SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
____________
Form 10-K
____________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-13159
ENRON CORP.
(Exact name of registrant as specified in its charter)
Oregon 47-0255140
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ENRON BUILDING
1400 Smith Street, Houston, Texas 77002-7369
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 713-853-6161
____________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which Registered
Common Stock, no par value New York Stock
Exchange;
Chicago Stock Exchange;
and
Pacific Stock Exchange
Cumulative Second Preferred New York Stock Exchange
Convertible Stock, and
no par value Chicago Stock Exchange
7% Exchangeable Notes due New York Stock Exchange
July 31, 2002
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
Aggregate market value of the voting stock held by non-
affiliates of the registrant, based on closing prices in the
daily composite list for transactions on the New York Stock
Exchange on February 15, 2000, was approximately
$51,230,710,146. As of March 1, 2000, there were
724,621,221 shares of registrant's Common Stock, no par
value, outstanding.
Documents incorporated by reference. Certain portions of
the registrant's definitive Proxy Statement for the May 2,
2000 Annual Meeting of Shareholders ("Proxy Statement") are
incorporated herein by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Page
Item 1. Business 1
General 1
Business Segments 1
Transportation and Distribution 2
Interstate Transmission of Natural Gas 2
Crude Oil Transportation Services 4
Electricity Transmission and Distribution
Operations 4
Wholesale Energy Operations and Services 5
Developed Markets 7
Developing Markets 8
Enron Broadband Services 11
Retail Energy Services 12
Other Enron Businesses 13
Regulation 13
Revenues by Business Segment 19
Current Executive Officers of the Registrant 20
Item 2. Properties 22
Natural Gas Transmission 22
Electric Utility Properties 22
Domestic Power Plants 23
International Power Plants and Pipelines 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 26
PART II
Item 5. Market for the Registrant's Common Equity
and Related Shareholder Matters 27
Item 6. Selected Financial Data (Unaudited) 28
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 29
Item 7A. Financial Risk Management 41
Information Regarding Forward Looking Statements 44
Item 8. Financial Statements and Supplementary Data 45
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 45
PART III
Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners
and Management 46
Item 13. Certain Relationships and Related Transactions 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 47
PART I
Item 1. BUSINESS
GENERAL
Enron Corp., an Oregon corporation, is an energy and
communications company with headquarters in Houston, Texas.
Enron's operations are conducted through its subsidiaries
and affiliates which are principally engaged in the
transportation of natural gas through pipelines to markets
throughout the United States; the generation, transmission
and distribution of electricity to markets in the
northwestern United States; the marketing of natural gas,
electricity and other commodities and related risk
management and finance services worldwide; the development,
construction and operation of power plants, pipelines and
other energy related assets worldwide; and the development
of an intelligent network platform to provide bandwidth
management services and deliver high bandwidth applications.
As of December 31, 1999, Enron employed approximately 17,900
persons.
As used herein, unless the context indicates otherwise,
"Enron" refers to Enron Corp. and its subsidiaries and
affiliates.
BUSINESS SEGMENTS
Enron has divided its operations into the following
reportable segments:
Transportation and Distribution - Regulated industries;
interstate transmission of natural gas; management and
operation of pipelines; electric utility operations.
Wholesale Energy Operations and 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 and communications assets
including broadband services.
Retail Energy Services - Sales of natural gas and
electricity directly to end-use customers, mainly in the
commercial and industrial sectors, including the outsourcing
of customers' energy-related activities;
Exploration and Production - Natural gas and crude oil
exploration and production primarily in the United States,
Canada, Trinidad and India until August 16, 1999.
Corporate and Other - Includes operation of water and
renewable energy businesses as well as clean fuels plants.
For financial information by business segment for the
fiscal years ended December 31, 1997 through December 31,
1999, please see Note 20 to the Consolidated Financial
Statements on page F-36.
TRANSPORTATION AND DISTRIBUTION
Enron's Transportation and Distribution business is
comprised of the company's North American interstate natural
gas transportation systems and its electricity transmission
and distribution operations in Oregon.
Interstate Transmission of Natural Gas
Enron and its subsidiaries operate domestic interstate
natural gas pipelines extending from Texas to the Canadian
border and across the southern United States from Florida to
California. Included in Enron's domestic interstate natural
gas pipeline operations are Northern Natural Gas Company
("Northern"), Transwestern Pipeline Company ("Transwestern")
and Florida Gas Transmission Company ("Florida Gas")
(indirectly 50% owned by Enron). Northern, Transwestern and
Florida Gas are interstate pipelines and are subject to the
regulatory jurisdiction of the Federal Energy Regulatory
Commission (the "FERC"). Each pipeline serves customers in
a specific geographical area: Northern, the upper Midwest;
Transwestern, principally the California market and pipeline
interconnects on the east end of the Transwestern system;
and Florida Gas, the State of Florida. In addition, Enron
holds an interest in Northern Border Partners, L.P., which
owns a 70% interest in the Northern Border Pipeline system.
An Enron subsidiary operates the Northern Border Pipeline
system, which transports gas from Western Canada to delivery
points in the midwestern United States.
Northern Natural Gas Company. Through its
approximately 16,500-mile natural gas pipeline system
stretching from Texas to Michigan's Upper Peninsula,
Northern transports natural gas to points in its traditional
market area of Illinois, Iowa, Kansas, Michigan, Minnesota,
Nebraska, South Dakota and Wisconsin. Gas is transported to
town border stations for consumption and resale by non-
affiliated gas utilities and municipalities and to other
pipeline companies and gas marketers. Northern also
transports gas at various points outside its traditional
market area in the production areas of Colorado, Kansas, New
Mexico, Oklahoma, Texas and North Dakota for utilities, end-
users and other pipeline and marketing companies. Northern
provides transportation and storage services to
approximately 90 utility customers and end-users in the
upper midwestern United States. Most of Northern's revenues
are comprised of monthly demand charges that are based on
contracted capacity rather than throughput.
In Northern's market area, natural gas is an energy
source available for traditional residential, commercial and
industrial uses. Northern's throughput totaled 1,394
trillion British thermal units ("TBtu") in 1999. Northern
also operates three natural gas storage facilities and two
liquefied natural gas storage peaking units. These storage
facilities provide Northern the operational capacity to
balance its system on a daily basis and assist in meeting
customers' heating season system requirements. Northern
competes with other interstate pipelines in the
transportation and storage of natural gas. In addition, the
FERC continues its efforts to introduce more competition
into the natural gas industry, having the effect of
increasing transportation and purchase options of Northern's
traditional customer base. See "Regulation - Natural Gas
Rates and Regulations".
Transwestern Pipeline Company. Transwestern is an
interstate pipeline engaged in the transportation of natural
gas. Through its approximately 2,500-mile pipeline system,
Transwestern transports natural gas from West Texas,
Oklahoma, eastern New Mexico and the San Juan Basin in
northwestern New Mexico and southern Colorado primarily to
the California market and to markets off the east end of its
system. Transwestern has access to three significant gas
basins for its gas supply: the San Juan Basin, the Permian
Basin in West Texas and eastern New Mexico and the Anadarko
Basin in the Texas and Oklahoma Panhandles. Transwestern's
peak delivery capacity was approximately 1.5 billion cubic
feet ("Bcf") per day in 1999. Substantially all of
Transwestern's delivery capacity to California was held by
shippers on a firm basis until November 1, 1996, when
approximately 450 million cubic feet ("MMcf") per day of
firm capacity was turned back to Transwestern by a major
customer as a result of oversupply of pipeline capacity to
California. Anticipating this turnback, Transwestern
entered into a settlement agreement with its customers
whereby the costs associated with this turnback are shared
by Transwestern and certain customers. Transwestern is
responsible for 70% of the risk of resubscribing the
released capacity, and Transwestern's customers have the
remaining 30% of such risk through 2001. In addition to
this cost-sharing mechanism, Transwestern and its customers
also agreed to contract rates through 2006 and agreed that
Transwestern would not be required to file a new rate case
for rates to be effective prior to November 1, 2006.
Transwestern's mainline includes a lateral pipeline to
the San Juan Basin which allows Transwestern to access San
Juan Basin gas supplies. Via Transwestern's San Juan
lateral pipeline, the San Juan Basin gas may be delivered to
California markets as well as markets off the east end of
Transwestern's system. This bi-directional flow capability
enhances pipeline utilization. Transwestern added bi-
directional flow capability in 1995 to increase system
flexibility and utilization as a result of the oversupply of
pipeline capacity to California. This initially increased
volumes delivered to the system's east end. Transwestern
has firm transportation service on the east end of its
system and transports Permian, Anadarko and San Juan Basin
supplies into Texas, Oklahoma and the midwestern United
States. More recently, Transwestern has reestablished
volumes flowing into the previously oversupplied California
market.
In January 2000, Transwestern received FERC
certification to increase delivery capability to California
by 140 MMcf per day. This expansion is expected to be in
service in May 2000. Transwestern competes with several
interstate pipelines in the California market and its
markets off the east end of its system.
Florida Gas Transmission Company. An Enron subsidiary
owns a 50% interest in Florida Gas by virtue of its 50%
interest in Citrus Corp., which owns all of the capital
stock of Florida Gas. Another Enron subsidiary operates the
Florida Gas pipeline.
Florida Gas is an interstate pipeline company that
transports natural gas for third parties. Its approximately
4,795-mile pipeline system extends from South Texas to a
point near Miami, Florida. Florida Gas provides a high
degree of gas supply flexibility for its customers because
of its proximity to the Gulf of Mexico producing region and
its interconnections with other interstate pipeline systems
which provide access to virtually every major natural gas
producing region in the United States. Florida Gas serves a
mix of customers anchored by electric utility generators.
