majority-owned limited liability
company and limited partnerships 105 71 -
Enron Oil & Gas Company - 2 24
Other 16 23 53
Total $154 $135 $ 77
<FN>
(a) Relates to the respective parents of Elektro, which had
minority shareholders in 2000 and 1999. See Note 8 to
the Consolidated Financial Statements.
Minority interests include Elektro beginning January 1, 1999,
a majority-owned limited liability company and majority-owned
limited partnerships since their formation during 1998 through
2000 and EOG until the exchange and sale of Enron's interests
in August 1999 (see Note 2 to the Consolidated Financial Statements).
Income Tax Expense
Income tax expense increased in 2000 as compared to 1999
primarily as a result of increased earnings, decreased equity
earnings and decreased tax benefits related to the foreign tax
rate differential, partially offset by an increase in the
differences between the book and tax basis of certain assets and
stock sales.
Income tax expense decreased in 1999 compared to 1998
primarily as a result of increased equity earnings, tax benefits
related to the foreign tax rate differential and the audit
settlement related to Monthly Income Preferred Shares, partially
offset by increased earnings.
Cumulative Effect of Accounting Changes
In 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 1999 charge was primarily related to the
adoption of SOP 98-5.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities," which was subsequently amended by SFAS No. 137 and
SFAS No. 138. SFAS No. 133 must be applied to all
derivative instruments and certain derivative instruments
embedded in hybrid instruments and requires that such instruments
be recorded in the balance sheet either as an asset or liability
measured at its fair value through earnings, with special
accounting allowed for certain qualifying hedges. Enron will
adopt SFAS No. 133 as of January 1, 2001. Due to
the adoption of SFAS No. 133, Enron will recognize
an after-tax non-cash loss of approximately $5 million in
earnings and an after-tax non-cash gain in "Other Comprehensive
Income," a component of shareholders' equity, of approximately
$22 million from the cumulative effect of a change in accounting
principle. Enron will also reclassify $532 million from "Long-
Term Debt" to "Other Liabilities" due to the adoption.
The total impact of Enron's adoption of SFAS No. 133
on earnings and on "Other Comprehensive Income" is
dependent upon certain pending interpretations, which are
currently under consideration, including those related to
"normal purchases and normal sales" and inflation escalators
included in certain contract payment provisions. The
interpretations of these issues, and others, are currently under
consideration by the FASB. While the ultimate conclusions
reached on interpretations being considered by the FASB could
impact the effects of Enron's adoption of SFAS No. 133,
Enron does not believe that such conclusions would have a material
effect on its current estimate of the impact of adoption.
FINANCIAL CONDITION
Cash Flows
(In millions) 2000 1999 1998
Cash provided by (used in):
Operating activities $ 4,779 $ 1,228 $ 1,640
Investing activities (4,264) (3,507) (3,965)
Financing activities 571 2,456 2,266
Net cash provided by operating activities increased $3,551
million in 2000, primarily reflecting decreases in working
capital, positive operating results and a receipt of cash
associated with the assumption of a contractual obligation.
Net cash provided by operating activities decreased $412
million in 1999, primarily reflecting increases in working
capital and net assets from price risk management activities,
partially offset by increased earnings and higher proceeds from
sales of merchant assets and investments. The 1998 amount
reflects positive operating cash flow from Enron's major
business segments, proceeds from sales of interests in energy-
related merchant assets and cash from timing and other changes
related to Enron's commodity portfolio, partially offset by new
investments in merchant assets and investments.
Net cash used in investing activities primarily reflects
capital expenditures and equity investments, which total $3,314
million in 2000, $3,085 million in 1999 and $3,564 million in
1998, and cash used for business acquisitions. See "Capital
Expenditures and Equity Investments" below and see Note 2 to
the Consolidated Financial Statements for cash used for business
acquisitions. Partially offsetting these uses of cash were proceeds
from sales of non-merchant assets, including certain equity instruments
by Energy Services and an international power project, which totaled
$494 million in 2000. Proceeds from non-merchant asset sales were
$294 million in 1999 and $239 million in 1998.
Cash provided by financing activities in 2000 included
proceeds from the issuance of subsidiary equity and the issuance
of common stock related to employee benefit plans, partially
offset by payments of dividends. Cash provided by financing
activities in 1999 included proceeds from the net issuance of
short- and long-term debt, the issuance of common stock and
the issuance of subsidiary equity, partially offset by payments
of dividends. Cash provided by financing activities in 1998
included proceeds from the net issuance of short- and long-term
debt, the issuance of common stock and the sale of a minority
interest in a subsidiary, partially offset by payments of dividends.
Capital Expenditures and Equity Investments
Capital expenditures by operating segment are as follows:
2001
(In millions) Estimate 2000 1999 1998
Transportation and Distribution $ 140 $ 270 $ 316 $ 310
Wholesale Services 570 1,280 1,216 706
Retail Energy Services 50 70 64 75
Broadband Services 700 436 - -
Exploration and Production - - 226 690
Corporate and Other 40 325 541 124
Total $1,500 $2,381 $2,363 $1,905
Capital expenditures increased $18 million in 2000 and
$458 million in 1999 as compared to the previous year.
Capital expenditures in 2000 primarily relate to construction of
power plants to extend Wholesale Services' network and fiber
optic network infrastructure for Broadband Services. During
1999, Wholesale Services expenditures increased due primarily to
construction of domestic and international power plants. The
1999 increase in Corporate and Other reflects the purchase of
certain previously leased MTBE-related assets.
Cash used for investments in equity affiliates by the
operating segments is as follows:
(In millions) 2000 1999 1998
Transportation and Distribution $ 1 $ - $ 27
Wholesale Services 911 712 703
Corporate and Other 21 10 929
Total $933 $722 $1,659
Equity investments in 2000 relate primarily to capital
invested for the ongoing construction, by a joint venture, of a
power plant in India as well as other international investments.
Equity investments in 1999 relate primarily to an investment in a
joint venture that holds gas distribution and related
businesses in South Korea and the power plant project in India.
The level of spending for capital expenditures and equity
investments will vary depending upon conditions in the energy and
broadband markets, related economic conditions and identified
opportunities. Management expects that the capital spending
program will be funded by a combination of internally generated
funds, proceeds from dispositions of selected assets and short-
and long-term borrowings.
Working Capital
At December 31, 2000, Enron had working capital of $2.0
billion. If a working capital deficit should occur, Enron has
credit facilities in place to fund working capital requirements.
At December 31, 2000, those credit lines provided for up to $4.2
billion of committed and uncommitted credit, of which $290
million was outstanding. Certain of the credit agreements
contain prefunding covenants. However, such covenants are not
expected to restrict Enron's access to funds under these
agreements. In addition, Enron sells commercial paper and has
agreements to sell trade accounts receivable, thus providing
financing to meet seasonal working capital needs. Management
believes that the sources of funding described above are
sufficient to meet short- and long-term liquidity needs not met
by cash flows from operations.
CAPITALIZATION
Total capitalization at December 31, 2000 was $25.0 billion.
Debt as a percentage of total capitalization increased to 40.9%
at December 31, 2000 as compared to 38.5% at December 31, 1999.
The increase in the ratio primarily reflects increased debt
levels and the impact on total equity of the decline in the value
of the British pound sterling. This was partially offset by the
issuances, in 2000, of Enron common stock and the contribution of
common shares (see Note 16 to the Consolidated Financial
Statements). The issuances of Enron common stock primarily related
to the acquisition of a minority shareholder's interest in Enron Energy
Services, LLC and the exercise of employee stock options.
Enron is a party to certain financial contracts which contain
provisions for early settlement in the event of a significant
market price decline in which Enron's common stock falls below
certain levels (prices ranging from $28.20 to $55.00 per share)
or if the credit ratings for Enron's unsecured, senior long-term
debt obligations fall below investment grade. The impact of this
early settlement could include the issuance of additional shares
of Enron common stock.
Enron's senior unsecured long-term debt is currently rated
BBB+ by Standard & Poor's Corporation and Fitch IBCA and Baa1 by Moody's
Investor Service. Enron's continued investment grade status is
critical to the success of its wholesale businesses as well as
its ability to maintain adequate liquidity. Enron's management
believes it will be able to maintain its credit rating.
FINANCIAL RISK MANAGEMENT
Wholesale Services offers price risk management services
primarily related to commodities associated with the energy
sector (natural gas, electricity, crude oil and natural gas
liquids). Energy Services and Broadband Services also offer
price risk management services to their customers. These
services are provided through a variety of financial instruments
including forward contracts, which may involve physical delivery,
swap agreements, which may require payments to (or receipt of
payments from) counterparties based on the differential between a
fixed and variable price for the commodity, options and other
contractual arrangements. Interest rate risks and foreign
currency risks associated with the fair value of Wholesale
Services' commodities portfolio are managed using a variety
of financial instruments, including financial futures, swaps
and options.
On a much more limited basis, Enron's other businesses also
enter into financial instruments such as forwards, swaps and
other contracts primarily for the purpose of hedging the impact
of market fluctuations on assets, liabilities, production or
other contractual commitments. Changes in the market value of
these hedge transactions are deferred until the gain or loss is
recognized on the hedged item.
Enron manages market risk on a portfolio basis, subject to
parameters established by its Board of Directors. Market risks
are monitored by an independent risk control group operating
separately from the units that create or actively manage these
risk exposures to ensure compliance with Enron's stated risk
management policies.
Market Risk
The use of financial instruments by Enron's businesses may
expose Enron to market and credit risks resulting from adverse
changes in commodity and equity prices, interest rates and
foreign exchange rates. For Enron's businesses, the major market
risks are discussed below:
Commodity Price Risk. Commodity price risk is a consequence
of providing price risk management services to customers. As
discussed above, Enron actively manages this risk on a portfolio
basis to ensure compliance with Enron's stated risk management
policies.
Interest Rate Risk. Interest rate risk is also a consequence
of providing price risk management services to customers and
having variable rate debt obligations, as changing interest rates
impact the discounted value of future cash flows. Enron utilizes
forwards, futures, swaps and options to manage its interest rate
risk.
Foreign Currency Exchange Rate Risk. Foreign currency exchange
rate risk is the result of Enron's international operations and
price risk management services provided to its worldwide customer
base. The primary purpose of Enron's foreign currency hedging
activities is to protect against the volatility associated with
foreign currency purchase and sale transactions. Enron primarily
utilizes forward exchange contracts, futures and purchased
options to manage Enron's risk profile.
Equity Risk. Equity risk arises from Enron's participation
in investments. Enron generally manages this risk by hedging
specific investments using futures, forwards, swaps and options.
Enron evaluates, measures and manages the market risk in its
investments on a daily basis utilizing value at risk and other
methodologies. The quantification of market risk using value at
risk provides a consistent measure of risk across diverse markets
and products. The use of these methodologies requires a number of
key assumptions including the selection of a confidence level for
expected losses, the holding period for liquidation and the
treatment of risks outside the value at risk methodologies,
including liquidity risk and event risk. Value at risk
represents an estimate of reasonably possible net losses in
earnings that would be recognized on its investments assuming
hypothetical movements in future market rates and no change in
positions. Value at risk is not necessarily indicative of actual
results which may occur.
Value at Risk
Enron has performed an entity-wide value at risk analysis of
virtually all of Enron's financial instruments, including price
risk management activities and merchant investments. Value at
risk incorporates numerous variables that could impact the fair
value of Enron's investments, including commodity prices,
interest rates, foreign exchange rates, equity prices and
associated volatilities, as well as correlation within and across
these variables. Enron estimates value at risk for commodity,
interest rate and foreign exchange exposures using a model based
on Monte Carlo simulation of delta/gamma positions which captures
a significant portion of the exposure related to option
positions. The value at risk for equity exposure discussed above
is based on J.P. Morgan's RiskMetrics(TM) approach. Both value at
risk methods utilize a one-day holding period and a 95%
confidence level. Cross-commodity correlations are used as
appropriate.
The use of value at risk models allows management to aggregate
risks across the company, compare risk on a consistent basis and
identify the drivers of risk. Because of the inherent
limitations to value at risk, including the use of delta/gamma
approximations to value options, subjectivity in the choice of
liquidation period and reliance on historical data to calibrate
the models, Enron relies on value at risk as only one component
in its risk control process. In addition to using value at risk
measures, Enron performs regular stress and scenario analyses to
estimate the economic impact of sudden market moves on the value
of its portfolios. The results of the stress testing, along with
the professional judgment of experienced business and risk
managers, are used to supplement the value at risk methodology
and capture additional market-related risks, including
volatility, liquidity and event, concentration and correlation
risks.