Florida Gas has periodically expanded its system
capacity to keep pace with the growing demand for natural
gas in Florida. In February 2000, Florida Gas received FERC
certification for its Phase IV expansion. Phase IV will
increase system capacity approximately 200 MMcf per day and
is backed by 20-year firm transportation agreements. This
expansion is expected to be in service in mid-2001 and is
expected to cost approximately $270 million. In December
1999, Florida Gas filed an application with FERC for its
Phase V expansion, which will increase capacity an
additional approximately 400 MMcf per day at an estimated
cost of $420 million. Subject to regulatory approvals,
Phase V is expected to be in service in 2002. Florida Gas'
current firm average delivery capacity into Florida is
approximately 1,495 billion British thermal units ("BBtu")
per day. Florida Gas also owns an interest in facilities
that link its system to the Mobile Bay producing area.
Florida Gas' customers have reserved over 99% of the
existing capacity on the Florida Gas system pursuant to
firm, long-term transportation service agreements.
Florida Gas is the only interstate natural gas pipeline
serving peninsular Florida. Florida Gas faces competition
from residual fuel oil in the Florida market. In addition,
there are two proposed pipeline projects currently on file
with the FERC that would compete with Florida Gas to serve
Florida's growing energy needs. Both projects propose
building a pipeline from Mobile, Alabama crossing the Gulf
of Mexico to Florida. Enron is unable to predict which of
these projects, if any, will go forward.
Northern Border Partners, L.P.. Northern Border
Partners, L.P., a Delaware limited partnership, owns 70% of
Northern Border Pipeline Company, a Texas general
partnership ("Northern Border"). An Enron subsidiary holds
a 12.4% interest in the limited partnership and serves as
operator of the pipeline. Northern Border owns an
approximately 1,214-mile interstate pipeline system that
transports natural gas from the Montana-Saskatchewan border
near Port of Morgan, Montana to interconnecting pipelines
and local distribution systems in the States of North
Dakota, South Dakota, Minnesota, Iowa and Illinois.
Northern Border has pipeline access to natural gas reserves
in the provinces of Alberta, British Columbia and
Saskatchewan, as well as the Williston Basin in the United
States. The pipeline system also has access to production
of synthetic gas from the Dakota Gasification Plant in North
Dakota. Interconnecting pipeline facilities provide
Northern Border shippers access to markets in the Midwest,
as well as other markets throughout the United States by
transportation, displacement and exchange agreements.
Therefore, Northern Border is strategically situated to
transport significant quantities of natural gas to major gas
consuming markets. Based upon existing contracts and
capacity, 100% of Northern Border's firm capacity
(approximately 2.4 Bcf of natural gas per day) is
contractually committed through October 31, 2001. In March
2000, Northern Border received FERC approval for Project
2000, an approximately $94 million proposed expansion and
extension of the pipeline system into the heavy industrial
area of northern Indiana. Northern Border competes with two
other interstate pipeline systems that transport gas from
Canada to the Midwest.
Crude Oil Transportation Services
EOTT Energy Partners, L.P. ("EOTT"), a Delaware limited
partnership, is engaged in the purchasing, gathering,
transporting, trading, storage and resale of crude oil and
refined petroleum products, and related activities. EOTT
Energy Corp. (a wholly-owned subsidiary of Enron) serves as
the general partner of EOTT. Enron owns a minority interest
in EOTT. Through its North American crude oil gathering and
marketing operations, EOTT purchases crude oil produced from
approximately 40,000 leases in 18 states and is a purchaser
of lease crude oil in Canada. EOTT provides transportation
and trading services for third party purchasers of crude
oil. EOTT competes with the crude oil marketing affiliates
of major oil companies and with smaller independent
marketers.
Electricity Transmission and Distribution Operations
Enron's electric utility operations are conducted
through its wholly-owned subsidiary Portland General
Electric Company ("PGE"). PGE is engaged in the generation,
purchase, transmission, distribution and sale of electricity
in the State of Oregon. PGE also sells energy to wholesale
customers throughout the western United States. PGE's
Oregon service area is approximately 3,170 square miles,
including 54 incorporated cities of which Portland and Salem
are the largest, within a state-approved service area
allocation of 4,070 square miles. As of December 31, 1999
PGE served approximately 719,000 retail customers.
Enron and Sierra Pacific Resources announced on
November 8, 1999 that they had entered into a purchase and
sale agreement whereby Enron will sell PGE to Sierra Pacific
Resources for $2.1 billion, comprised of $2.02 billion in
cash and the assumption of Enron's approximately $80 million
merger payment obligation. Sierra Pacific Resources will
also assume $1 billion in PGE debt and preferred stock. The
proposed transaction, which is subject to customary
regulatory approvals, is expected to close in late 2000.
PGE serves a diverse retail customer base. Residential
customers constitute the largest customer class and
accounted for approximately 45% of the retail revenues in
1999. Residential demand is highly sensitive to the effects
of weather, with revenues highest during the winter heating
season. Commercial customers comprised approximately 38%
and industrial customers represented approximately 17% of
retail revenues in 1999. The commercial and industrial
classes are not dominated by any single industry. While the
20 largest customers constituted approximately 18% of 1999
retail demand, they represented eight different industry
groups including paper manufacturing, high technology, metal
fabrication, general merchandising and health services. No
single customer represents more than 3% of PGE's total
retail load.
PGE operates within a state-approved service area and
under current regulation is substantially free from direct
retail competition with other electric utilities. PGE's
competitors within its Oregon service territory include
other fuel suppliers, such as the local natural gas company,
which compete with PGE for the residential and commercial
space and water heating market.
WHOLESALE ENERGY OPERATIONS AND SERVICES
Enron's wholesale business ("Enron Wholesale") includes
its wholesale energy businesses around the world, as well as
its new broadband services business. Enron Wholesale
operates in developed markets such as North America and
Europe, as well as developing or newly deregulating markets
including South America, India and Japan.
Enron builds its wholesale businesses through the
creation of networks involving asset ownership, contractual
access to third-party assets and market-making activities.
Each market in which Enron Wholesale operates utilizes these
components in a slightly different manner and is at a
different stage of development. This network strategy has
enabled Enron Wholesale to establish a significant position
in its markets. These activities are categorized into two
business lines: (a) Commodity Sales and Services, and (b)
Assets and Investments. Often these activities are
integrated into a bundled product offering for Enron's
customers.
Enron Wholesale manages its portfolio of contracts and
assets in order to maximize value, minimize the associated
risks and provide overall liquidity. In doing so, Enron
Wholesale uses portfolio and risk management disciplines,
including offsetting or hedging transactions, to manage
exposures to market price movements (commodities, interest
rates, foreign currencies and equities). Additionally,
Enron Wholesale manages its liquidity and exposure to third
party credit risk through monetization of its contract
portfolio or third party insurance contracts. Enron
Wholesale also sells interests in certain investments and
other assets to improve liquidity and overall return.
Commodity Sales and Services. Enron Wholesale provides
customers reliable delivery and predictable pricing for a
range of energy commodities. Activities include the
purchase, sale, marketing and delivery of natural gas,
electricity, liquids and other commodities, as well as
management of associated price risks. Enron acts as
principal to make markets in energy commodities, and
optimizes its large portfolio of energy contracts to source
low cost supplies to meet customers' needs. Enron
Wholesale's delivery of commodities at predictable prices is
facilitated through a network of capabilities including
asset ownership. Accordingly, certain assets involved in
the delivery of these services are included in this business
(such as intrastate natural gas pipelines, power plants and
gas storage facilities).
Enron Wholesale markets, transports and provides energy
commodities as reflected in the following table (including
intercompany amounts):
Year Ended December 31,
1999 1998 1997
Physical Volumes (BBtue/d)(a)(b)
Gas:
United States 8,982 7,418 7,654
Canada 4,398 3,486 2,263
Europe 1,549 1,243 660
Other 23 8 -
14,952 12,155 10,577
Transport volumes 575 559 460
Total gas volumes 15,527 12,714 11,037
Crude oil 5,407 2,960 690
Liquids 753 610 987
Electricity(c) 10,742 11,024 5,256
Total physical volumes (BBtue/d) 32,429 27,308 17,970
Electricity volumes marketed (thousand MWh)
United States 380,518 401,843 191,746
Europe and Other 11,143 483 100
Other 433 46 -
Total 392,094 402,372 191,846
Financial settlements (notional)(BBtue/d) 99,337 75,266 49,028
<FN>
(a) Billion British thermal units equivalent per day.
(b) Includes third-party transactions by Enron Energy Services.
(c) Represents electricity volumes marketed, converted to BBtue/d.
During 1999, Enron Wholesale strengthened its position
in the deregulated North American gas markets and
deregulating power markets. Enron also continued to expand
its presence in Europe, particularly on the Continent where
wholesale markets began deregulation in early 1999. Enron
Wholesale 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. In late 1999, Enron Wholesale launched an Internet-
based e-commerce system, EnronOnline, which allows wholesale
customers to view Enron's real time pricing and complete
commodity transactions with Enron as principal, with no
direct interaction. This capability has positively impacted
energy volumes and transaction levels. In 1999, there was a
19% increase in Enron's physical wholesale commodity sales
over 1998, with physical volumes for all commodities
totaling more than 32 trillion British thermal units
equivalent ("TBtue") per day. This included electricity
volumes equal to 10.7 TBtue, or approximately 392.1 million
megawatt hours, in 1999. In addition, financial settlements
totaled approximately 99 TBtue per day.
Assets and Investments. Enron's Wholesale businesses
make investments in various energy and communications-
related assets as a part of its network strategy. Enron
Wholesale either purchases the asset from a third party or
develops and constructs the asset. In most cases, Enron
Wholesale operates and manages such assets. Earnings from
these investments principally result from operations of the
assets or sales of ownership interests.
Additionally, Enron Wholesale invests in debt and
equity securities of energy and communications-related
businesses, which may also utilize Enron Wholesale's
products and services. With these merchant investments,
Enron's influence is much more limited relative to assets
Enron develops or constructs. Earnings from these
activities result from changes in the market value of the
security.
Developed Markets
North America
Enron purchases, markets and delivers natural gas,
electricity and other energy commodities in North America.
Customers include independent oil and gas producers, energy-
intensive industrials, public and investor-owned utility
power companies, small independent power producers and local
distribution companies. Enron also offers a broad range of
price, risk management and financing services including
forward contracts, swap agreements and other contractual
commitments.
Enron's strategy is to enhance the scale, scope,
flexibility and speed of its North American energy network
through building and acquiring strategically placed
generation assets and forming alliances with customers.
During 1999, Enron completed the development and
construction of three single cycle gas-fired power plants in
the southeastern U.S. to produce 1,300 megawatts of peaking
power. An additional 1,600 megawatts of peaking capacity is
under construction, scheduled for commercial operation in
June 2000. These assets enable Enron to quickly produce
power, enhancing Enron's ability to reliably deliver power
in periods of increased demand or volatile prices.
Enron's intrastate natural gas pipelines include
Houston Pipe Line Company ("HPL"), which owns a 5,269-mile
pipeline in Texas which interconnects with Northern,
Transwestern, Florida Gas and numerous other interstate and
intrastate pipelines. HPL's intrastate natural gas
transportation and storage services are subject to seasonal
variation because many of its customers have weather-
sensitive natural gas requirements. The Railroad Commission
of Texas has jurisdiction over intrastate gas pipeline
rates, operations and transactions in Texas. See
"Regulation--Natural Gas Rates and Regulations." Enron's
Bammel natural gas storage facility located near Houston
provides approximately 58 Bcf of working capacity. This
facility has the flexibility to deliver gas to the Texas
market, or to the East Coast or the midwestern United
States. Enron also owns an interest in Louisiana Resources
Company ("LRC"), which owns a 540-mile intrastate pipeline,
and the Napoleonville natural gas storage facility in
Louisiana, which accesses the LRC pipeline and provides four
Bcf of working capacity.
Europe
As the energy markets liberalize across Europe, Enron's
strategy is to build a presence early in each key market in
order to create a pan European energy business that provides
similar energy service capabilities and products to those
established in North America. Services include delivery of
physical commodities, price risk management and financing
services. At the end of 1999, Enron employed more than 1,750
people in energy marketing and power generation across
continental Europe including the United Kingdom, Norway,
Germany, Turkey, Poland and Italy.
Enron's entry into a market varies from country to
country, including through the provision of asset
infrastructure or the introduction of energy-related
products and services. Enron's activity in the United
Kingdom, which liberalized its energy markets in 1992,
includes well-established natural gas and power marketing
operations. The development, construction and operation of
energy assets such as the Teesside and Sutton Bridge power
plants and the acquisition of Teesside Utilities Services
have contributed to the expansion of Enron's energy
marketing business in the United Kingdom.
Enron has an office in Oslo which accesses the power
trading opportunities available in the Nordic region, the
most open market for power trading in the Europe region.
Enron provides power risk management services to regional
municipalities, utilities and large industrials. Enron was
appointed market maker for all base load electricity trades
on the Nord Pool Nordic Power Exchange. Enron is also
pursuing opportunities in continental Europe where there is
a need for energy infrastructure and demand from large
industrials to restructure their energy supply contracts to
benefit from liberalizing gas and power markets. Enron's
power and gas volumes and transactions in continental Europe
are continuing to increase.
In contrast to the early stages of energy deregulation
in North America where there was generally adequate
infrastructure in place to produce and transport gas and
power, the international energy markets have generally
lacked adequate energy infrastructure, providing Enron
opportunities to develop, construct and operate large energy
projects. Enron has developed or is developing, owns
interests in and/or operates several power plants across
Europe. Enron is the turnkey contractor and will be the
operator of a natural gas fired, 116-megawatt electric, 70-
megawatt thermal power plant located in Nowa Sarzyna,
Poland. Twenty-year power purchase agreements have been
signed with the Polish power grid company for electricity
and with a state-owned chemical company and the City of Nowa
Sarzyna for steam. Financing was completed and construction
began in early 1998, with commercial operation expected to
commence in the first half of 2000. In addition, Enron is
developing a 551-megawatt combined-cycle oil gasification
power plant located on the island of Sardinia, Italy, and
Enron will provide technical services to the plant. A 20-
year power purchase agreement has been signed with ENEL, the
Italian government utility, and commercial operation is
anticipated in 2000. Enron also developed and operates a
478-megawatt gas-fired power plant located at Marmara,
Turkey, near Istanbul. The plant supplies electricity to
the state power utility under a 20-year power purchase
agreement. Commercial operation commenced in June 1999.
Enron is pursuing other opportunities such as joint ventures
with national utilities or other energy companies in the
development, operation or construction of power generation
facilities across Europe, including Spain and Croatia.
Developing Markets
In many markets outside of North America and Europe, a
shortage of energy infrastructure exists, providing Enron
significant opportunities to develop, construct, promote and
operate natural gas pipelines, power plants and other energy
infrastructure. In these markets, Enron's strategy is to
facilitate completion of vital energy assets and investments
that will connect areas of energy supply to areas where
energy is consumed. By creating energy networks, Enron
seeks to provide reliable delivery of physical energy
commodities and develop risk management and financing
services to wholesale customers in key international
regions. Enron has developed regional wholesale energy
businesses around its international asset base in both South
America and in India and continues to pursue a range of
energy infrastructure opportunities outside of North America
and Europe.
Enron's energy infrastructure projects are, to varying
degrees, subject to all the risks associated with project
development, construction and financing in foreign
countries, including without limitation, the receipt of
permits and consents, the availability of project financing
on acceptable terms, expropriation of assets, renegotiation
of contracts with foreign governments and political
instability, as well as changes in laws and policies
governing operations of foreign-based businesses generally.
India
In India, Enron's strategy is to deliver natural gas to
the west coast of India to fuel Enron's own gas-fired power
plants as well as to deliver natural gas to the industrial
regions further north in India and to new power plants
expected to be constructed in southern India.
In connection with a Power Purchase Agreement between
Dabhol Power Company, Enron's 60%-owned subsidiary, and the
Maharashtra State Electricity Board (the "MSEB"), Dabhol
Power Company has constructed Phase I of an electricity
generating power plant south of Mumbai, State of
Maharashtra, India. The power plant has an initial capacity
of 826 megawatts (gross) (Phase I), which began commercial
operations in May 1999. Enron is the fuel manager and
operator of the plant, which provides electricity for the
growing Maharashtra State economy.
Enron is currently developing Phase II of the Dabhol
power project, a 1,624-megawatt (gross) combined-cycle power
plant to be fueled by natural gas. A 20-year power purchase
agreement has been signed with the MSEB. Financing of Phase
II is completed, with commercial operations expected to
commence in late 2001. Phase II will include construction
of a liquefied natural gas (LNG) terminal and harbor, which
will be capable of handling LNG to fuel both the Dabhol
power project and for additional natural gas demand in
India.
South America
Enron is participating in the development of a
comprehensive energy network to connect South America energy
supplies to markets with growing energy demands.
In South America, Enron owns, operates or is developing
several pipeline and power projects. Enron owns a 35%
interest in Transportadora de Gas del Sur ("TGS") in
Argentina. The 4,104-mile pipeline system has a capacity of
approximately 1.9 Bcf per day and primarily serves four
distribution companies in the greater Buenos Aires area
under long-term, firm transportation contracts.
Enron has a 25% interest in Transredes Transporte de
Hidrocarburos S.A. ("Transredes"), an approximately 3,570-
mile system of natural gas, crude oil and products pipelines
located in Bolivia and connecting Bolivian oil and gas
reserves to major markets in Bolivia. Transredes' existing
pipeline operations are being upgraded and the capacity of
the pipeline system is increasing to 4.3 Bcf per day to
supply market needs primarily in eastern Brazil.
Enron developed, along with Petrobras, the national oil
and gas company of Brazil, and others, a pipeline which will
connect with Transredes in Bolivia and transport natural gas
to markets in Brazil. The pipeline project includes an
approximately 1,864-mile natural gas pipeline from Santa
Cruz, Bolivia to Porto Alegre, Brazil. Enron currently owns
(including through its ownership interest in Transredes)
29.75% of the Bolivian segment of the pipeline and 7% of the
Brazilian segment of the pipeline. Commercial operation of
the first phase of the pipeline commenced in mid-1999.
Enron is developing a 480-megawatt combined-cycle power
plant at Cuiaba in the State of Mato Grosso in western
Brazil to feed power into the Brazilian energy grid in
Cuiaba, at a strategic delivery point having few existing
alternate generation sources. Commercial operations of
Phase I of the project (150 megawatts) commenced in early
1999. Commercial operations of Phase II (additional 150
megawatts) and Phase III (additional 180 megawatts) are
expected to commence in late 2000 or early 2001. As an
additional part of this project, Enron is developing an
approximately 385-mile, 18-inch natural gas pipeline
connecting to the Bolivia to Brazil pipeline in Bolivia.