The following table illustrates the value at risk for each
component of market risk:
December 31, Year ended December 31, 2000
High Low
(In millions) 2000 1999 Average(a) Valuation(a) Valuation(a)
Trading Market Risk:
Commodity price(b) $66 $21 $50 $81 $23
Interest rate - - - - -
Foreign currency
exchange rate - - - - -
Equity(c) 59 26 45 59 36
Non-Trading Market Risk(d):
Commodity price 2 1 2 5 2
Interest rate - 2 1 2 -
Foreign currency
exchange rate 8 4 8 10 4
Equity 7 3 6 7 5
<FN>
(a) The average value presents a twelve month average of the
month-end values. The high and low valuations for each market
risk component represent the highest and lowest month-end value
during 2000.
(b) In 2000, increased natural gas prices combined with
increased price volatility in power and gas markets caused
Enron's value at risk to increase significantly.
(c) Enron's equity trading market risk primarily relates to
merchant investments (see Note 4 to the Consolidated Financial
Statements). In 2000, the value at risk model utilized for
equity trading market risk was refined to more closely correlate
with the valuation methodologies used for merchant activities.
(d) Includes only the risk related to the financial instruments
that serve as hedges and does not include the related underlying
hedged item.
Accounting Policies
Accounting policies for price risk management and hedging
activities are described in Note 1 to the Consolidated Financial
Statements.
INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS
This Report 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
Transportation Services, extension of Enron's business model to
new markets and industries, 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, completion of the sale
of certain assets and growth in the demand for retail energy
outsourcing solutions. When used in this document, the words
"anticipate," "believe," "estimate," "expects," "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 success in marketing natural gas and power to wholesale
customers; the ability of Enron to penetrate new retail natural
gas and electricity markets (including energy outsourcing
markets) in the United States and foreign jurisdictions;
development of Enron's broadband network and customer demand for
intermediation and content services; the timing, extent and
market effects of deregulation of energy markets in the United
States, including the current energy market conditions in
California, and in foreign jurisdictions; other regulatory
developments in the United States and in foreign countries,
including tax legislation and regulations; political developments
in foreign countries; 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 the
credit ratings for its unsecured senior long-term debt obligations.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Enron Corp.:
We have audited the accompanying consolidated balance sheet of
Enron Corp. (an Oregon corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated
statements of income, comprehensive income, cash flows and
changes in shareholders' equity for each of the three years in
the period ended December 31, 2000. These financial statements
are the responsibility of Enron Corp.'s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Enron Corp. and subsidiaries as of December 31, 2000 and 1999,
and the results of their operations, cash flows and changes in
shareholders' equity for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 18 to the consolidated financial
statements, Enron Corp. and subsidiaries changed its method of
accounting for costs of start-up activities and its method of
accounting for certain contracts involved in energy trading and
risk management activities in the first quarter of 1999.
Arthur Andersen LLP
Houston, Texas
February 23, 2001
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
Year ended December 31,
(In millions, except per share amounts) 2000 1999 1998
Revenues
Natural gas and other products $ 50,500 $19,536 $13,276
Electricity 33,823 15,238 13,939
Metals 9,234 - -
Other 7,232 5,338 4,045
Total revenues 100,789 40,112 31,260
Costs and Expenses
Cost of gas, electricity, metals and
other products 94,517 34,761 26,381
Operating expenses 3,184 3,045 2,473
Depreciation, depletion and
amortization 855 870 827
Taxes, other than income taxes 280 193 201
Impairment of long-lived assets - 441 -
Total costs and expenses 98,836 39,310 29,882
Operating Income 1,953 802 1,378
Other Income and Deductions
Equity in earnings of unconsolidated
equity affiliates 87 309 97
Gains on sales of non-merchant assets 146 541 56
Gain on the issuance of stock by TNPC, Inc. 121 - -
Interest income 212 162 88
Other income, net (37) 181 (37)
Income Before Interest, Minority
Interests and Income Taxes 2,482 1,995 1,582
Interest and related charges, net 838 656 550
Dividends on company-obligated preferred
securities of subsidiaries 77 76 77
Minority interests 154 135 77
Income tax expense 434 104 175
Net income before cumulative effect of
accounting changes 979 1,024 703
Cumulative effect of accounting changes,
net of tax - (131) -
Net Income 979 893 703
Preferred stock dividends 83 66 17
Earnings on Common Stock $ 896 $ 827 $ 686
Earnings Per Share of Common Stock
Basic
Before cumulative effect of accounting
changes $ 1.22 $ 1.36 $ 1.07
Cumulative effect of accounting changes - (0.19) -
Basic earnings per share $ 1.22 $ 1.17 $ 1.07
Diluted
Before cumulative effect of accounting
changes $ 1.12 $ 1.27 $ 1.01
Cumulative effect of accounting changes - (0.17) -
Diluted earnings per share $ 1.12 $ 1.10 $ 1.01
Average Number of Common Shares Used in Computation
Basic 736 705 642
Diluted 814 769 695
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended December 31,
(In millions) 2000 1999 1998
Net Income $ 979 $ 893 $ 703
Other comprehensive income:
Foreign currency translation
adjustment and other (307) (579) (14)
Total Comprehensive Income $ 672 $ 314 $ 689
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
(In millions) 2000 1999
ASSETS
Current Assets
Cash and cash equivalents $ 1,374 $ 288
Trade receivables (net of allowance
for doubtful accounts of $133 and
$40, respectively) 10,396 3,030
Other receivables 1,874 518
Assets from price risk management
activities 12,018 2,205
Inventories 953 598
Deposits 2,433 81
Other 1,333 535
Total current assets 30,381 7,255
Investments and Other Assets
Investments in and advances to
unconsolidated equity affiliates 5,294 5,036
Assets from price risk management
activities 8,988 2,929
Goodwill 3,638 2,799
Other 5,459 4,681
Total investments and other assets 23,379 15,445
Property, Plant and Equipment, at cost
Natural gas transmission 6,916 6,948
Electric generation and distribution 4,766 3,552
Fiber optic network and equipment 839 379
Construction in progress 682 1,120
Other 2,256 1,913
15,459 13,912
Less accumulated depreciation,
depletion and amortization 3,716 3,231
Property, plant and equipment, net 11,743 10,681
Total Assets $65,503 $33,381
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
(In millions, except shares) 2000 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 9,777 $ 2,154
Liabilities from price risk
management activities 10,495 1,836
Short-term debt 1,679 1,001
Customers' deposits 4,277 44
Other 2,178 1,724
Total current liabilities 28,406 6,759
Long-Term Debt 8,550 7,151
Deferred Credits and Other Liabilities
Deferred income taxes 1,644 1,894
Liabilities from price risk
management activities 9,423 2,990
Other 2,692 1,587
Total deferred credits and
other liabilities 13,759 6,471
Commitments and Contingencies
(Notes 13, 14 and 15)
Minority Interests 2,414 2,430
Company-Obligated Preferred Securities
of Subsidiaries 904 1,000
Shareholders' Equity
Second preferred stock, cumulative, no par
value, 1,370,000 shares authorized,
1,240,933 shares and 1,296,184 shares
issued, respectively 124 130
Mandatorily Convertible Junior Preferred
Stock, Series B, no par value, 250,000
shares issued 1,000 1,000
Common stock, no par value, 1,200,000,000
shares authorized, 752,205,112 shares
and 716,865,081 shares issued, respectively 8,348 6,637
Retained earnings 3,226 2,698
Accumulated other comprehensive income (1,048) (741)
Common stock held in treasury, 577,066
shares and 1,337,714 shares,
respectively (32) (49)
Restricted stock and other (148) (105)
Total shareholders' equity 11,470 9,570
Total Liabilities and Shareholders' Equity $65,503 $33,381
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31,
(In millions) 2000 1999 1998
Cash Flows From Operating Activities
Reconciliation of net income to net
cash provided by operating activities
Net income $ 979 $ 893 $ 703
Cumulative effect of accounting changes - 131 -
Depreciation, depletion and amortization 855 870 827
Impairment of long-lived assets (including
equity investments) 326 441 -
Deferred income taxes 207 21 87
Gains on sales of non-merchant assets (146) (541) (82)
Changes in components of working
capital 1,769 (1,000) (233)
Net assets from price risk management
activities (763) (395) 350
Merchant assets and investments:
Realized gains on sales (104) (756) (628)
Proceeds from sales 1,838 2,217 1,434
Additions and unrealized gains (1,295) (827) (721)
Other operating activities 1,113 174 (97)
Net Cash Provided by Operating Activities 4,779 1,228 1,640
Cash Flows From Investing Activities
Capital expenditures (2,381) (2,363) (1,905)
Equity investments (933) (722) (1,659)
Proceeds from sales of non-merchant assets 494 294 239
Acquisition of subsidiary stock (485) - (180)
Business acquisitions, net of cash acquired
(see Note 2) (777) (311) (104)
Other investing activities (182) (405) (356)
Net Cash Used in Investing Activities (4,264) (3,507) (3,965)
Cash Flows From Financing Activities
Issuance of long-term debt 3,994 1,776 1,903
Repayment of long-term debt (2,337) (1,837) (870)
Net increase (decrease) in short-term borrowings (1,595) 1,565 (158)
Net issuance (redemption) of company-obligated
preferred securities of subsidiaries (96) - 8
Issuance of common stock 307 852 867
Issuance of subsidiary equity 500 568 828
Dividends paid (523) (467) (414)
Net disposition of treasury stock 327 139 13
Other financing activities (6) (140) 89
Net Cash Provided by Financing Activities 571 2,456 2,266
Increase (Decrease) in Cash and Cash Equivalents 1,086 177 (59)
Cash and Cash Equivalents, Beginning of Year 288 111 170
Cash and Cash Equivalents, End of Year $ 1,374 $ 288 $ 111
Changes in Components of Working Capital
Receivables $(8,203) $ (662) $(1,055)
Inventories 1,336 (133) (372)
Payables 7,167 (246) 433
Other 1,469 41 761
Total $ 1,769 $(1,000) $ (233)
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions, except per share 2000 1999 1998
amounts; shares in thousands) Shares Amount Shares Amount Shares Amount
Cumulative Second Preferred
Convertible Stock
Balance, beginning of year 1,296 $ 130 1,320 $ 132 1,338 $ 134
Exchange of convertible preferred
stock for common stock (55) (6) (24) (2) (18) (2)
Balance, end of year 1,241 $ 124 1,296 $ 130 1,320 $ 132
Mandatorily Convertible Junior Preferred
Stock, Series B
Balance, beginning of year 250 $ 1,000 - $ - - $ -
Issuances - - 250 1,000 - -
Balance, end of year 250 $ 1,000 250 $1,000 - $ -
Common Stock
Balance, beginning of year 716,865 $ 6,637 671,094 $5,117 636,594 $4,224
Exchange of convertible preferred
stock for common stock 1,509 6 465 (1) - (7)
Issuances related to benefit
and dividend reinvestment plans 28,100 966 10,054 258 - 45
Sales of common stock - - 27,600 839 34,500 836
Issuances of common stock in business
acquisitions (see Note 2) 5,731 409 7,652 250 - -
Other - 330 - 174 - 19
Balance, end of year 752,205 $ 8,348 716,865 $6,637 671,094 $5,117
Retained Earnings
Balance, beginning of year $ 2,698 $2,226 $1,852
Net income 979 893 703
Cash dividends
Common stock ($0.5000, $0.5000 and
$0.4812 per share in 2000, 1999
and 1998, respectively) (368) (355) (312)
Cumulative Second Preferred
Convertible Stock ($13.652, $13.652
and $13.1402 per share in 2000,
1999 and 1998, respectively) (17) (17) (17)
Series A and B Preferred Stock (66) (49) -
Balance, end of year $ 3,226 $2,698 $2,226
Accumulated Other Comprehensive Income
Balance, beginning of year $ (741) $ (162) $ (148)
Translation adjustments and other (307) (579) (14)
Balance, end of year $(1,048) $ (741) $ (162)
Treasury Stock
Balance, beginning of year (1,338) $ (49) (9,334) $ (195) (14,102) $ (269)
Shares acquired (3,114) (234) (1,845) (71) (2,236) (61)
Exchange of convertible preferred
stock for common stock - - 181 4 486 9
Issuances related to benefit
and dividend reinvestment plans 3,875 251 9,660 213 6,426 124
Issuances of treasury stock in
business acquisitions - - - - 92 2
Balance, end of year (577) $ (32) (1,338) $ (49) (9,334) $ (195)
Restricted Stock and Other
Balance, beginning of year $ (105) $ (70) $ (175)
Issuances related to benefit
and dividend reinvestment plans (43) (35) 105
Balance, end of year $ (148) $ (105) $ (70)
Total Shareholders' Equity $11,470 $9,570 $7,048
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
ENRON CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy and Use of Estimates. The accounting and
financial reporting policies of Enron Corp. and its subsidiaries
conform to generally accepted accounting principles and
prevailing industry practices. The consolidated financial
statements include the accounts of all subsidiaries controlled by
Enron Corp. after the elimination of significant intercompany
accounts and transactions.
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.
"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 its subsidiaries and
affiliates whose operations are managed by their respective
officers.
Cash Equivalents. Enron records as cash equivalents all
highly liquid short-term investments with original maturities of
three months or less.
Inventories. Inventories consist primarily of commodities,
priced at market as such inventories are used in trading
activities.
Depreciation, Depletion and Amortization. The provision for
depreciation and amortization with respect to operations other
than oil and gas producing activities is computed using the
straight-line or regulatorily mandated method, based on estimated
economic lives. Composite depreciation rates are applied to
functional groups of property having similar economic
characteristics. The cost of utility property units retired,
other than land, is charged to accumulated depreciation.
Provisions for depreciation, depletion and amortization of
proved oil and gas properties are calculated using the units-of-
production method.
Income Taxes. Enron accounts for income taxes using an asset
and liability approach under which deferred assets and
liabilities are recognized based on anticipated future tax
consequences attributable to differences between financial
statement carrying amounts of assets and liabilities and their
respective tax bases (see Note 5).
Earnings Per Share. Basic earnings per share is computed
based upon the weighted-average number of common shares
outstanding during the periods. Diluted earnings per share is
computed based upon the weighted-average number of common shares
outstanding plus the assumed issuance of common shares for all
potentially dilutive securities. All share and per share amounts
have been adjusted to reflect the August 13, 1999 two-for-one
stock split. See Note 11 for a reconciliation of the basic and
diluted earnings per share computations.
Accounting for Price Risk Management. Enron engages in price
risk management activities for both trading and non-trading
purposes. Instruments utilized in connection with trading
activities are accounted for using the mark-to-market method.
Under the mark-to-market method of accounting, forwards, swaps,
options, energy transportation contracts utilized for trading
activities and other instruments with third parties are reflected
at fair value and are shown as "Assets and Liabilities from Price
Risk Management Activities" in the Consolidated Balance Sheet.
These activities also include the commodity risk management
component embedded in energy outsourcing contracts. Unrealized
gains and losses from newly originated contracts, contract
restructurings and the impact of price movements are recognized
as "Other Revenues." Changes in the assets and liabilities from
price risk management activities result primarily from changes in
the valuation of the portfolio of contracts, newly originated
transactions and the timing of settlement relative to the receipt
of cash for certain contracts. The market prices used to value
these transactions reflect management's best estimate considering
various factors including closing exchange and over-the-counter
quotations, time value and volatility factors underlying the
commitments.
Financial instruments are also utilized for non-trading
purposes to hedge the impact of market fluctuations on assets,
liabilities, production and other contractual commitments. Hedge
accounting is utilized in non-trading activities when there is a
high degree of correlation between price movements in the
derivative and the item designated as being hedged. In instances
where the anticipated correlation of price movements does not
occur, hedge accounting is terminated and future changes in the
value of the financial instruments are recognized as gains or
losses. If the hedged item is sold, the value of the financial
instrument is recognized in income. Gains and losses on
financial instruments used for hedging purposes are recognized in
the Consolidated Income Statement in the same manner as the
hedged item.
The cash flow impact of financial instruments is reflected as
cash flows from operating activities in the Consolidated
Statement of Cash Flows. See Note 3 for further discussion of
Enron's price risk management activities.
Accounting for Development Activity. Development costs
related to projects, including costs of feasibility studies, bid
preparation, permitting, licensing and contract negotiation, are
expensed as incurred until the project is estimated to be
probable. At that time, such costs are capitalized or expensed
as incurred, based on the nature of the costs incurred.
Capitalized development costs may be recovered through
reimbursements from joint venture partners or other third
parties, or classified as part of the investment and recovered
through the cash flows from that project. Accumulated
capitalized project development costs are otherwise expensed in
the period that management determines it is probable that the
costs will not be recovered.
Environmental Expenditures. Expenditures that relate to an
existing condition caused by past operations, and do not
contribute to current or future revenue generation, are expensed.
Environmental expenditures relating to current or future revenues
are expensed or capitalized as appropriate based on the nature of
the costs incurred. Liabilities are recorded when environmental
assessments and/or clean-ups are probable and the costs can be
reasonably estimated.
Computer Software. Direct costs of materials and services
consumed in developing or obtaining software, including payroll
and payroll-related costs for employees who are directly
associated with and who devote time to the software project are
capitalized. Costs may begin to be capitalized once the application
development stage has begun. All other costs are expensed as
incurred. Enron amortizes the costs on a straight-line basis
over the useful life of the software. Impairment is evaluated
based on changes in the expected usefulness of the software. At
December 31, 2000 and 1999, Enron has capitalized, net of
amortization, $381 million and $240 million, respectively, of
software costs covering numerous systems, including trading and
settlement, accounting, billing, and upgrades.
Investments in Unconsolidated Affiliates. Investments in
unconsolidated affiliates are accounted for by the equity method,
except for certain investments resulting from Enron's merchant
investment activities which are included at market value in
"Other Investments" in the Consolidated Balance Sheet. See Notes
4 and 9. Where acquired assets are accounted for under the
equity method based on temporary control, earnings or losses are
recognized only for the portion of the investment to be retained.
Sale of Subsidiary Stock. Enron accounts for the issuance of stock
by its subsidiaries in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin (SAB) 51. SAB 51 allows for
Enron to recognize a gain in the amount that the offering price
per share of a subsidiary's stock exceeds Enron's carrying amount
per share.
Foreign Currency Translation. For international subsidiaries,
asset and liability accounts are translated at year-end rates of
exchange and revenue and expenses are translated at average
exchange rates prevailing during the year. For subsidiaries
whose functional currency is deemed to be other than the U.S.
dollar, translation adjustments are included as a separate
component of other comprehensive income and shareholders' equity.
Currency transaction gains and losses are recorded in income.
During 1999, the exchange rate for the Brazilian real to the
U.S. dollar declined, resulting in a non-cash foreign currency
translation adjustment reducing the value of Enron's assets and
shareholders' equity by approximately $600 million.
Reclassifications. Certain reclassifications have been made
to the consolidated financial statements for prior years to
conform with the current presentation.
2 BUSINESS ACQUISITIONS AND DISPOSITIONS
In 2000, Enron, through a wholly-owned subsidiary, acquired
all of the outstanding common shares of MG plc, a leading
independent international metals market-making business that
provides financial and marketing services to the global metals
industry, for $413 million in cash and assumed debt
of approximately $1.6 billion.
In addition, Enron made other acquisitions including a
technology-related company, a facility maintenance company and all
minority shareholders' interests in Enron Energy Services, LLC and
Enron Renewable Energy Corp. Enron issued 5.7 million shares of
Enron common stock, contributed common stock and warrants
of an unconsolidated equity affiliate and paid cash in these
transactions.
On August 16, 1999, Enron exchanged approximately 62.3 million
shares (approximately 75%) of the Enron Oil & Gas Company (EOG)
common stock it held for all of the stock of EOGI-India, Inc., a
subsidiary of EOG. Also in August 1999, Enron received net
proceeds of approximately $190 million for the sale of 8.5
million shares of EOG common stock in a public offering and
issued approximately $255 million of public debt that is
exchangeable in July 2002 into approximately 11.5 million shares
of EOG common stock. As a result of the share exchange and share
sale, Enron recorded a pre-tax gain of $454 million ($345 million
after tax, or $0.45 per diluted share) in 1999. As of August 16,
1999, EOG is no longer included in Enron's consolidated financial
statements. EOGI-India, Inc. is included in the consolidated
financial statements within the Wholesale Services segment
following the exchange and sale. Enron accounts for its oil and
gas exploration and production activities under the successful
efforts method of accounting.
In August 1998, Enron, through a wholly-owned subsidiary,
completed the acquisition of a controlling interest in Elektro
Eletricidade e Servicos S.A. (Elektro) for approximately $1.3
billion. Elektro was initially accounted for using the equity
method based on temporary control. In 1999, after the acquisition
of additional interests, Elektro was consolidated by Enron.
Additionally, during 1999 and 1998, Enron acquired generation,
natural gas distribution, renewable energy, telecommunications
and energy management businesses for cash, Enron and subsidiary
stock and notes.
Enron has accounted for these acquisitions using the purchase
method of accounting as of the effective date of each
transaction. Accordingly, the purchase price of each transaction
has been allocated based upon the estimated fair value of the
assets and liabilities acquired as of the acquisition date, with
the excess reflected as goodwill in the Consolidated Balance
Sheet. This and all other goodwill is being amortized on a
straight-line basis over 5 to 40 years.
Assets acquired, liabilities assumed and consideration paid as
a result of businesses acquired were as follows:
(In millions) 2000 1999 1998(a)
Fair value of assets acquired,
other than cash $ 2,641 $ 376 $ 269
Goodwill 963 (71) 94
Fair value of liabilities assumed (2,418) 6 (259)
Common stock of Enron issued
and equity of an unconcolidated
equity affiliate contributed (409) - -
Net cash paid $ 777 $ 311 $ 104
<FN>
(a) Excludes amounts related to the 1998 acquisition of Elektro.
On November 8, 1999, Enron announced that it had entered into
an agreement to sell Enron's wholly-owned electric utility
subsidiary, Portland General Electric Company (PGE), to Sierra
Pacific Resources for $2.1 billion. Sierra Pacific Resources will
also assume approximately $1 billion in PGE debt and preferred
stock. The transaction has been delayed by the effect of recent
events in California and Nevada on the buyer. Enron's
carrying amount of PGE as of December 31, 2000 was approximately
$1.6 billion. Income before interest, minority interest and
income taxes for PGE was $338 million, $298 million and $284
million for 2000, 1999 and 1998, respectively.
3 PRICE RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS
Trading Activities. Enron offers price risk management
services to wholesale, commercial and industrial customers
through a variety of financial and other instruments including
forward contracts involving physical delivery, swap agreements,
which require payments to (or receipt of payments from)
counterparties based on the differential between a fixed and
variable price for the commodity, options and other contractual
arrangements. Interest rate risks and foreign currency risks
associated with the fair value of the commodity portfolio are
managed using a variety of financial instruments, including
financial futures.
Notional Amounts and Terms. The notional amounts and terms of
these instruments at December 31, 2000 are shown below (dollars
in millions):
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
Commodities(a)
Natural gas 7,331 6,910 23
Crude oil and liquids 3,513 1,990 6
Electricity 2,424 2,388 24
Metals, coal and pulp
and paper 368 413 9
Bandwidth 167 325 11
Financial products
Interest rate(b) $4,732 $3,977 29
Foreign currency $ 79 $ 465 22
Equity investments(c) $2,998 $3,768 13
<FN>
(a) Natural gas, crude oil and liquids and electricity
volumes are in TBtue; metals, coal and pulp and paper
volumes are in millions of metric tonnes; and bandwidth
volumes are in thousands of terabytes.
(b) The interest rate fixed price receiver includes the net
notional dollar value of the interest rate sensitive component
of the combined commodity portfolio. The remaining interest
rate fixed price receiver and the entire interest rate fixed
price payor represent the notional contract amount of a
portfolio of various financial instruments used to hedge the
net present value of the commodity portfolio. For a given
unit of price protection, different financial instruments
require different notional amounts.
(c) Excludes derivatives on Enron common stock. See Notes 10 and 11.
Enron also has sales and purchase commitments associated with
commodity contracts based on market prices totaling 8,169 TBtue,
with terms extending up to 16 years, and 7.2 million metric
tonnes, with terms extending up to 5 years.