Including its ownership interest through Transredes, Enron
owns 55.75% of the power plant, 53.125% of the Brazilian
segment of the pipeline and 35% of the Bolivian segment of
the pipeline.
Enron has an interest in the Rio de Janeiro municipal
gas distribution company, the gas distribution company of
the State of Rio de Janeiro and natural gas distribution
systems in seven other Brazilian states. These systems
encompass an area with a population of approximately 55
million people. Through these ownership interests, Enron
has long-term franchises for gas distribution in the largest
gas consuming regions in Brazil.
Enron has a majority ownership interest in Elektro-
Electricidade e Servicos S.A. ("Elektro"). Elektro has a
51,000-mile transmission system for the distribution of
electricity to approximately 1.5 million consumers
throughout 228 municipalities in the State of Sao Paulo, and
a number of other municipalities in the State of Mato Grosso
do Sul, Brazil.
Other
As a result of its development, construction and energy
marketing activities, Enron owns or operates various other
energy assets and investments, including the following:
Enron has an interest in a 507-megawatt combined-cycle
power plant, including a liquefied natural gas terminal and
desalination facility, under construction in Penuelas,
Puerto Rico. Enron is the operator of the project, which
includes a 22-year power purchase agreement with the Puerto
Rico Electric Power Authority. Commercial operations are
expected to commence in the second half of 2000.
Certain of Enron's operations in the Caribbean area are
conducted through Enron Americas, Inc. and its subsidiary
companies. Enron Americas' subsidiary Industrias Ventane,
organized in 1953, operates the leading natural gas liquids
transportation and distribution business in Venezuela.
Enron has a natural gas distribution system in Puerto Rico,
and liquid fuels businesses in both Puerto Rico and Jamaica.
Enron operates a 185-megawatt barge-mounted combined-
cycle power plant at Puerto Plata on the north coast of the
Dominican Republic. The plant began operation in January
1996. Power is sold pursuant to a 19-year power purchase
agreement with the Dominican Republic government utility.
In addition, in October 1999 Enron acquired a 17% interest
in an electric generating company in the Domican Republic
which has a capacity of approximately 329 megawatts.
Enron has a 50% interest in an approximately 110-
megawatt fuel-oil-fired diesel engine power plant mounted on
two movable barges at Puerto Quetzal on Guatemala's Pacific
Coast. The U.S. flagged vessels went into commercial
operation in February 1993, and sell all of their power
output under a long-term contract to a large Guatemalan
electric utility, a majority interest in which is owned by
Guatemala's national electric utility.
Enron has a 51% interest in the 355-megawatt Bahia Las
Minas power plant near Colon, Panama. Plant capacity is
sold to local distribution companies through five-year power
purchase agreements.
Enron has a 50% interest in an approximately 357-mile
natural gas pipeline which runs from the northern coast of
Colombia to the central region of the country. Ecopetrol,
the state-owned gas company of Colombia, is the sole
customer for the transportation services under a 15-year
contract.
Enron has an interest in an approximately 80-megawatt
baseload diesel power plant located in Piti, Guam. The
project includes a 20-year power purchase agreement with the
Guam Power Authority, an agency of the Guam government.
Operations commenced in early 1999.
Enron currently has interests in two power plants in
the Philippines. The Batangas power project, owned 100% by
Enron, is an approximately 110-megawatt fuel-oil-fired
diesel engine plant located at Pinamucan, Batangas, on Luzon
Island, which began commercial operation in July 1993. The
Subic Bay power project, owned 50% by Enron, is an
approximately 116-megawatt fuel-oil-fired diesel engine
plant located at the Subic Bay Freeport complex on Luzon
Island, which began commercial operation in February 1994.
Both projects were developed by Enron and sell power to the
National Power Corporation of the Philippines.
Enron has a 100% interest in an approximately 160-
megawatt diesel combined-cycle power plant on Hainan Island,
a special economic trade zone off the southeastern coast of
China. The independent power project is the first such
project developed by a U.S. company in China. An Enron
affiliate is operator and fuel manager.
Enron opened an office in Australia in late 1998 and is
offering similar commodity, risk management and finance
services as those provided to the North American and
European power markets. Enron is also pursuing a similar
strategy in Japan and expects to open an office in Japan in
2000.
In addition to the projects referenced above, Enron is
involved in projects in varying stages of development in
Europe, Mozambique, Nigeria, South Korea and Saudi Arabia,
and is pursuing projects elsewhere.
Enron Broadband Services
Enron Broadband Services is currently developing the
Enron Intelligent Network ("EIN"), a high capacity, global
fiber optic network with a distributed server architecture,
to provide services to the broadband market. It is
anticipated that broadband (or high bandwidth) applications
will be an area of growth in the internet industry, as well
as a platform for growth in e-commerce. Enron's services
include (i) bandwidth management and intermediation services
and (ii) high quality content delivery services.
The EIN consists of a high capacity fiber optic network
based on ownership or contractual access to approximately
14,000 miles of fiber optics throughout the United States,
with a distributed server architecture. The EIN currently
connects to most major U.S. cities and is anticipated to be
linked to Tokyo and several other major European cities
during 2000. At December 31, 1999, the EIN included over
200 large capacity servers in 30 locations throughout the
United States. Enron anticipates that the scope and reach
of the EIN will be increased significantly during 2000.
The EIN's fiber and satellite distribution and imbedded
software intelligence bypasses traditional fragmented and
congested public internet routes to deliver faster, higher
quality data. Enron's Broadband Operating System provides
the intelligence to the EIN and connects to all physical and
software network elements. The Enron Broadband Operating
System is being developed to provide network control of
routing, bandwidth reservation services, metering, tiered
quality of service and management of applications that are
accessed over the EIN. As a result, the EIN allows Enron to
provide high quality content delivery services for content
providers and to contract for firm bandwidth delivery
commitments to support Enron's developing bandwidth
intermediation business.
Similar to its wholesale energy businesses, Enron acts
as principal in its bandwidth transactions and makes markets
for bandwidth capacity. Enron aggregates bandwidth supplies
from multiple counterparties and, from its portfolio of
bandwidth contracts, provides flexible, low cost bandwidth
management products to its customers. Enron believes that
customers will be able to reduce costs by paying for only
the bandwidth they use, at prices that reflect the current
market. Enron completed the first bandwidth transaction in
December 1999, a monthly incremental contract for bandwidth
between New York City and Los Angeles. Enron is currently
developing standardized terms and conditions to allow for
efficient commodity trading of bandwidth. Enron's plans for
the bandwidth capacity market include risk management
products, structured finance and bandwidth portfolio
management to the broadband market.
Enron believes that applying its skills developed in
the merchant energy services market to the developing
bandwidth market can result in operating efficiencies to
Enron and other participants in this market. Development of
bandwidth as a commodity will be dependent, among other
things, on the ability of the industry to develop and
measure quality of service benchmarks and connectivity of
networks of market participants to facilitate processing of
contracted services. There can be no assurance that such a
market will develop.
Enron provides premium broadband delivery services to
media and entertainment, financial services, general
enterprise and technology companies. The transportation of
rich media, including live and on-demand streaming video
over the EIN, significantly enhances the quality and speed
to end-users from that provided by the public internet.
Enron has expanded its sales force to capture the developing
streaming broadband media delivery services market. In
addition to streaming broadband services, Enron is providing
complementary video file transfer, and data management
services and data, storage and archival services.
RETAIL ENERGY SERVICES
Enron Energy Services ("Energy Services") is a
nationwide provider of energy outsourcing products and
services to business customers. This includes sales of
natural gas, electricity and energy management services
directly to commercial and industrial customers, as well as
investments in related businesses. Energy Services provides
end-users with a broad range of energy products and services
to reduce total energy costs. These products and services
include delivery of natural gas and power, energy tariff and
information management, demand-side services to reduce
energy consumption and financial services, including price
risk management.
Energy Services' products and services help commercial
and industrial businesses understand how they can maximize
total energy savings while meeting their operational needs.
With a focus on total energy savings and nationwide
commodity, services and finance capabilities, Energy
Services provides outsourcing and other innovative programs
not only to supply electricity and natural gas to
businesses, but also to manage unregulated energy assets to
reduce their energy consumption, delivery and billing costs,
to eliminate inefficiencies of decentralized systems and to
minimize the risk of energy prices and operations to the
customer.
OTHER ENRON BUSINESSES
Formed in January 1998, Azurix Corp. is a global water
company engaged in the business of owning, operating and
managing water and wastewater assets, providing water and
wastewater related services and developing and managing
water resources. Enron owns a 50% voting interest in
Atlantic Water Trust, which currently owns approximately 67%
of Azurix common stock, with public stockholders owning the
remainder. Azurix's largest asset is Wessex Water Ltd, a
water and wastewater company based in southwestern England.
Other assets include: a 30-year water and wastewater
concession in the Province of Buenos Aires, Argentina;
interests in long-term water and wastewater concessions in
the Province of Mendoza, Argentina and in Cancun, Mexico;
and Azurix North America, a water and wastewater services
company, formerly the businesses of Philip Utilities
Management Corporation, with operations in nine U.S. states
and five Canadian provinces, which has been expanded by
subsequent acquisitions and contract awards.