Notional amounts reflect the volume of transactions but do not
represent the amounts exchanged by the parties to the financial
instruments. Accordingly, notional amounts do not accurately
measure Enron's exposure to market or credit risks. The maximum
terms in years detailed above are not indicative of likely future
cash flows as these positions may be offset in the markets at any
time in response to the company's price risk management needs to
the extent available in the market.
The volumetric weighted average maturity of Enron's fixed
price portfolio as of December 31, 2000 was approximately 1.5
years.
Fair Value. The fair value as of December 31, 2000 and the
average fair value of instruments related to price risk
management activities held during the year are set forth below:
Average Fair Value
Fair Value for the Year Ended
as of 12/31/00 12/31/00(a)
(In millions) Assets Liabilities Assets Liabilities
Natural gas $10,270 $ 9,342 $ 5,525 $ 5,114
Crude oil and liquids 1,549 3,574 1,402 2,745
Electricity 7,335 5,396 3,453 1,613
Other commodities 1,509 1,311 988 757
Equity investments 795 295 492 280
Total $21,458 $19,918 $11,860 $10,509
<FN>
(a) Computed using the ending balance at each month-end.
The income before interest, taxes and certain unallocated
expenses arising from price risk management activities for 2000
was $1,899 million.
Securitizations. From time to time, Enron sells interests
in certain of its financial assets. Some of these sales
are completed in securitizations, in which Enron concurrently
enters into swaps associated with the underlying assets which
limits the risks assumed by the purchaser. Such swaps are
adjusted to fair value using quoted market prices, if available,
or estimated fair value based on management's best estimate of
the present value of future cash flow. These swaps are included
in Price Risk Management activities above as equity investments.
During 2000, gains from sales representing securitizations were
$381 million and proceeds were $2,379 million ($545 million of
the proceeds related to sales to Whitewing Associates, L.P.
(Whitewing)). See Notes 4 and 9. Purchases of securitized
merchant financial assets totaled $1,184 million during 2000.
Amounts primarily related to equity interests.
Credit Risk. In conjunction with the valuation of its
financial instruments, Enron provides reserves for credit risks
associated with such activity. Credit risk relates to the risk
of loss that Enron would incur as a result of nonperformance by
counterparties pursuant to the terms of their contractual
obligations. Enron maintains credit policies with regard to its
counterparties that management believes significantly minimize
overall credit risk. These policies include an evaluation of
potential counterparties' financial condition (including credit
rating), collateral requirements under certain circumstances and
the use of standardized agreements which allow for the netting of
positive and negative exposures associated with a single
counterparty. Enron also minimizes this credit exposure using
monetization of its contract portfolio or third-party insurance
contracts. The counterparties associated with assets from price
risk management activities as of December 31, 2000 and 1999 are
summarized as follows:
2000 1999
Investment Investment
(In millions) Grade(a) Total Grade(a) Total
Gas and electric utilities $ 5,050 $ 5,327 $1,461 $1,510
Energy marketers 4,677 6,124 544 768
Financial institutions 4,145 4,917 1,016 1,273
Independent power producers 672 791 471 641
Oil and gas producers 1,308 2,804 379 688
Industrials 607 1,138 336 524
Other 256 357 59 67
Total $16,715 21,458 $4,266 5,471
Credit and other reserves (452) (337)
Assets from price risk
management activities(b) $21,006(c) $5,134
<FN>
(a) "Investment Grade" is primarily determined using publicly
available credit ratings along with consideration of cash,
standby letters of credit, parent company guarantees and
property interests, including oil and gas reserves. Included
in "Investment Grade" are counterparties with a minimum
Standard & Poor's or Moody's rating of BBB- or Baa3, respectively.
(b) One and two customers' exposures, respectively, at
December 31, 2000 and 1999 comprise greater than 5% of Assets
From Price Risk Management Activities and are included above
as Investment Grade.
(c) At December 31, 2000, Enron held collateral of approximately
$5.5 billion, which consists substantially of cash deposits shown
as "Customers' Deposits" on the balance sheet.
This concentration of counterparties may impact Enron's
overall exposure to credit risk, either positively or negatively,
in that the counterparties may be similarly affected by changes
in economic, regulatory or other conditions. Based on Enron's
policies, its exposures and its credit reserves, Enron
does not anticipate a materially adverse effect on financial
position or results of operations as a result of counterparty
nonperformance.
During 2000, the California power market was significantly
impacted by the increase in wholesale power prices. California
customer rates are currently frozen, requiring the utilities to
finance the majority of their power purchases. If wholesale
prices remain at the current levels and no regulatory relief or
legislative assistance is obtained, certain California utilities
may need to seek bankruptcy protection. During 2000, Enron
entered into wholesale power transactions with California
utilities, including their nonregulated power marketing
affiliates. Enron has provided credit reserves related to such
activities based on Enron's net position with each California
utility. Due to the uncertainties surrounding the California
power situation, management cannot predict the ultimate outcome
but believes these matters will not have a material adverse
impact on Enron's financial condition.
Non-Trading Activities. Enron also enters into financial
instruments such as swaps and other contracts primarily for the
purpose of hedging the impact of market fluctuations on assets,
liabilities, production or other contractual commitments.
Energy Commodity Price Swaps. At December 31, 2000, Enron was
a party to energy commodity price swaps covering 18.6 TBtu, 29.9
TBtu and 0.5 TBtu of natural gas for the years 2001, 2002 and
2003, respectively, and 0.3 million barrels of crude oil for the
year 2001.
Interest Rate Swaps. At December 31, 2000, Enron had entered
into interest rate swap agreements with an aggregate notional
principal amount of $1.0 billion to manage interest rate
exposure. These swap agreements are scheduled to terminate $0.4
billion in 2001 and $0.6 billion in the period 2002 through 2010.
Foreign Currency Contracts. At December 31, 2000, foreign
currency contracts with a notional principal amount of $1.4
billion were outstanding. These contracts will expire $1.0
billion in 2001 and $0.4 billion in the period 2002 through 2006.
Equity Contracts. At December 31, 2000, Enron had entered
into Enron common stock swaps, with an aggregate notional amount
of $121 million, to hedge certain incentive-based compensation
plans. Such contracts will expire in 2001.
Credit Risk. While notional amounts are used to express the
volume of various financial instruments, the amounts potentially
subject to credit risk, in the event of nonperformance by the
third parties, are substantially smaller. Forwards, futures and
other contracts are entered into with counterparties who are equivalent
to investment grade. Accordingly, Enron does not anticipate any
material impact to its financial position or results of
operations as a result of nonperformance by the third parties on
financial instruments related to non-trading activities.
Financial Instruments. The carrying amounts and estimated
fair values of Enron's financial instruments, excluding trading
activities, at December 31, 2000 and 1999 were as follows:
2000 1999
Carrying Estimated Carrying Estimated
(In millions) Amount Fair Value Amount Fair Value
Short- and long-term debt
(Note 7) $10,229 $10,217 $8,152 $8,108
Company-obligated preferred
securities of subsidiaries
(Note 10) 904 920 1,000 937
Energy commodity price swaps - 68 - (3)
Interest rate swaps - 1 - (55)
Foreign currency contracts - 94 - -
Equity contracts 15 15 4 4
Enron uses the following methods and assumptions in estimating
fair values: (a) short- and long-term debt - the carrying amount
of variable-rate debt approximates fair value, the fair value of
marketable debt is based on quoted market prices and the fair
value of other debt is based on the discounted present value of
cash flows using Enron's current borrowing rates; (b) company-
obligated preferred securities of subsidiaries - the fair value
is based on quoted market prices, where available, or based on
the discounted present value of cash flows using Enron's current
borrowing rates if not publicly traded; and (c) energy commodity
price swaps, interest rate swaps, foreign currency contracts and
equity contracts - estimated fair values have been determined
using available market data and valuation methodologies. Judgment
is necessarily required in interpreting market data and the use of
different market assumptions or estimation methodologies may affect
the estimated fair value amounts.
The fair market value of cash and cash equivalents, trade and
other receivables, accounts payable and investments accounted for
at fair value are not materially different from their carrying
amounts.
Guarantees of liabilities of unconsolidated entities and
residual value guarantees have no carrying value and fair values
which are not readily determinable (see Note 15).
4 MERCHANT ACTIVITIES
An analysis of the composition of Enron's merchant investments
and energy assets at December 31, 2000 and 1999 is as follows:
December 31,
(In millions) 2000 1999
Merchant investments(a)
Energy $ 137 $ 516
Energy-intensive industries 63 218
Technology-related 99 11
Other 302 341
601 1,086
Merchant assets(b)
Independent power plants 53 152
Natural gas transportation 36 35
89 187
Total $ 690 $1,273
<FN>
(a) Investments are recorded at fair value in "Other Assets"
with changes in fair value reflected in "Other Revenues."
(b) Amounts represent Enron's investment in unconsolidated
equity affiliates with operating earnings reflected in "Equity
in Earnings of Unconsolidated Equity Affiliates."
Enron provides capital primarily to energy and technology-related
businesses seeking debt or equity financing. The merchant investments
made by Enron and certain of its unconsolidated affiliates (see Note 9)
are carried at fair value and include public and private equity,
government securities with maturities of more than 90 days, debt and
interests in limited partnerships. The valuation methodologies
utilize market values of publicly-traded securities, independent
appraisals and cash flow analyses.
Also included in Enron's wholesale business are investments in
merchant assets such as power plants and natural gas pipelines,
primarily held through equity method investments. Some of these
assets were developed, constructed and operated by Enron. The
merchant assets are not expected to be long-term, integrated
components of Enron's energy networks.
For the years ended December 31, 2000, 1999 and 1998,
respectively, pre-tax gains from sales of merchant assets and
investments totaling $104 million, $756 million and $628 million
are included in "Other Revenues," and proceeds were $1,838
million, $2,217 million and $1,434 million.
5 INCOME TAXES
The components of income before income taxes are as follows:
(In millions) 2000 1999 1998
United States $ 640 $ 357 $197
Foreign 773 771 681
$1,413 $1,128 $878
Total income tax expense is summarized as follows:
(In millions) 2000 1999 1998
Payable currently
Federal $112 $ 29 $ 30
State 22 6 8
Foreign 93 48 50
227 83 88
Payment deferred
Federal 13 (159) (14)
State 14 23 11
Foreign 180 157 90
207 21 87
Total income tax expense(a) $434 $104 $175
<FN>
(a) See Note 11 for tax benefits related to stock options
exercised by employees reflected in shareholders'
equity.
The differences between taxes computed at the U.S. federal
statutory tax rate and Enron's effective income tax rate are as
follows:
2000 1999 1998
Statutory federal income tax
provision 35.0% 35.0% 35.0%
Net state income taxes 2.5 1.8 1.7
Foreign tax rate differential (2.4) (7.0) 0.8
Equity earnings 5.3 (10.1) (4.3)
Basis and stock sale differences (11.9) (10.8) (14.2)
Goodwill amortization 1.6 1.6 2.0
Audit settlement related to Monthly
Income Preferred Shares - (1.8) -
Other 0.6 0.5 (1.0)
30.7% 9.2% 20.0%
The principal components of Enron's net deferred income tax
liability are as follows:
December 31,
(In millions) 2000 1999
Deferred income tax assets
Alternative minimum tax credit
carryforward $ 254 $ 220
Net operating loss carryforward 369 1,302
Other 189 188
812 1,710
Deferred income tax liabilities
Depreciation, depletion and
amortization 1,813 1,807
Price risk management activities (182) 1,133
Other 963 782
2,594 3,722
Net deferred income tax liabilities(a) $1,782 $2,012
<FN>
(a) Includes $138 million and $118 million in other current
liabilities for 2000 and 1999, respectively.
Enron has an alternative minimum tax (AMT) credit carryforward
of approximately $254 million which can be used to offset regular
income taxes payable in future years. The AMT credit has an
indefinite carryforward period.
Enron has a net operating loss carryforward applicable to U.S.
subsidiaries of approximately $65 million, which will begin to
expire in 2011. Enron has a net operating loss carryforward
applicable to non-U.S. subsidiaries of approximately $1.2
billion, of which $1.0 billion can be carried forward
indefinitely. The remaining $200 million expires between the
years 2001 and 2010. Deferred tax assets have been recognized
on the $65 million domestic loss and $1.0 billion of the foreign
losses.
U.S. and foreign income taxes have been provided for earnings
of foreign subsidiary companies that are expected to be remitted
to the U.S. Foreign subsidiaries' cumulative undistributed
earnings of approximately $1.8 billion are considered to be
permanently reinvested outside the U.S. and, accordingly, no U.S.
income taxes have been provided thereon. In the event of a
distribution of those earnings in the form of dividends, Enron
may be subject to both foreign withholding taxes and U.S. income
taxes net of allowable foreign tax credits.
6 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest expense, including
fees incurred on sales of accounts receivable, is as follows:
(In millions) 2000 1999 1998
Income taxes (net of refunds) $ 62 $ 51 $ 73
Interest (net of amounts capitalized) 834 678 585
Non-Cash Activity. In 2000, Enron acquired all minority
shareholders' interests in Enron Energy Services, LLC and other
businesses with Enron common stock. See Note 2.
In 2000 and 1999, Enron entered into various transactions with
related parties, which resulted in an exchange of assets and an
increase in common stock of $171 million in 2000. See Note 16.
In 2000, a partnership in which Enron was a limited partner
made a liquidating distribution to Enron resulting in a non-cash
increase in current assets of $220 million, a decrease of $20 million
in non-current assets and an increase in current liabilities of
$160 million.
During 2000 and 1999, Enron received the rights to specific
third-party fiber optic cable in exchange for the rights on
specific fiber optic cable held for sale by Enron. These
exchanges resulted in non-cash increases in assets of $69
million and $111 million, respectively.
During 1999, Enron issued approximately 7.6 million shares of
common stock in connection with the acquisition, by an unconsolidated
equity affiliate, of interests in three power plants in New Jersey.
In December 1998, Enron extinguished its 6.25% Exchangeable
Notes with 10.5 million shares of EOG common stock.
7 CREDIT FACILITIES AND DEBT
Enron has credit facilities with domestic and foreign banks
which provide for an aggregate of $1.4 billion in long-term
committed credit, of which $150 million relates to Portland
General, and $2.4 billion in short-term committed credit.
Expiration dates of the committed facilities range from February
2001 to May 2005. Interest rates on borrowings are based upon
the London Interbank Offered Rate, certificate of deposit rates
or other short-term interest rates. Certain credit facilities
contain covenants which must be met to borrow funds. Such debt
covenants are not anticipated to materially restrict Enron's
ability to borrow funds under such facilities. Compensating
balances are not required, but Enron is required to pay a
commitment or facility fee. At December 31, 2000, $290 million
was outstanding under these facilities.
Enron has also entered into agreements which provide for
uncommitted lines of credit totaling $420 million at December 31,
2000. The uncommitted lines have no stated expiration dates.
Neither compensating balances nor commitment fees are required,
as borrowings under the uncommitted credit lines are available
subject to agreement by the participating banks. At December 31,
2000, no amounts were outstanding under the uncommitted lines.
In addition to borrowing from banks on a short-term basis,
Enron and certain of its subsidiaries sell commercial paper to
provide financing for various corporate purposes. As of December
31, 2000 and 1999, short-term borrowings of $15 million and $330
million, respectively, and long-term debt due within one year of
$1,303 million and $670 million, respectively, have been
reclassified as long-term debt based upon the availability of
committed credit facilities with expiration dates exceeding
one year and management's intent to maintain such amounts in
excess of one year. Weighted average interest rates on
short-term debt outstanding at December 31, 2000 and 1999 were
6.9% and 6.4%, respectively.
Detailed information on long-term debt is as follows:
December 31,
(In millions) 2000 1999
Enron Corp.
Senior debentures
6.75% to 8.25% due 2005 to 2012 $ 262 $ 318
Notes payable(a)
7.00% exchangeable notes due 2002 532 239
6.40% to 9.88% due 2001 to 2028 4,416 4,114
Floating rate notes due 2000 to 2005 92 79
Other 242 34
Northern Natural Gas Company
Notes payable
6.75% to 7.00% due 2005 to 2011 500 500
Transwestern Pipeline Company
Notes payable
9.20% due 2004 11 15
Portland General
First mortgage bonds
6.47% to 9.46% due 2000 to 2023 328 373
Pollution control bonds
Various rates due 2010 to 2033 200 200
Other 282 129
Other 414 204
Amount reclassified from short-term debt 1,318 1,000
Unamortized debt discount and premium (47) (54)
Total long-term debt $8,550 $7,151
<FN>
(a) Includes debt denominated in foreign currencies of approximately
$955 million and $525 million, respectively, at December 31,
2000 and 1999. Enron has entered into derivative transactions
to hedge interest rates and foreign currency exchange fluctuations
associated with such debt. See Note 3.
The indenture securing Portland General's First Mortgage Bonds
constitutes a direct first mortgage lien on substantially all
electric utility property and franchises, other than expressly
excepted property.
The aggregate annual maturities of long-term debt outstanding
at December 31, 2000 were $2,112 million, $750 million, $852
million, $646 million and $1,592 million for 2001 through 2005,
respectively.
In February 2001, Enron issued $1.25 billion zero coupon
convertible senior notes that mature in 2021. The notes carry a
2.125 percent yield to maturity with an aggregate face value of $1.9
billion and may be converted, upon certain contingencies being met,
into Enron common stock at an initial conversion premium of 45 percent.
8 MINORITY INTERESTS
Enron's minority interests at December 31, 2000 and 1999
include the following:
(In millions) 2000 1999
Majority-owned limited liability
company and limited partnerships $1,759 $1,773
Elektro(a) 462 475
Other 193 182
$2,414 $2,430
<FN>
(a) Relates to the respective parents of Elektro, which
had minority shareholders in 2000 and 1999.
Enron has formed separate limited partnerships and a limited
liability company with third-party investors for various
purposes. These entities are included in Enron's consolidated
financial statements, with the third-party investors' interests
reflected in "Minority Interests" in the Consolidated Balance
Sheet.
In October 2000, Enron contributed approximately $1.0 billion
of net assets to a wholly-owned limited liability company. A
third party contributed $500 million for a preferred membership
interest in the limited liability company. The contribution by
the third party was invested in highly liquid investment grade
securities (including Enron notes) and short-term receivables.
At December 31, 2000, the majority-owned limited liability company
held net assets of $1.0 billion.
During 1999, third-party investors contributed cash and
merchant investments totaling $1.0 billion to Enron-sponsored
entities to invest in highly liquid investment grade securities
(including Enron notes) and short-term receivables. The merchant
investments, totaling $500 million, were sold prior to December
31, 1999. During 2000, Enron acquired a portion of the minority
shareholder's interest for $485 million.
In 1998, Enron formed a wholly-owned limited partnership for
the purpose of holding $1.6 billion of assets contributed by
Enron. That partnership contributed $850 million of assets and a
third party contributed $750 million to a second newly-formed
limited partnership. The assets held by the wholly-owned limited
partnership represent collateral for a $750 million note
receivable held by the second limited partnership. In 2000 and
1999, the wholly-owned and second limited partnerships sold
assets valued at approximately $152 million and $460 million,
respectively, and invested the proceeds in Enron notes.
Absent certain defaults or other specified events, Enron has
the option to acquire the minority holders' interests in these
partnerships. Enron has the option to acquire the minority
holders' interest in the limited liability company after
November 2002. If Enron does not acquire the minority holders'
interests before December 2004 through May 2009, or earlier upon
certain specified events, the minority interest holders may cause
the entities to liquidate their assets and dissolve.
In 2000, as part of a restructuring, Jacare Electrical
Distribution Trust (Jacare) sold a 47 percent interest in Enron
Brazil Power Holdings V Ltd, a subsidiary that holds its
investment in Elektro, to Whitewing for approximately $460 million.
See Note 9. The proceeds were used to acquire the original minority
shareholder's interest in Jacare.
In 2000, Enron acquired all minority shareholders' interests
in Enron Energy Services, LLC and Enron Renewable Energy Corp.
See Note 2.
9 UNCONSOLIDATED EQUITY AFFILIATES
Enron's investment in and advances to unconsolidated
affiliates which are accounted for by the equity method is as
follows:
Net
Voting December 31,
(In millions) Interest(a) 2000 1999
Azurix Corp. 34% $ 325 $ 762
Bridgeline Holdings 40% 229 -
Citrus Corp. 50% 530 480
Dabhol Power Company 50% 693 466
Joint Energy Development Investments
L.P. (JEDI)(b) 50% 399 211
Joint Energy Development Investments
II L.P. (JEDI II)(b) 50% 220 162
SK - Enron Co. Ltd. 50% 258 269
Transportadora de Gas del Sur S.A. 35% 479 452
Whitewing Associates, L.P.(b) 50% 558 662
Other 1,603 1,572
$5,294(c) $5,036(c)
<FN>
(a) Certain investments have income sharing ratios which differ
from Enron's voting interests.
(b) JEDI and JEDI II account for their investments at fair
value. Whitewing accounts for certain of its investments at
fair value. These affiliates held fair value investments
totaling $1,823 million and $1,128 million, respectively,
at December 31, 2000 and 1999.
(c) At December 31, 2000 and 1999, the unamortized excess of
Enron's investment in unconsolidated affiliates was $182
million and $179 million, respectively, which is being
amortized over the expected lives of the investments.
Enron's equity in earnings (losses) of unconsolidated equity
affiliates is as follows:
(In millions) 2000 1999 1998
Azurix Corp.(a) $(428) $ 23 $ 6
Citrus Corp. 50 25 23
Dabhol Power Company 51 30 -
Joint Energy Development Investments L.P. 197 11 (45)
Joint Energy Development Investments II, L.P. 58 92 (4)
TNPC, Inc. (The New Power Company) (60) - -
Transportadora de Gas del Sur S.A. 38 32 36
Whitewing Associates, L.P. 58 9 -
Other 123 87 81
$ 87 $309 $ 97
<FN>
(a) During the fourth quarter of 2000, Azurix Corp. (Azurix) impaired
the carrying value of its Argentine assets, resulting in a charge
of approximately $470 million. Enron's portion of the charge was
$326 million.
Summarized combined financial information of Enron's
unconsolidated affiliates is presented below:
December 31,
(In millions) 2000 1999
Balance sheet
Current assets(a) $ 5,884 $ 3,168
Property, plant and equipment, net 14,786 14,356
Other noncurrent assets 13,485 9,459
Current liabilities(a) 4,739 4,401
Long-term debt(a) 9,717 8,486
Other noncurrent liabilities 6,148 2,402
Owners' equity 13,551 11,694
<FN>
(a) Includes $410 million and $327 million receivable from
Enron and $302 million and $84 million payable to Enron at
December 31, 2000 and 1999, respectively.
(In millions) 2000 1999 1998
Income statement(a)
Operating revenues $15,903 $11,568 $8,508
Operating expenses 14,710 9,449 7,244
Net income 586 1,857 142
Distributions paid to Enron 137 482 87
<FN>
(a) Enron recognized revenues from transactions with
unconsolidated equity affiliates of $510 million in 2000,
$674 million in 1999 and $563 million in 1998.
In 2000 and 1999, Enron sold approximately $632 million and
$192 million, respectively, of merchant investments and other
assets to Whitewing. Enron recognized no gains or losses in
connection with these transactions. Additionally, in 2000, ECT
Merchant Investments Corp., a wholly-owned Enron subsidiary,
contributed two pools of merchant investments to a limited
partnership that is a subsidiary of Enron. Subsequent to the
contributions, the partnership issued partnership interests
representing 100% of the beneficial, economic interests in the
two asset pools, and such interests were sold for a total of $545
million to a limited liability company that is a subsidiary of
Whitewing. See Note 3. These entities are separate legal entities
from Enron and have separate assets and liabilities. In 2000 and 1999,
the Related Party, as described in Note 16, contributed $33 million
and $15 million, respectively, of equity to Whitewing. In 2000,
Whitewing contributed $7.1 million to a partnership formed by Enron,
Whitewing and a third party. Subsequently, Enron sold a portion of
its interest in the partnership through a securitization. See Note 3.
In 2000, The New Power Company sold warrants convertible into
common stock of The New Power Company for $50 million to the
Related Party (described in Note 16).
From time to time, Enron has entered into various
administrative service, management, construction, supply and
operating agreements with its unconsolidated equity affiliates.
Enron's management believes that its existing agreements and
transactions are reasonable compared to those which could have
been obtained from third parties.