Enron is pursuing clean energy solutions in North
America and Europe through Enron Wind Corp. Enron Wind is
an integrated manufacturer and developer of wind power,
providing power plant design and engineering, project
development, and operations and maintenance services. Enron
Wind also designs and manufactures wind turbines in
California and Germany.
REGULATION
General
Enron's interstate natural gas pipeline companies are
subject to the regulatory jurisdiction of the FERC under the
Natural Gas Act ("NGA") with respect to rates, accounts and
records, the addition of facilities, the extension of
services in some cases, the abandonment of services and
facilities, the curtailment of gas deliveries and other
matters. Enron's intrastate pipeline companies are subject
to state and some federal regulation. Enron's importation
of natural gas from Canada is subject to approval by the
Office of Fossil Energy of the Department of Energy ("DOE").
Certain activities of Enron are subject to the Natural Gas
Policy Act of 1978 ("NGPA"). Enron's pipelines which carry
natural gas liquids and refined petroleum products are
subject to the regulatory jurisdiction of the FERC under the
Interstate Commerce Act as to rates and conditions of
service.
Enron's power marketing companies are subject to the
FERC's regulatory jurisdiction under the Federal Power Act
("FPA") with respect to rates, terms and conditions of
service and certain reporting requirements. Certain of the
power marketing companies' exports of electricity are
subject to approval by the DOE. Enron's affiliates involved
in cogeneration and independent power production are subject
to regulation by the FERC under the Public Utility
Regulatory Policies Act ("PURPA") and the FPA with respect
to rates, the procurement and provision of certain services
and operating standards.
The regulatory structure that has historically applied
to the natural gas and electric industry is in transition.
Legislative and regulatory initiatives, at both federal and
state levels, are designed to supplement regulation with
increasing competition. Legislation to restructure the
electric industry is under active consideration on both the
federal and state levels. Proposed federal legislation
would make the electric industry more competitive by
providing retail electric customers with the right to choose
their power suppliers. Modifications to PURPA and the
Public Utility Holding Company Act of 1935 ("PUHCA") have
also been proposed. In addition, new technology and
interest in self-generation and cogeneration have provided
opportunities for alternative sources and supplies of
energy. Retention of existing customers and potential
growth of Enron's customer base will depend, in part, upon
the ability of Enron to respond to new customer expectations
and changing economic and regulatory conditions.
Domestic legislation affecting the oil and gas industry
is under constant review for amendment or expansion. Also,
numerous departments and agencies, both federal and state,
are authorized by statute to issue and have issued rules and
regulations which, among other things, require permits for
the drilling of wells, regulate the spacing of wells,
prevent the waste of natural gas and crude oil resources
through proration, require drilling bonds and regulate
environmental and safety matters. The regulatory burden on
the oil and gas industry increases its cost of doing
business and, consequently, affects its ability to compete
and profitability.
Various federal, state and local laws and regulations
covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, may
affect Enron's operations and costs through their effect on
oil and gas exploration, development and production
operations as well as their effect on the construction,
operation and maintenance of pipeline and terminaling
facilities. It is not anticipated that Enron will be
required in the near future to expend amounts that are
material in relation to its total capital expenditures
program by reason of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently
changed, Enron is unable to predict the ultimate cost of
compliance.
Enron's international operations are subject to the
jurisdiction of numerous governmental agencies in the
countries in which its projects are located, with respect to
environmental and other regulatory matters. Generally, many
of the countries in which Enron does and will do business
have recently developed or are in the process of developing
new regulatory and legal structures to accommodate private
and foreign-owned businesses. These regulatory and legal
structures and their interpretation and application by
administrative agencies are relatively new and sometimes
limited. Many detailed rules and procedures are yet to be
issued. The interpretation of existing rules can also be
expected to evolve over time. Although Enron believes that
its operations are in compliance in all material respects
with all applicable environmental laws and regulations in
the applicable foreign jurisdictions, Enron also believes
that the operations of its projects eventually may be
required to meet standards that are comparable in many
respects to those in effect in the United States and in
countries within the European Community. In addition, as
Enron acquires additional projects in various countries, it
will be affected by the environmental and other regulatory
restrictions of such countries.
Natural Gas Rates and Regulations
Northern, Transwestern, Florida Gas and Northern Border
are "natural gas companies" under the NGA and, as such, are
subject to the jurisdiction of the FERC. The FERC has
jurisdiction over, among other things, the construction and
operation of pipeline and related facilities used in the
transportation, storage and sale of natural gas in
interstate commerce, including the extension, expansion or
abandonment of such facilities. The FERC also has
jurisdiction over the rates and charges for the
transportation of natural gas in interstate commerce and the
sale by a natural gas company of natural gas in interstate
commerce for resale. Northern, Transwestern, Florida Gas
and Northern Border hold the required certificates of public
convenience and necessity issued by the FERC authorizing
them to construct and operate all of their pipelines,
facilities and properties for which certificates are
required in order to transport and sell natural gas for
resale in interstate commerce.
As necessary, Northern, Transwestern, Florida Gas and
Northern Border file applications with the FERC for changes
in their rates and charges designed to allow them to recover
substantially all their costs of providing service to
transportation customers, including a reasonable rate of
return. These rates are normally allowed to become
effective after a suspension period, and in certain cases
are subject to refund under applicable law, until such time
as the FERC issues an order on the allowable level of rates.
Since 1985, the FERC has made natural gas
transportation more accessible to gas buyers and sellers on
an open and non-discriminatory basis. These efforts have
significantly altered the marketing and pricing of natural
gas. The FERC's Order No. 636, issued in April 1992,
mandated a fundamental restructuring of interstate pipeline
sales and transportation services. Northern, Transwestern
and Florida Gas have implemented the service restructuring
required by such orders by unbundling their sales service,
implementing certain tariff changes, and establishing a
straight fixed variable rate design to recover fixed costs,
including return on equity, in the demand component of their
rates.
Enron believes that, overall, Order No. 636 has had a
positive impact on Enron and the natural gas industry as a
whole. The structural changes mandated by Order No. 636
have resulted in a more competitive industry. The rate
design included in Order No. 636 allows pipelines to recover
in the demand component of their rates all fixed costs,
including income taxes and return on equity, allocated to
firm customers. Since a pipeline recovers demand costs
regardless of whether gas is ever transported, the straight
fixed variable rate design has reduced the volatility of the
revenue stream to pipelines.
The FERC's Order No. 637 (issued February 9, 2000),
among other things, imposes additional reporting
requirements, requires changes to make pipeline and
secondary market services more comparable, removes the price
caps on secondary market capacity for a period of two years,
allows rates to be based on seasonal or term differentiated
factors and narrows the applicability of the regulatory
right of first refusal to apply only to maximum rate
contracts. Enron believes that, overall, this lesser
regulation of the secondary market will have a positive
effect on the pipelines and on the industry in general.
The rates at which natural gas is sold in Texas to gas
utilities serving customers within an incorporated area are
subject to the original jurisdiction of the Railroad
Commission of Texas. The rates set by city councils or
commissions for gas sold within their jurisdiction may be
appealed to the Railroad Commission. Regulation of
intrastate gas sales and transportation by the Railroad
Commission is governed by certain provisions of the Texas
Gas Utility Regulatory Act of 1983. The Railroad Commission
also regulates production activities and to some degree the
operation of affiliated special marketing programs.
Electric Industry Regulation
Historically, the electric industry has been subject to
comprehensive regulation at the federal and state levels.
The FERC regulated sales of electric power at wholesale and
the transmission of electric energy in interstate commerce
pursuant to the FPA. The FERC subjected public utilities
under the FPA to rate and tariff regulation, accounting and
reporting requirements, as well as oversight of mergers and
acquisitions, securities issuances and dispositions of
facilities. States or local authorities have historically
regulated the distribution and retail sale of electricity,
as well as the construction of generating facilities.
Enacted in 1978, PURPA created opportunities for
independent power producers, including cogenerators. If a
generating project obtained the status of a "Qualifying
Facility," it was exempted by PURPA from most provisions of
the FPA and certain state laws relating to securities, rate
and financial regulation. PURPA also required electric
utilities (i) to purchase electricity generated by
Qualifying Facilities at a price based on the utility's
avoided cost of purchasing electricity or generating
electricity itself, and (ii) to sell supplementary, back-up,
maintenance and interruptible power to Qualifying Facilities
on a just and reasonable and non-discriminatory basis.
PUHCA subjects certain entities that directly or
indirectly own, control or hold the power to vote 10% of the
outstanding voting securities of a "public utility company"
or a company which is a "holding company" of a public
utility company to registration requirements of the
Securities and Exchange Commission ("SEC") and regulation
under PUHCA, unless the entity is eligible for an exemption
or has been granted an SEC order declaring the entity not to
be a holding company. Affiliates, or direct or indirect
holders of 5% of the voting securities of such companies,
are also subject to regulation under PUHCA unless so
eligible for an exemption or SEC order. PUHCA requires
registration for a holding company of a public utility
company, and requires a public utility holding company to
limit its operations to a single integrated utility system
and to divest any other operations not functionally related
to the operation of the utility system. A public utility
company which is a subsidiary of a registered holding
company under PUHCA is subject to financial and
organizational regulation, including SEC approval of its
financing transactions.
The Energy Policy Act of 1992 ("EP Act") exempted from
some traditional federal utility regulation generators
selling power at wholesale in an effort to enhance
competition in the wholesale generation market. The EP Act
also authorized FERC to require utilities to transport and
deliver or "wheel" energy for the supply of bulk power to
wholesale customers.