10 PREFERRED STOCK
Preferred Stock. Enron has authorized 16,500,000 shares of
preferred stock, no par value. At December 31, 2000, Enron had
outstanding 1,240,933 shares of Cumulative Second Preferred
Convertible Stock (the Convertible Preferred Stock), no par
value. The Convertible Preferred Stock pays dividends at an
amount equal to the higher of $10.50 per share or the equivalent
dividend that would be paid if shares of the Convertible
Preferred Stock were converted to common stock. Each share of
the Convertible Preferred Stock is convertible at any time at the
option of the holder thereof into 27.304 shares of Enron's common
stock, subject to certain adjustments. The Convertible Preferred
Stock is currently subject to redemption at Enron's option at a
price of $100 per share plus accrued dividends. During 2000,
1999 and 1998, 55,251 shares, 23,664 shares and 17,797 shares,
respectively, of the Convertible Preferred Stock were converted
into common stock.
In 1999, all outstanding shares of Series A Preferred Stock
held by Whitewing were exchanged for 250,000 shares of Enron
Mandatorily Convertible Junior Preferred Stock, Series B (Series
B Preferred Stock). Also in 1999, Enron entered into a Share
Settlement Agreement under which Enron could be obligated, under
certain circumstances, to deliver additional shares of common
stock or Series B Preferred Stock to Whitewing for the amount
that the market price of the converted Enron common shares is
less than $28 per share. In 2000, Enron increased the strike
price in the Share Settlement Agreement to $48.55 per share in
exchange for an additional capital contribution in Whitewing by
third-party investors. The number of shares of Series B
Preferred Stock authorized equals the number of shares necessary
to satisfy Enron's obligation under the Share Settlement
Agreement. Absent certain defaults or other specified events,
Enron has the option to acquire the third-party investors'
interests. If Enron does not acquire the third-party investors'
interests before January 2003, or earlier upon certain specified
events, Whitewing may liquidate its assets and dissolve. At
December 31, 2000, Enron had outstanding 250,000 shares of Series
B Preferred Stock with a liquidation value of $1.0 billion. The
Series B Preferred Stock pays semi-annual cash dividends at an
annual rate of 6.50%. Each share of Series B Preferred Stock is
mandatorily convertible into 200 shares of Enron common stock on
January 15, 2003 or earlier upon the occurrence of certain
events.
In connection with the 1998 financial restructuring (yielding
proceeds of approximately $1.2 billion) of Enron's investment in
Azurix, Enron committed to cause the sale of Enron convertible
preferred stock, if certain debt obligations of the related
entity which acquired an interest in Azurix, are defaulted
upon, or in certain events, including, among other things,
Enron's credit ratings fall below specified levels. If the sale
of the convertible preferred stock is not sufficient to retire
such obligations, Enron would be liable for the shortfall. Such
obligations will mature in December 2001. The number of common
shares issuable upon conversion is based on future common stock
prices.
Company-Obligated Preferred Securities of Subsidiaries.
Summarized information for Enron's company-obligated preferred
securities of subsidiaries is as follows:
Liquidation
(In millions, except per share amounts December 31, Value
and shares) 2000 1999 Per Share
Enron Capital LLC
8% Cumulative Guaranteed Monthly Income
Preferred Shares (8,550,000 shares)(a) $ 214 $ 214 $ 25
Enron Capital Trust I
8.3% Trust Originated Preferred Securities
(8,000,000 preferred securities)(a) 200 200 25
Enron Capital Trust II
8 1/8% Trust Originated Preferred Securities
(6,000,000 preferred securities)(a) 150 150 25
Enron Capital Trust III
Adjustable-Rate Capital Trust Securities
(200,000 preferred securities) - 200 1,000
LNG Power II L.L.C.
6.74% Preference Units (105,000 shares)(b) 105 - 1,000
Enron Equity Corp.
8.57% Preferred Stock (880 shares)(a) 88 88 100,000
7.39% Preferred Stock (150 shares)(a)(c) 15 15 100,000
Enron Capital Resources, L.P.
9% Cumulative Preferred Securities, Series A
(3,000,000 preferred securities)(a) 75 75 25
Other 57 58
$ 904 $1,000
<FN>
(a) Redeemable under certain circumstances after specified
dates.
(b) Initial rate is 6.74% increasing to 7.79%.
(c) Mandatorily redeemable in 2006.
11 COMMON STOCK
Earnings Per Share. The computation of basic and diluted
earnings per share is as follows:
Year Ended December 31,
(In millions, except per share amounts) 2000 1999 1998
Numerator:
Basic
Income before cumulative effect
of accounting changes $ 979 $1,024 $ 703
Preferred stock dividends:
Second Preferred Stock (17) (17) (17)
Series A Preferred Stock - (30) -
Series B Preferred Stock (66) (19) -
Income available to common share-
holders before cumulative effect
of accounting changes 896 958 686
Cumulative effect of accounting
changes - (131) -
Income available to common
shareholders $ 896 $ 827 $ 686
Diluted
Income available to common share-
holders before cumulative effect
of accounting changes $ 896 $ 958 $ 686
Effect of assumed conversion of
dilutive securities(a):
Second Preferred Stock 17 17 17
Income before cumulative effect
of accounting changes 913 975 703
Cumulative effect of accounting
changes - (131) -
Income available to common share-
holders after assumed conversions $ 913 $ 844 $ 703
Denominator:
Denominator for basic earnings per
share - weighted-average shares 736 705 642
Effect of dilutive securities:
Preferred stock 35 36 36
Stock options 43 28 17
Dilutive potential common shares 78 64 53
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 814 769 695
Basic earnings per share:
Before cumulative effect of accounting
changes $1.22 $1.36 $1.07
Cumulative effect of accounting changes - (0.19) -
Basic earnings per share $1.22 $1.17 $1.07
Diluted earnings per share
Before cumulative effect of accounting
changes $1.12 $1.27 $1.01
Cumulative effect of accounting changes - (0.17) -
Diluted earnings per share $1.12 $1.10 $1.01
<FN>
(a) The Series A Preferred Stock and the Series B Preferred
Stock were not included in the calculation of diluted earnings
per share because conversion of these shares would be
antidilutive.
Derivative Instruments. At December 31, 2000, Enron had
derivative instruments (excluding amounts disclosed in Note 10)
on 54.8 million shares of Enron common stock, of which
approximately 12 million shares are with JEDI and 22.5 million
shares are with related parties (see Note 16), at an average
price of $67.92 per share on which Enron was a fixed price
payor. Shares potentially deliverable to counterparties under the
contracts are assumed to be outstanding in calculating diluted
earnings per share unless they are antidilutive. At December 31,
2000, there were outstanding non-employee options to purchase 6.4 million
shares of Enron common stock at an exercise price of $19.59 per
share.
Stock Option Plans. Enron applies Accounting Principles Board
(APB) Opinion 25 and related interpretations in accounting for
its stock option plans. In accordance with APB Opinion 25, no
compensation expense has been recognized for the fixed stock
option plans. Compensation expense charged against income for
the restricted stock plan for 2000, 1999 and 1998 was $220
million, $131 million and $58 million, respectively. Had
compensation cost for Enron's stock option compensation plans
been determined based on the fair value at the grant dates for
awards under those plans, Enron's net income and earnings per
share would have been $886 million ($1.09 per share basic, $1.01
per share diluted) in 2000, $827 million ($1.08 per share basic,
$1.01 per share diluted) in 1999 and $674 million ($1.02 per
share basic, $0.97 per share diluted) in 1998.
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with
weighted-average assumptions for grants in 2000, 1999 and 1998,
respectively: (i) dividend yield of 2.4%, 2.4% and 2.5%; (ii)
expected volatility of 22.3%, 20.0% and 18.3%; (iii) risk-free
interest rates of 5.8%, 5.6% and 5.0%; and (iv) expected lives of
3.2 years, 3.7 years and 3.8 years.
Enron has four fixed option plans (the Plans) under which
options for shares of Enron's common stock have been or may be
granted to officers, employees and non-employee members of the
Board of Directors. Options granted may be either incentive
stock options or nonqualified stock options and are granted at
not less than the fair market value of the stock at the time of
grant. Under the Plans, Enron may grant options with a maximum
term of 10 years. Options vest under varying schedules.
Summarized information for Enron's Plans is as follows:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
Outstanding,
beginning of year 93,531 $26.74 79,604 $19.60 78,858 $17.89
Granted 39,167 70.02 35,118 37.49 15,702 24.99
Exercised(a) (32,235) 24.43 (19,705) 18.08 (13,072) 15.70
Forfeited (4,358) 35.68 (1,465) 24.51 (1,498) 19.77
Expired (42) 23.75 (21) 18.79 (386) 19.76
Outstanding,
end of year 96,063 $44.24 93,531 $26.74 79,604 $19.60
Exercisable,
end of year 46,755 $29.85 52,803 $22.56 45,942 $18.16
Available for grant,
end of year(b) 22,066 24,864 10,498
Weighted average
fair value of
options granted $13.35 $ 7.24 $ 4.20
<FN>
(a) In 2000, Enron recorded tax benefits related to stock options
exercised by employees of approximately $390 million reflected
in shareholders' equity.
(b) Includes up to 20,707,969 shares, 22,140,962 shares and
10,497,670 shares as of December 31, 2000, 1999 and 1998,
respectively, which may be issued either as restricted stock
or pursuant to stock options.
The following table summarizes information about stock options
outstanding at December 31, 2000 (shares in thousands):
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/00 Life Price at 12/31/00 Price
$ 6.88 to $20.00 15,368 4.7 $16.72 14,001 $16.54
20.06 to 34.81 24,091 6.8 24.79 18,304 24.13
35.03 to 47.31 21,520 6.8 40.52 8,731 40.27
50.48 to 69.00 13,965 6.5 60.18 4,072 61.81
71.06 to 86.63 21,119 5.6 79.69 1,647 72.36
96,063 6.2 $44.24 46,755 $29.85
Restricted Stock Plan. Under Enron's Restricted Stock Plan,
participants may be granted stock without cost to the
participant. The shares granted under this plan vest to the
participants at various times ranging from immediate vesting to
vesting at the end of a five-year period. Upon vesting, the
shares are released to the participants. The following
summarizes shares of restricted stock under this plan:
(Shares in thousands) 2000 1999 1998
Outstanding, beginning of year 6,781 6,034 5,074
Granted 2,243 2,672 2,122
Released to participants (2,201) (1,702) (1,064)
Forfeited (1,444) (223) (98)
Outstanding, end of year 5,379 6,781 6,034
Available for grant, end of year 20,708 22,141 10,498
Weighted average fair value of
restricted stock granted $57.69 $37.38 $23.70
12 PENSION AND OTHER BENEFITS
Enron maintains a retirement plan (the Enron Plan) which is a
noncontributory defined benefit plan covering substantially all
employees in the United States and certain employees in foreign
countries. The benefit accrual is in the form of a cash balance
of 5% of annual base pay.
Portland General has a noncontributory defined benefit pension
plan (the Portland General Plan) covering substantially all of
its employees. Benefits under the Portland General Plan are based
on years of service, final average pay and covered compensation.
Enron Facility Services has a noncontributory defined benefit
pension plan (the EFS Plan) covering substantially all of its
employees. Benefits under the EFS Plan are based on years
of service, final average pay and covered compensation.
Enron also maintains a noncontributory employee stock
ownership plan (ESOP) which covers all eligible employees.
Allocations to individual employees' retirement accounts within
the ESOP offset a portion of benefits earned under the Enron
Plan. All shares included in the ESOP have been allocated to the
employee accounts. At December 31, 2000 and 1999, 12,600,271
shares and 17,241,731 shares, respectively, of Enron common stock
were held by the ESOP, a portion of which may be used to offset
benefits under the Enron Plan.
Assets of the Enron Plan, the Portland General Plan and the
EFS Plan are comprised primarily of equity securities, fixed
income securities and temporary cash investments. It is Enron's
policy to fund all pension costs accrued to the extent required
by federal tax regulations.
Enron provides certain postretirement medical, life insurance
and dental benefits to eligible employees and their eligible
dependents. Benefits are provided under the provisions of
contributory defined dollar benefit plans. Enron is currently
funding that portion of its obligations under these
postretirement benefit plans which are expected to be recoverable
through rates by its regulated pipelines and electric utility
operations.
Enron accrues these postretirement benefit costs over the
service lives of the employees expected to be eligible to receive
such benefits. Enron is amortizing the transition obligation
which existed at January 1, 1993 over a period of approximately
19 years.
The following table sets forth information related to changes
in the benefit obligations, changes in plan assets, a
reconciliation of the funded status of the plans and components
of the expense recognized related to Enron's pension and other
postretirement plans:
Pension Benefits Other Benefits
(In millions) 2000 1999 2000 1999
Change in benefit obligation
Benefit obligation, beginning of year $708 $687 $120 $134
Service cost 33 32 2 2
Interest cost 53 49 10 9
Plan participants' contributions - - 4 3
Plan amendments - 6 - -
Actuarial loss (gain) 9 (51) 10 (12)
Acquisitions and divestitures - 36 - -
Effect of curtailment and settlements(a) (2) (8) - -
Benefits paid (55) (43) (22) (16)
Benefit obligation, end of year $746 $708 $124 $120
Change in plan assets
Fair value of plan assets, beginning
of year(b) $853 $774 $ 68 $ 60
Actual return on plan assets 41 80 (4) 7
Acquisitions and divestitures - 37 - -
Employer contribution 19 5 7 6
Plan participants' contributions - - 4 3
Benefits paid (55) (43) (11) (8)
Fair value of plan assets, end of year(b) $858 $853 $ 64 $ 68
Reconciliation of funded status, end of year
Funded status, end of year $112 $145 $(60) $(52)
Unrecognized transition obligation (asset) (6) (13) 44 48
Unrecognized prior service cost 25 32 12 14
Unrecognized net actuarial loss (gain) 55 11 (17) (29)
Prepaid (accrued) benefit cost $186 $175 $(21) $(19)
Weighted-average assumptions at December 31
Discount rate 7.75% 7.75% 7.75% 7.75%
Expected return on plan assets (pre-tax) (c) (c) (d) (d)
Rate of compensation increase (e) (e) (e) (e)
Components of net periodic benefit cost
Service cost $ 33 $ 32 $ 2 $ 2
Interest cost 53 49 10 9
Expected return on plan assets (75) (70) (4) (4)
Amortization of transition obligation
(asset) (6) (6) 4 4
Amortization of prior service cost 5 5 1 1
Recognized net actuarial loss (gain) - 3 (1) -
Effect of curtailment and settlements(a) - (6) - 6
Net periodic benefit cost $ 10 $ 7 $ 12 $ 18
<FN>
(a) Represents one-time nonrecurring events including the
exchange and sale of EOG (see Note 2) and certain employees
ceasing participation in the Portland General Plan as a result of
union negotiations.
(b) Includes plan assets of the ESOP of $116 million and $121
million at December 31, 2000 and 1999, respectively.
(c) Long-term rate of return on assets is assumed to be 10.5%
for the Enron Plan, 9.0% for the Portland General Plan and 9.5%
for the EFS Plan.
(d) Long-term rate of return on assets is assumed to be 7.5% for
the Enron assets and 9.5% for the Portland General assets.
(e) Rate of compensation increase is assumed to be 4.0% for the
Enron Plan, 4.0% to 9.5% for the Portland General Plan and 5.0%
for the EFS Plan.
Included in the above amounts are the unfunded obligations for
the supplemental executive retirement plans. At both December 31,
2000 and 1999, the projected benefit obligation for these unfunded
plans was $56 million and the fair value of assets was $1 million.
The measurement date of the Enron Plan and the ESOP is
September 30, and the measurement date of the Portland General
Plan, the EFS Plan and the postretirement benefit plans is
December 31. The funded status as of the valuation date of the
Enron Plan, the Portland General Plan, the ESOP and the
postretirement benefit plans reconciles with the amount detailed
above which is included in "Other Assets" on the Consolidated
Balance Sheet.
For measurement purposes, 6% and 10% annual rates of increase
in the per capita cost of covered health care benefits were
assumed for the period 2000 to 2001 for the Enron and Portland
General postretirement plans, respectively. The rates were assumed
to decrease to 5% by 2002 and 2010 for the Enron and Portland
General postretirement plans, respectively. Assumed health care
cost trend rates have a significant effect on the amounts reported
for the health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects:
1-Percentage 1-Percentage
(In millions) Point Increase Point Decrease
Effect on total of service and
interest cost components $0.4 $(0.3)
Effect on postretirement benefit obligation $4.4 $(3.8)
Additionally, certain Enron subsidiaries maintain various
incentive based compensation plans for which participants may
receive a combination of cash or stock options, based upon the
achievement of certain performance goals.
13 RATES AND REGULATORY ISSUES
Rates and regulatory issues related to certain of Enron's
natural gas pipelines and its electric utility operations are
subject to final determination by various regulatory agencies.
The domestic interstate pipeline operations are regulated by the
Federal Energy Regulatory Commission (FERC) and the electric
utility operations are regulated by the FERC and the Oregon
Public Utility Commission (OPUC). As a result, these operations
are subject to the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects
of Certain Types of Regulation," which recognizes the economic
effects of regulation and, accordingly, Enron has recorded
regulatory assets and liabilities related to such operations.
The regulated pipelines operations' net regulatory assets were
$290 million and $250 million at December 31, 2000 and 1999,
respectively, and are expected to be recovered over varying time
periods.
The electric utility operations' net regulatory assets were
$450 million and $494 million at December 31, 2000 and 1999,
respectively. Based on rates in place at December 31, 2000,
Enron estimates that it will collect substantially all of its
regulatory assets within the next 11 years.
Pipeline Operations. On April 16, 1999, Northern Natural Gas
Company (Northern) filed an uncontested Stipulation and Agreement
of Settlement (Settlement) with the FERC and an order
approving the Settlement was issued by the FERC on June 18,
1999. The rates effectuated by Northern on November 1, 1999
remain in effect. On May 1, 2000, Northern filed to implement an
optional volumetric firm throughput service. An order approving
such service was issued November 8, 2000 with effectiveness
November 1, 2000; a rehearing request is pending. On November 1,
2000, Northern filed to increase its rates for the recovery of
return and taxes on its System Levelized Account. On November
22, 2000, the FERC issued an order approving the rates, subject
to refund.
On November 1, 2000, Transwestern Pipeline Company implemented
a rate escalation of settled transportation rates in accordance
with its May 1995 global settlement, as amended in May 1996. On
August 23, 1999, Transwestern filed for a new service, Enhanced
Firm Backhaul. An order by the FERC was issued February 23,
2000, approving the service.
Electric Utility Operations. On October 2, 2000 PGE filed a
restructuring plan with the OPUC that implements the provisions
of the State Senate Bill SB1149, signed into law in July 1999.
The new law provides industrial and commercial customers of
investor-owned utilities in the state direct access to competing
energy suppliers by October 1, 2001. As filed, PGE's plan also
proposes an increase in base rates, with new tariffs effective on
October 1, 2001. PGE is a 67.5% owner of the Trojan Nuclear
Plant (Trojan). In September 2000, PGE entered into an agreement
with the OPUC related to Trojan. See Note 14. At December 31,
2000, PGE's regulatory asset related to recovery of Trojan
decommissioning costs from customers was $190 million.
Enron believes, based upon its experience to date and after
considering appropriate reserves that have been established, that
the ultimate resolution of pending regulatory matters will not
have a material impact on Enron's financial position or results
of operations.
14 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 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 claims have been settled. 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, PGE ceased commercial
operation of the Trojan nuclear power generating facility. The OPUC
granted PGE, through a general rate order, recovery of, and a return
on, 87 percent of its remaining investment in Trojan.
The OPUC's general rate order related to Trojan has been
subject to litigation in various state courts, including rulings
by the Oregon Court of Appeals and petitions to the Oregon
Supreme Court filed by parties opposed to the OPUC's order,
including the Utility Reform Project(URP) and the Citizens
Utility Board (CUB).
In August 2000, PGE entered into agreements with CUB and the
staff of the OPUC to settle the litigation related to PGE's
recovery of its investment in the Trojan plant. Under the
agreements, CUB agreed to withdraw from the litigation and to
support the settlement as the means to resolve the Trojan
litigation. The OPUC approved the accounting and ratemaking
elements of the settlement on September 29, 2000. As a result of
these approvals, PGE's investment in Trojan is no longer included
in rates charged to customers, either through a return on or a
return of that investment. Collection of ongoing decommissioning
costs at Trojan is not affected by the settlement agreements or
the September 29, 2000 OPUC order. With CUB's withdrawal, URP is
the one remaining significant adverse party in the litigation.
URP has indicated that it plans to continue to challenge the OPUC
order allowing PGE recovery of its investment in Trojan.
Enron cannot predict the outcome of these actions. 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.
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.
15 COMMITMENTS
Firm Transportation Obligations. Enron has firm
transportation agreements with various joint venture and
other pipelines. Under these agreements, Enron must make
specified minimum payments each month. At December 31, 2000,
the estimated aggregate amounts of such required future payments
were $91 million, $88 million, $89 million, $85 million and $77 million
for 2001 through 2005, respectively, and $447 million for later
years.
The costs recognized under firm transportation agreements,
including commodity charges on actual quantities shipped, totaled
$68 million, $55 million and $30 million in 2000, 1999 and 1998,
respectively.
Other Commitments. Enron leases property, operating
facilities and equipment under various operating leases, certain
of which contain renewal and purchase options and residual value
guarantees. Future commitments related to these items at
December 31, 2000 were $123 million, $98 million, $69 million,
$66 million and $49 million for 2001 through 2005, respectively,
and $359 million for later years. Guarantees under the leases
total $556 million at December 31, 2000.
Total rent expense incurred during 2000, 1999 and 1998 was
$143 million, $143 million and $147 million, respectively.
Enron has entered into two development agreements whereby
Enron is required to manage construction of a certain number of
power projects on behalf of third party owners. Under one
development agreement, where construction is expected to be
completed on or before March 31, 2004, Enron has agreed to enter
into power offtake agreements for varying portions of the offtake
from each facility. Under both development agreements, Enron
maintains purchase options, which may be assigned to a third
party. In addition to the purchase option under the development
agreement, Enron maintains lease options on the power projects.
If upon completion, which is expected to occur on or before August 31,
2002, Enron has failed to exercise one of its options, Enron may
participate in the remarketing of the power projects which Enron
has guaranteed the recovery of 89.9 percent of certain project
costs, of which approximately $140 million has been incurred
through December 31, 2000.
Enron guarantees the performance of certain of its
unconsolidated equity affiliates in connection with letters of
credit issued on behalf of those entities. At December 31, 2000,
a total of $264 million of such guarantees were outstanding,
including $103 million on behalf of EOTT Energy Partners, L.P.
(EOTT). In addition, Enron is a guarantor on certain liabilities
of unconsolidated equity affiliates and other companies totaling
approximately $1,863 million at December 31, 2000, including $538
million related to EOTT trade obligations. The EOTT letters of
credit and guarantees of trade obligations are secured by the
assets of EOTT. Enron has also guaranteed $386 million in lease
obligations for which it has been indemnified by an "Investment
Grade" company. Management does not consider it likely that
Enron would be required to perform or otherwise incur any losses
associated with the above guarantees. In addition, certain
commitments have been made related to capital expenditures and
equity investments planned in 2001.
On December 15, 2000, Enron announced that it had entered into
an agreement with Azurix under which the holders of Azurix's
approximately 39 million publicly traded shares would receive cash
of $8.375 in exchange for each share. The agreement, which is
subject to the approval of Azurix shareholders, is expected to
close in early 2001.
16 RELATED PARTY TRANSACTIONS
In 2000 and 1999, 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. Management believes that
the terms of the transactions with the Related Party were reasonable
compared to those which could have been negotiated with unrelated
third parties.
In 2000, Enron entered into transactions with the Related
Party to hedge certain merchant investments and other assets. As
part of the transactions, Enron (i) contributed to newly-formed
entities (the Entities) assets valued at approximately $1.2
billion, including $150 million in Enron notes payable, 3.7
million restricted shares of outstanding Enron common stock and the
right to receive up to 18.0 million shares of outstanding Enron
common stock in March 2003 (subject to certain conditions) and
(ii) transferred to the Entities assets valued at approximately
$309 million, including a $50 million note payable and an
investment in an entity that indirectly holds warrants
convertible into common stock of an Enron equity method investee.