Recent FERC regulatory initiatives are changing the
electric power industry. In April 1996, FERC paved the way
for the transition to more competitive electric markets by
issuing its Order Nos. 888 and 889. Order No. 888 required
utilities to provide third parties wholesale open access to
transmission facilities on terms comparable to those that
apply when utilities use their own systems. Utilities were
required by the order to file open access tariffs in July
1996. Power pools, which are associations of interconnected
electric transmission and distribution systems that have an
agreement for integrated and coordinated operations, were
directed to file their open access tariffs by the end of
1996. These tariffs enable eligible parties to obtain
wholesale transmission service over utilities' transmission
systems. In Order No. 888, FERC stated its intention to
permit utilities to recover legitimate, verifiable and
prudently incurred costs that are rendered uneconomic or
"stranded" as a result of customers taking advantage of
wholesale open access to meet their power needs from others.
In Order No. 889, FERC required utilities owning
transmission facilities to adopt procedures for an open
access same-time information system ("OASIS") that will make
available, on a real-time basis, pertinent information
concerning each transmission utility's services. The order
also promulgated standards of conduct to ensure that
utilities separate their transmission functions from their
wholesale power merchant functions and to prevent the misuse
of commercially valuable information. In March 1997 FERC
issued its orders on rehearing of Order Nos. 888 and 889.
In these orders FERC upheld the basic open access and OASIS
regulatory framework established in Order Nos. 888 and 889,
while making certain modifications to its open access and
stranded cost recovery rules.
Congress is considering legislation to modify federal
laws affecting the electric industry. Bills have been
introduced in the Senate and the House of Representatives
that would, among other things, open wholesale electric
markets to greater competition and/or provide retail
electric customers with the right to choose their power
suppliers. Modifications to PURPA and PUHCA have also been
proposed. In addition, various states have either enacted
or are considering legislation designed to deregulate the
production and sale of electricity. Deregulation is
expected to result in a shift from cost-based rates to
market-based rates for electric energy and related services.
Although the legislation and regulatory initiatives vary,
common themes include the availability of market pricing,
retail customer choice, recovery of stranded costs, and
separation of generation assets from transmission,
distribution and other assets. It is unclear whether or
when all power customers will obtain open access to power
supplies. Decisions by regulatory agencies may have a
significant impact on the future economics of the power
marketing business.
The Oregon Public Utility Commission ("OPUC"), a three-
member commission appointed by the Governor of Oregon,
approves PGE's retail rates and establishes conditions of
utility service. The OPUC ensures that prices are fair and
equitable and provides PGE an opportunity to earn a fair
return on its investment. In addition, the OPUC regulates
the issuance of securities and prescribes the system of
accounts to be kept by Oregon utilities. PGE is also
subject to the jurisdiction of the FERC with regard to the
transmission and sale of wholesale electric energy,
licensing of hydroelectric projects and certain other
matters. Construction of new generating facilities requires
a permit from Oregon Energy Facility Siting Counsel.
Environmental Regulations
Enron and its subsidiaries are subject to extensive
federal, state and local laws and regulations covering the
discharge of materials into the environment, or otherwise
relating to the protection of the environment, and which
require expenditures for remediation at various operating
facilities and waste disposal sites, as well as expenditures
in connection with the construction of new facilities.
Enron believes that its operations and facilities are in
general compliance with applicable environmental
regulations. Environmental laws and regulations have
changed substantially and rapidly over the last 20 years,
and Enron anticipates that there will be continuing changes.
The clear trend in environmental regulation is to place more
restrictions and limitations on activities that may impact
the environment, such as emissions of pollutants, generation
and disposal of wastes and use and handling of chemical
substances. Increasingly strict environmental restrictions
and limitations have resulted in increased operating costs
for Enron and other businesses throughout the United States,
and it is possible that the costs of compliance with
environmental laws and regulations will continue to
increase. Enron will attempt to anticipate future
regulatory requirements that might be imposed and to plan
accordingly in order to remain in compliance with changing
environmental laws and regulations and to minimize the costs
of such compliance.
The Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), also known as the "Superfund"
law, requires payments for cleanup of certain abandoned
waste disposal sites, even though such waste disposal
activities were undertaken in compliance with regulations
applicable at the time of disposal. Under the Superfund
legislation, one party may, under certain circumstances, be
required to bear more than its proportional share of cleanup
costs at a site where it has responsibility pursuant to the
legislation, if payments cannot be obtained from other
responsible parties. Other legislation mandates cleanup of
certain wastes at facilities that are currently being
operated. States also have regulatory programs that can
mandate waste cleanup. CERCLA authorizes the Environmental
Protection Agency ("EPA") and, in some cases, third parties
to take actions in response to threats to the public health
or the environment and to seek to recover from the
responsible classes of persons the costs they incur. The
scope of financial liability under these laws involves
inherent uncertainties. Enron has entered into consent
decrees with the EPA with respect to the cleanup of two
Superfund sites. Enron has received requests for
information from the EPA and state agencies concerning what
wastes Enron may have sent to certain sites, and it has also
received requests for contribution from other parties with
respect to the cleanup of other sites. However, management
does not believe that any costs incurred in connection with
these sites (either individually or in the aggregate) will
have a material impact on Enron's financial position or
results of operations. (See Item 3, "Legal Proceedings").
PGE's current and historical operations are subject to
a wide range of environmental protection laws covering air
and water quality, noise, waste disposal, and other
environmental issues. PGE is also subject to the Federal
Rivers and Harbors Act of 1899 and similar Oregon laws under
which it must obtain permits from the U.S. Army Corps of
Engineers or the Oregon Division of State Lands to construct
facilities or perform activities in navigable waters of the
State. State agencies or departments which have direct
jurisdiction over environmental matters include the
Environmental Quality Commission, the Oregon Department of
Environmental Quality, the Oregon Office of Energy and
Oregon Energy Facility Siting Counsel. Environmental
matters regulated by these agencies include the siting and
operation of generating facilities and the accumulation,
cleanup and disposal of toxic and hazardous wastes.
Water Industry Regulation
In the United States, the rates for water and
wastewater services are generally subject to state and local
laws and regulation. The Safe Drinking Water Act directs
the EPA to set drinking water standards for the community
water supply systems in the United States. The Federal
Water Pollution Control Act (the "Clean Water Act")
establishes a system of standards, permits and enforcement
procedures for the discharge of pollutants from industrial
and municipal wastewater sources. The law requires permits
for discharges from water treatment facilities and sets
treatment standards for industries and wastewater treatment
plants. Discharge permits issued under the Clean Water Act
are subject to renewal once every five years. The economic
aspects of the water industry in England and Wales is
principally regulated under the provisions of the Water Act
1989, the Water Industry Act 1991 (which consolidated the
Water Act 1989) and the Water Resources Act 1991. In
general, most countries where Azurix has invested, or
intends to consider investments, have drinking water quality
and environmental laws and regulations. Azurix intends to
invest in companies or projects that operate in material
compliance with drinking water quality and environmental
laws and regulations. However, Azurix cannot guarantee that
due diligence performed by it in advance of investing in an
entity will identify any or all non-compliance with
environmental laws and regulations by such entities.
Other
PGE is a 67.5% owner of the Trojan Nuclear Plant
("Trojan"). The Nuclear Regulatory Commission ("NRC")
regulates the licensing and decommissioning of nuclear power
plants. In 1993 the NRC issued a possession-only license
amendment to PGE's Trojan operating license and in early
1996 approved the Trojan Decommissioning Plan. Approval of
the Trojan Decommissioning Plan by the NRC and Oregon Energy
Facility Siting Counsel has allowed PGE to commence
decommissioning activities, which are proceeding
satisfactorily and within approved cost estimates. After
receiving regulatory approval, PGE in 1999 shipped and
disposed of the Trojan reactor vessel as a single package
called the Reactor Vessel and Internals Removal Project.
Equipment removal and disposal activities will also continue
in 2000. Trojan will be subject to NRC regulation until
Trojan is fully decommissioned, all nuclear fuel is removed
from the site and the license is terminated. The Oregon
Department of Energy also monitors Trojan.
REVENUES BY BUSINESS SEGMENT
The following table presents revenues for each business segment
(in millions):
Year Ended December 31,
1999 1998 1997
Transportation and Distribution
Natural Gas and Other Products $ 50 $ 16 $ 10
Electricity 1,354 1,137 712
Transportation 592 628 649
Other Revenues 36 68 45
TOTAL 2,032 1,849 1,416
Wholesale Energy Operations and Services
Natural Gas and Other Products 18,694 12,315 12,373
Electricity 13,733 12,714 4,376
Transportation 7 12 15
Other Revenues 3,853 2,684 1,258
TOTAL 36,287 27,725 18,022
Retail Energy Services
Natural Gas and Other Products 653 616 651
Electricity 144 84 1
Other Revenues 1,010 372 33
TOTAL 1,807 1,072 685
Exploration and Production
Natural Gas and Other Products 535 842 943
Other Revenues (9) 42 (46)
TOTAL 526 884 897
Corporate and Other
Natural Gas and Other Products 182 159 -
Electricity 7 3 12
Other Revenues 551 354 43
TOTAL 740 516 55
Intersegment Eliminations (1,280) (786) (802)
Total Revenues $40,112 $31,260 $20,273
CURRENT EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Present Principal Position and Other
Material Positions Held During Last Five
Years
Kenneth L. Lay (57) Chairman of the Board and Chief
Executive Officer, Enron Corp., since
February 1986.
Jeffrey K. Skilling (46) President and Chief Operating
Officer, Enron Corp., since January
1997. Chief Executive Officer and
Managing Director of Enron Capital &
Trade Resources Corp. ("ECT") from
June 1995 to December 1996. From
August 1990 to June 1995, Mr. Skilling
served ECT in a variety of executive
managerial positions.
Joseph W. Sutton (52) Vice Chairman, Enron Corp., since July
1999. Chief Executive Officer, Enron
International Inc., from May 1998
until July 1999. President, Enron
International Inc., from January 1996
until July 1999. President and Chief
Operating Officer, Enron Development
Corp., from May 1995 to January 1996.
Vice President, Enron Development
Corp., from 1992 to 1995.
J. Clifford Baxter (41) Chairman and Chief Executive
Officer, Enron North America Corp.,
since June 1999. Senior Vice
President, Corporate Development,
Enron Corp., from January 1997 until
June 1999. Managing Director, ECT,
1996; Vice President, Corporate
Development, ECT, 1995-1996.
Mark A. Frevert (45) Chairman and Chief Executive Officer
of Enron Europe since March 1997.
From 1993 to March 1997, Mr. Frevert
served ECT in a variety of executive
managerial positions.
Joseph M. Hirko (43) Co-Chairman and Chief Executive
Officer, Enron Broadband Services,
Inc., formerly Enron Communications,
Inc., since June 1999. Chief
Executive Officer of Enron
Communications, Inc. from January 1998
until June 1999. President of
FirstPoint Communications (predecessor
of Enron Communications, Inc.), from
November 1996 to January 1998. Senior
Vice President of Finance and Chief
Financial Officer, Portland General
Electric Company and Portland General
Corp., from September 1995 to November
1996. Senior Vice President, Enron
Corp., since 1997.
Stanley C. Horton (50) Chairman and Chief Executive
Officer, Enron Gas Pipeline Group,
since January 1997. Co-Chairman and
Chief Executive Officer of Enron
Operations Corp. from February 1996 to
January 1997. President and Chief
Operating Officer of Enron Operations
Corp. from June 1993 to February 1996.
Lou L. Pai (52) Chairman of the Board and Chief
Executive Officer of Enron Energy
Services since March 1997. President
and Chief Operating Officer of ECT
from August 1995 to March 1997. From
March 1993 to August 1995, Mr. Pai
served ECT in a variety of executive
managerial positions.
Kenneth D. Rice (41) Co-Chairman and Chief Executive
Officer, Enron Broadband Services,
Inc., since June 1999. Chairman and
Chief Executive Officer of ECT - North
America from March 1997 until June
1999. From 1993 to March 1997, Mr.
Rice served ECT in a variety of
executive managerial positions.
Richard B. Buy (47) Executive Vice President and Chief
Risk Officer, Enron Corp., since July
1999. Senior Vice President and Chief
Risk Officer, Enron Corp., from March
1999 until July 1999. Managing
Director and Chief Risk Officer, ECT,
from January 1998 to March 1999. Vice
President and Chief Credit Officer,
ECT, from August 1995 to January 1998.
Richard A. Causey (40) Executive Vice President and
Chief Accounting Officer, Enron Corp.,
since July 1999. Senior Vice
President and Chief Accounting and
Information Officer, Enron Corp., from
January 1997 to July 1999. Managing
Director, ECT, from June 1996 to
January 1997; Vice President, ECT,
from January 1992 to June 1996.
James V. Derrick, Jr.(55) Executive Vice President and
General Counsel, Enron Corp., since
July 1999. Senior Vice President and
General Counsel, Enron Corp., from
June 1991 to July 1999. Partner,
Vinson & Elkins from January 1977
until June 1991.
Andrew S. Fastow (38) Executive Vice President and Chief
Financial Officer, Enron Corp., since
July 1999. Senior Vice President and
Chief Financial Officer from March
1998 to July 1999. Senior Vice
President, Finance, Enron Corp., from
January 1997 to March 1998. Managing
Director, Retail and Treasury, ECT,
from May 1995 to January 1997. Vice
President, ECT, from January 1993 to
May 1995.
Steven J. Kean (38) Executive Vice President and Chief of
Staff, Enron Corp. since July 1999.
Senior Vice President, Government
Affairs, Enron Corp., from 1997 to
1999. From 1989 to 1997, Mr. Kean
held a variety of management positions
in Enron Corp. subsidiaries.
Mark E. Koenig (44) Executive Vice President, Investor
Relations, Enron Corp., since July
1999. Senior Vice President, Investor
Relations, Enron Corp., from July 1997
until July 1999. Vice President,
Investor Relations, Enron Corp., from
December 1992 until July 1997.
Michael S. McConnell (40) Executive Vice President,
Technology, Enron Corp., since July
1999. Managing Director, ECT, and
President, Houston Pipe Line Company,
from July 1997 until July 1999. Vice
President, ECT Europe from August 1994
until July 1997.
Jeffrey McMahon (39) Executive Vice President, Finance and
Treasurer, Enron Corp., since July
1999. Senior Vice President, Finance
and Treasurer, Enron Corp., from July
1998 to July 1999. Chief Financial
Officer, Enron Europe, from 1994 to
July 1998.
J. Mark Metts (41) Executive Vice President, Corporate
Development, Enron Corp., since August
1999. Partner, Vinson & Elkins L.L.P.
from January 1991 until August 1999.
Cindy K. Olson (47) Executive Vice President, Human
Resources and Community Relations,
Enron Corp., since September 1999.
Senior Vice President, Corporate
Affairs, Enron Corp., from January
1999 until September 1999. Vice
President, Corporate Affairs, Enron
Corp., from January 1995 until January
1999.
Item 2. PROPERTIES
Natural Gas Transmission
Enron's domestic natural gas facilities include
approximately 32,000 miles of transmission lines, five
underground gas storage fields and two liquefied natural
gas storage facilities. Enron also owns interests in
pipeline and related facilities associated with its
participation and investments in jointly-owned pipeline
systems.
Substantially all the transmission lines of Enron are
constructed on rights-of-way granted by the apparent record
owners of such property. In many instances, lands over
which rights-of-way have been obtained are subject to prior
liens which have not been subordinated to the right-of-way
grants. In some cases, not all of the apparent record
owners have joined in the right-of-way grants, but in
substantially all such cases, signatures of the owners of
majority interests have been obtained. Permits have been
obtained from public authorities to cross over or under, or
to lay facilities in or along, water courses, county roads,
municipal streets and state highways, and in some instances,
such permits are revocable at the election of the grantor,
or, the pipeline may be required to move its facilities at
its own expense. Permits have also been obtained from
railroad companies to cross over or under lands or rights-of-
way, many of which are also revocable at the grantor's
election. Some such permits require annual or other
periodic payments. In a few minor cases, property for
pipeline purposes was purchased in fee.
In most cases, Enron's transmission subsidiaries have
the right of eminent domain to acquire rights-of-way and
lands necessary for their pipelines and appurtenant
facilities.
Enron's regulator and compressor stations, clean fuel
facilities and offices are located on tracts of land owned
by it in fee or leased from others.
Enron is of the opinion that it has generally
satisfactory title to its rights-of-way and lands used in
the conduct of its businesses, subject to liens for current
taxes, liens incident to operating agreements and minor
encumbrances, easements and restrictions which do not
materially detract from the value of such property or the
interest of Enron therein or the use of such properties in
such businesses.
Electric Utility Properties
PGE's principal plants and appurtenant generating
facilities and storage reservoirs are situated on land owned
by PGE in fee or land under the control of PGE pursuant to
valid existing leases, federal or state licenses, easements,
or other agreements. In some cases meters and transformers
are located upon the premises of customers. The indenture
securing PGE's first mortgage bonds constitutes a direct
first mortgage lien on substantially all utility property
and franchises, other than expressly excepted property.
Generating facilities owned by PGE are set forth in the
following table:
PGE Net
MW
Facility Location Fuel Capability
Wholly Owned:
Faraday Estacada, OR Hydro 44
North Fork Estacada, OR Hydro 54
Oak Grove Three Lynx, OR Hydro 44
River Mill Estacada, OR Hydro 25
Pelton Madras, OR Hydro 108
Round Butte Madras, OR Hydro 300
Bull Run Bull Run, OR Hydro 22
Sullivan West Linn, OR Hydro 16
Beaver Clatskanie, OR Gas/Oil 500
Coyote Springs Boardman, OR Gas/Oil 241
Jointly Owned:
Boardman Boardman, OR Coal 348
Colstrip 3 & 4 Colstrip, MT Coal 296
1,998
PGE holds licenses under the Federal Power Act for its
hydroelectric generating plants as well as licenses from the
State of Oregon for all or portions of five of the plants.
All of its licenses expire during the years 2001 to 2006.
The FERC requires that a notice of intent to relicense these
projects be filed approximately five years prior to
expiration of the license.
PGE filed for relicensing of the Pelton Round Butte
Project in December 1998 and in December 1999 reached a
preliminary agreement that would result in shared ownership
and control of the Project with the Confederated Tribes of
Warm Springs over a proposed 50-year license period. PGE
would remain as the operator of the Project.
PGE has reached a tentative agreement with the City of
Portland, the State of Oregon, and the National Marine
Fisheries Service to decommission the Bull Run Hydroelectric
Project, removing the Marmot and Little Sandy Dams. The
purpose of the agreement is to improve habitat for salmon,
steelhead, and other fish protected by the Endangered
Species Act in the Little Sandy/Bull Run watersheds. In
November 1999, PGE filed with the FERC a "Notice of Intent
Not to File Application for New License" when its existing
federal license expires in November 2004. The regulatory
approval process and dam decommissioning are expected to
take approximately three years.