In return, Enron received economic interests in the Entities,
$309 million in notes receivable, of which $259 million is
recorded at Enron's carryover basis of zero, and a special
distribution from the Entities in the form of $1.2 billion in
notes receivable, subject to changes in the principal for amounts
payable by Enron in connection with the execution of additional
derivative instruments. Cash in these Entities of $172.6 million
is invested in Enron demand notes. In addition, Enron paid $123
million to purchase share-settled options from the Entities on
21.7 million shares of Enron common stock. The Entities paid
Enron $10.7 million to terminate the share-settled options on
14.6 million shares of Enron common stock outstanding.
In late 2000, Enron entered into share-settled collar
arrangements with the Entities on 15.4 million shares of
Enron common stock. Such arrangements will be accounted
for as equity transactions when settled.
In 2000, Enron entered into derivative transactions with the
Entities with a combined notional amount of approximately $2.1
billion to hedge certain merchant investments and other assets.
Enron's notes receivable balance was reduced by $36 million as a
result of premiums owed on derivative transactions. Enron
recognized revenues of approximately $500 million related to the
subsequent change in the market value of these derivatives,
which offset market value changes of certain merchant investments
and price risk management activities. In addition, Enron recognized
$44.5 million and $14.1 million of interest income and interest expense,
respectively, on the notes receivable from and payable to the
Entities.
In 1999, Enron entered into a series of transactions
involving a third party and the Related Party. The effect of the
transactions was (i) Enron and the third party amended certain
forward contracts to purchase shares of Enron common stock,
resulting in Enron having forward contracts to purchase Enron
common shares at the market price on that day, (ii) the Related
Party received 6.8 million shares of Enron common stock subject
to certain restrictions and (iii) Enron received a note
receivable, which was repaid in December 1999, and certain
financial instruments hedging an investment held by Enron. Enron
recorded the assets received and equity issued at estimated fair
value. In connection with the transactions, the Related Party
agreed that the senior officer of Enron would have no pecuniary
interest in such Enron common shares and would be restricted from
voting on matters related to such shares. In 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.
In 2000, Enron sold a portion of its dark fiber inventory to
the Related Party in exchange for $30 million cash and a $70
million note receivable that was subsequently repaid. Enron
recognized gross margin of $67 million on the sale.
In 2000, the Related Party acquired, through securitizations,
approximately $35 million of merchant investments from Enron. In
addition, Enron and the Related Party formed partnerships in which
Enron contributed cash and assets and the Related Party
contributed $17.5 million in cash. Subsequently, Enron sold a
portion of its interests in the partnerships through securitizations.
See Note 3. Also, Enron contributed a put option to a trust in
which the Related Party and Whitewing hold equity and debt interests.
At December 31, 2000, the fair value of the put option was a $36
million loss to Enron.
In 1999, the Related Party acquired approximately $371 million,
merchant assets and investments and other assets from Enron. Enron
recognized pre-tax gains of approximately $16 million related to
these transactions. The Related Party also entered into an agreement
to acquire Enron's interests in an unconsolidated equity affiliate
for approximately $34 million.
17 ASSET IMPAIRMENT
In 1999, continued significant changes in state and federal
rules regarding the use of MTBE as a gasoline additive have
significantly impacted Enron's view of the future prospects for
this business. As a result, Enron completed a reevaluation of
its position and strategy with respect to its operated MTBE
assets which resulted in (i) the purchase of certain previously-
leased MTBE related assets, under provisions within the lease, in
order to facilitate future actions, including the potential
disposal of such assets and (ii) a review of all MTBE-related
assets for impairment considering the recent adverse changes and
their impact on recoverability. Based on this review and
disposal discussions with market participants, in 1999, Enron
recorded a $441 million pre-tax charge for the impairment of its
MTBE-related assets.
18 ACCOUNTING PRONOUNCEMENTS
Cumulative Effect of Accounting Changes. In 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
1999 charge was primarily related to the adoption of SOP 98-5.
Recently Issued Accounting Pronouncements. In 1998, the
Financial Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities,"
which was subsequently amended by SFAS No. 137 and SFAS No. 138.
SFAS No. 133 must be applied to all derivative
instruments and certain derivative instruments embedded in
hybrid instruments and requires that such instruments be
recorded in the balance sheet either as an asset or liability
measured at its fair value through earnings, with special
accounting allowed for certain qualifying hedges. Enron will
adopt SFAS No. 133 as of January 1, 2001. Due to
the adoption of SFAS No. 133, Enron will recognize
an after-tax non-cash loss of approximately $5 million in
earnings and an after-tax non-cash gain in "Other Comprehensive
Income," a component of shareholders' equity, of approximately
$22 million from the cumulative effect of a change in accounting
principle. Enron will also reclassify $532 million from "Long-
Term Debt" to "Other Liabilities" due to the adoption.
The total impact of Enron's adoption of SFAS No. 133
on earnings and on "Other Comprehensive Income" is
dependent upon certain pending interpretations, which are
currently under consideration, including those related to
"normal purchases and normal sales" and inflation escalators
included in certain contract payment provisions. The
interpretations of these issues, and others, are currently under
consideration by the FASB. While the ultimate conclusions
reached on interpretations being considered by the FASB could
impact the effects of Enron's adoption of SFAS No. 133,
Enron does not believe that such conclusions would have a material
effect on its current estimate of the impact of adoption.
19 QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data is as follows:
(In millions, except First Second Third Fourth Total
per share amounts) Quarter Quarter Quarter Quarter Year(a)
2000
Revenues $13,145 $16,886 $30,007 $40,751 $100,789
Income before
interest, minority
interests and income taxes 624 609 666 583 2,482
Net income 338 289 292 60 979
Earnings per share:
Basic $ 0.44 $ 0.37 $ 0.37 $ 0.05 $ 1.22
Diluted 0.40 0.34 0.34 0.05 1.12
1999
Revenues $ 7,632 $ 9,672 $11,835 $10,973 $ 40,112
Income before
interest, minority
interests and income taxes 533 469 520 473 1,995
Net income 122 222 290 259 893
Earnings per share:
Basic $ 0.17 $ 0.29 $ 0.38 $ 0.33 $ 1.17
Diluted 0.16 0.27 0.35 0.31 1.10
<FN>
(a) The sum of earnings per share for the four quarters may not
equal earnings per share for the total year due to changes in
the average number of common shares outstanding.
20 GEOGRAPHIC AND 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 chief operating
decision maker, or decision-making group, in deciding how to
allocate resources to an individual segment and in assessing
performance of the segment. Enron's chief operating decision-
making group is the Office of the Chairman.
Enron's chief operating decision-making group evaluates
performance and allocates resources based on income before
interest, minority interests and income taxes (IBIT) as well as
on net income. Certain costs related to company-wide functions
are allocated to each segment. However, interest on corporate
debt is primarily maintained at Corporate and is not allocated to
the segments. Therefore, management believes that IBIT is the
dominant measurement of segment profits consistent with Enron's
consolidated financial statements. The accounting policies of
the segments are substantially the same as those described in the
summary of significant accounting policies in Note 1.
Beginning in 2000, Enron's communications business is being
managed as a separate operating segment named Broadband Services
and therefore, based on criteria set by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," is reported separately.
Enron has divided its operations into the following reportable
segments, based on similarities in economic characteristics,
products and services, types of customers, methods of
distributions and regulatory environment.
Transportation and Distribution - Regulated industries.
Interstate transmission of natural gas. Management and operation
of pipelines. Electric utility operations.
Wholesale Services - Energy commodity sales and services,
risk management products and financial services to wholesale customers.
Development, acquisition and operation of power plants, natural gas
pipelines and other energy-related assets.
Retail Energy Services - Sales of natural gas and electricity
directly to end-use customers, particularly in the commercial and
industrial sectors, including the outsourcing of energy-related
activities.
Broadband Services - Construction and management of a
nationwide fiber optic network, the marketing and management of
bandwidth and the delivery of high-bandwidth content.
Exploration and Production - Natural gas and crude oil
exploration and production primarily in the United States,
Canada, Trinidad and India until August 16, 1999. See Note 2.
Corporate and Other - Includes operation of water and
renewable energy businesses as well as clean fuels plants.
Financial information by geographic and business segment
follows for each of the three years in the period ended December
31, 2000.
Geographic Segments
Year Ended December 31,
(In millions) 2000 1999 1998
Operating revenues from
unaffiliated customers
United States $ 77,891 $30,176 $25,247
Foreign 22,898 9,936 6,013
$100,789 $40,112 $31,260
Income before interest,
minority interests and income
taxes
United States $ 2,131 $ 1,273 $ 1,008
Foreign 351 722 574
$ 2,482 $ 1,995 $ 1,582
Long-lived assets
United States $ 10,899 $ 8,286 $ 9,382
Foreign 844 2,395 1,275
$ 11,743 $10,681 $10,657
Business Segments
Transportation Retail Corporate
and Wholesale Energy Broadband and
(In millions) Distribution Services Services Services Other(d) Total
2000
Unaffiliated revenues(a) $2,742 $93,278 $3,824 $ 408 $ 537 $100,789
Intersegment revenues(b) 213 1,628 791 - (2,632) -
Total revenues 2,955 94,906 4,615 408 (2,095) 100,789
Depreciation, depletion and
amortization 278 343 38 77 119 855
Operating income (loss) 565 1,668 58 (64) (274) 1,953
Equity in earnings of
unconsolidated equity affiliates 65 486 (60) 1 (405) 87
Gains on sales of assets
and investments 25 9 74 - 38 146
Gain on the issuance of stock by
TNPC, Inc. - - 121 - - 121
Interest income 6 171 5 3 27 212
Other income, net 71 (74) (33) - (1) (37)
Income (loss) before interest,
minority interests and
income taxes 732 2,260 165 (60) (615) 2,482
Capital expenditures 270 1,280 70 436 325 2,381
Identifiable assets 7,509 43,920 4,266 1,313 3,201 60,209
Investments in and advances to
unconsolidated equity affiliates 774 4,014 104 24 378 5,294
Total assets $8,283 $47,934 $4,370 $1,337 $3,579 $ 65,503
Transportation Retail Exploration Corporate
and Wholesale Energy and and
(In millions) Distribution Services Services Production(c) Other(d) Total
1999
Unaffiliated revenues(a) $2,013 $35,501 $1,518 $ 429 $ 651 $40,112
Intersegment revenues(b) 19 786 289 97 (1,191) -
Total revenues 2,032 36,287 1,807 526 (540) 40,112
Depreciation, depletion and
amortization 247 294 29 213 87 870
Operating income (loss) 551 889 (81) 66 (623) 802
Equity in earnings of
unconsolidated equity affiliates 50 237 - - 22 309
Gains on sales of assets
and investments 19 11 - - 511 541
Interest income 20 126 5 - 11 162
Other income, net 45 54 8 (1) 75 181
Income (loss) before interest,
minority interests and
income taxes 685 1,317 (68) 65 (4) 1,995
Capital expenditures 316 1,216 64 226 541 2,363
Identifiable assets 7,148 18,501 956 - 1,740 28,345
Investments in and advances to
unconsolidated equity affiliates 811 2,684 - - 1,541 5,036
Total assets $7,959 $21,185 $ 956 $ - $3,281 $33,381
1998
Unaffiliated revenues(a) $1,833 $27,220 $1,072 $ 750 $ 385 $31,260
Intersegment revenues(b) 16 505 - 134 (655) -
Total revenues 1,849 27,725 1,072 884 (270) 31,260
Depreciation, depletion and
amortization 253 195 31 315 33 827
Operating income (loss) 562 880 (124) 133 (73) 1,378
Equity in earnings of
unconsolidated equity affiliates 33 42 (2) - 24 97
Gains on sales of assets
and investments 31 4 - - 21 56
Interest income 9 67 - 1 11 88
Other income, net 2 (25) 7 (6) (15) (37)
Income (loss) before interest,
minority interests and
income taxes 637 968 (119) 128 (32) 1,582
Capital expenditures 310 706 75 690 124 1,905
Identifiable assets 6,955 12,205 747 3,001 2,009 24,917
Investments in and advances to
unconsolidated equity affiliates 661 2,632 - - 1,140 4,433
Total assets $7,616 $14,837 $ 747 $3,001 $3,149 $29,350
<FN>
(a) Unaffiliated revenues include sales to unconsolidated equity
affiliates.
(b) Intersegment sales are made at prices comparable to those
received from unaffiliated customers and in some instances are
affected by regulatory considerations.
(c) Reflects results through August 16, 1999. See Note 2.
(d) Includes consolidating eliminations.