PGE is actively pursuing the renewal of all other
licenses for its hydroelectric generating plants.
Following the 1993 closure of the Trojan nuclear plant,
PGE was granted a possession-only license amendment by the
NRC. In early 1996 PGE received NRC approval of its Trojan
decommissioning plan.
PGE leases its headquarters complex in downtown
Portland and the coal-handling facilities and certain
railroad cars for the Boardman coal plant.
Domestic Power Plants
Enron's principal domestic operating power plants and
appurtenant facilities are situated on land owned by Enron
(or joint ventures in which Enron has an ownership interest)
in fee or land under the control of Enron (or such joint
ventures) pursuant to valid existing leases, licenses,
easements or other agreements. Power plants in which Enron
owns various interests are set forth in the following table:
Facility Location Fuel Size/Capacity
Brownsville Power I, LLC Brownsville, TN Natural gas 500 MW
Caledonia Power I, LLC Caledonia, MS Natural gas 450 MW
New Albany Power I, LLC New Albany, MS Natural gas 390 MW
Las Vegas Cogeneration Las Vegas, NV Natural gas 53 MW
In addition, the following power plants are in various
stages of construction or development:
Facility Location Fuel Size/Capacity
Des Plaines Green Manhattan, IL Natural gas 650 MW
Land Development LLC
Gleason Power I, LLC Gleason, TN Natural gas 544 MW
West Fork Land Wheatland, IN Natural gas 514 MW
Development Company LLC
Pastoria Energy Facility Pastoria, CA Natural gas 750 MW
Doyle LLC Monrose, GA Natural gas 342 MW
International Power Plants and Pipelines
Enron's principal international operating power plants
and pipelines and appurtenant facilities are (i) situated on
land owned by Enron (or joint ventures in which Enron has an
ownership interest) in fee or land under the control of
Enron (or such joint ventures) pursuant to valid existing
leases, licenses, easements or other agreements, or (ii) in
the case of certain power plants, barge-mounted on vessels
owned by Enron (or such joint ventures). Power plants and
pipelines in which Enron owns various interests are set
forth in the following table:
Facility Location Fuel Size/Capacity
Power Plants:
Trakya Turkey Gas 478 MW
Dabhol, Phase I India Gas 826 MW
Cuiaba, Phase I Brazil Diesel 150 MW
Puerto Plata Dominican Fuel oil 185 MW
Republic
Haina Dominican Fuel oil 329 MW
Republic
Puerto Quetzal Guatemala Gas 110 MW
Bahia Las Minas Panama Diesel 355 MW
Piti Guam Diesel 80 MW
Batangas Philippines Fuel oil 110 MW
Subic Bay Philippines Fuel oil 116 MW
Hainan Island China Diesel 160 MW
Pipelines:
TGS Argentina - 1.9 Bcf/d;
4,104 miles
Centragas Colombia - 110 MMcf/d;
357 miles
Transredes Bolivia - 4.3 Bcf/d;
57 MMb/d;
3,570 miles
Item 3. LEGAL PROCEEDINGS
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 materially adverse impact on Enron's
financial position or its results of operations.
Litigation. In 1995, several parties (the Plaintiffs)
filed suit in Harris County District Court in Houston,
Texas, against Intratex Gas Company (Intratex), Houston Pipe
Line Company and Panhandle Gas Company (collectively, the
Enron Defendants), each of which is a wholly-owned
subsidiary of Enron. The Plaintiffs were either sellers or
royalty owners under numerous gas purchase contracts with
Intratex, many of which have terminated. Early in 1996, the
case was severed by the Court into two matters to be tried
(or otherwise resolved) separately. In the first matter,
the Plaintiffs alleged that the Enron Defendants committed
fraud and negligent misrepresentation in connection with the
"Panhandle program," a special marketing program established
in the early 1980s. This case was tried in October 1996 and
resulted in a verdict for the Enron Defendants. In the
second matter, the Plaintiffs allege that the Enron
Defendants violated state regulatory requirements and
certain gas purchase contracts by failing to take the
Plaintiffs' gas ratably with other producers' gas at certain
times between 1978 and 1988. The trial court has certified
a class action with respect to ratability claims. On April
30, 1999, the Texas Supreme Court granted Enron's petition
for review and agreed to consider Enron's appeal of the
class certification. The Enron Defendants deny the
Plaintiffs' claims and have asserted various affirmative
defenses, including the statute of limitations. The Enron
Defendants believe that they have strong legal and factual
defenses, and intend to vigorously contest the claims.
Although no assurances can be given, Enron believes that the
ultimate resolution of these matters will not have a
materially adverse effect on its financial position or
results of operations.
On November 21, 1996, an explosion occurred in or
around the Humerto Vidal Building in San Juan, Puerto Rico.
The explosion resulted in fatalities, bodily injuries and
damage to the building and surrounding property. San Juan
Gas Company, Inc. (San Juan), an Enron subsidiary, operated
a propane/air distribution system in the vicinity. Although
San Juan did not provide service to the building, the
National Transportation Safety Board (NTSB) concluded that
the probable cause of the incident was propane leaking from
San Juan's distribution system. San Juan and Enron strongly
disagree. The NTSB found no path of migration of propane
from San Juan's system to the building and no forensic
evidence that propane fueled the explosion. Enron, San
Juan, and four San Juan affiliates have been named, along
with several third parties, as defendants in numerous
lawsuits filed in U.S. District Court for the district of
Puerto Rico and the Superior Court of Puerto Rico. These
suits, which seek damages for wrongful death, personal
injury, business interruption and property damage, allege
that negligence of Enron, San Juan and its affiliates, among
others, caused the explosion. Enron, San Juan and its
affiliates are vigorously contesting the claims. Although
no assurances can be given, Enron believes that the ultimate
resolution of these matters will not have a materially
adverse effect on its financial position or results of
operations.
Trojan Investment Recovery. In early 1993, PGE ceased
commercial operation of Trojan. In April 1996 a circuit
court judge in Marion County, Oregon found that the OPUC
could not authorize PGE to collect a return on its
undepreciated investment in Trojan, contradicting a November
1994 ruling from the same court. The ruling was the result
of an appeal of PGE's 1995 general rate order which granted
PGE recovery of, and a return on, 87% of its remaining
investment in Trojan. The 1994 ruling was appealed to the
Oregon Court of Appeals and stayed pending the appeal of the
OPUC's March 1995 order. Both PGE and the OPUC have
separately appealed the April 1996 ruling, which appeals
were combined with the appeal of the November 1994 ruling at
the Oregon Court of Appeals. On June 24, 1998, the Court of
Appeals of the State of Oregon ruled that the OPUC does not
have the authority to allow PGE to recover a rate of return
on its undepreciated investment in the Trojan generating
facility. The court upheld the OPUC's authorization of
PGE's recovery of its undepreciated investment in Trojan.
PGE and the OPUC each filed a petition for review with
the Oregon Supreme Court. On August 26, 1998, the Utility
Reform Project filed a Petition for Review with the Oregon
Supreme Court seeking review of that portion of the Oregon
Court of Appeals decision relating to PGE's recovery of its
undepreciated investment in Trojan. On April 29, 1999, the
Oregon Supreme Court accepted the petitions for review. On
June 16, 1999, Oregon House Bill 3220 authorizing the OPUC
to allow recovery of a return on the undepreciated
investment in property retired from service was signed. One
of the effects of the bill is to affirm retroactively the
OPUC's authority to allow PGE's recovery of a return on its
undepreciated investment in the Trojan generating facility.
Relying on the new legislation, on July 2, 1999, PGE
requested the Oregon Supreme Court to vacate the June 24,
1998 adverse ruling of the Oregon Court of Appeals, affirm
the validity of the OPUC's order allowing PGE to recover a
return on its undepreciated investment in Trojan and to
reverse its decision accepting the Utility Reform Project's
petition for review. The Utility Reform Project and the
Citizens Utility Board, another party to the proceeding,
opposed such request and submitted to the Oregon Secretary
of State sufficient signatures in support of placing a
referendum to negate the new legislation on the November
2000 ballot. The Oregon Supreme Court has indicated it will
defer hearing the matter until after the November 2000
elections. Enron cannot predict the outcome of these
actions. Additionally, due to uncertainties in the
regulatory process, management cannot predict, with
certainty, what ultimate rate-making action the OPUC will
take regarding PGE's recovery of a rate of return on its
Trojan investment. Although no assurances can be given,
Enron believes that the ultimate resolution of these matters
will not have a material adverse effect on its financial
position or results of operations.
Environmental Matters. Enron is subject to extensive
federal, state and local environmental laws and regulations.
These laws and regulations require expenditures in connection
with the construction of new facilities, the operation of
existing facilities and for remediation at various
operating sites. The implementation of the Clean Air Act
Amendments is expected to result in increased operating
expenses. These increased operating expenses are not
expected to have a materially adverse effect on Enron's
financial position or results of operations.
The EPA has informed Enron that it is a potentially
responsible party at the Decorah Former Manufactured Gas
Plant Site (the Decorah Site) in Decorah, Iowa, pursuant to
the provisions of CERCLA. The manufactured gas plant in
Decorah ceased operations in 1951. A predecessor company of
Enron purchased the Decorah Site in 1963. Enron's
predecessor did not operate the gas plant and sold the
Decorah Site in 1965. The EPA alleges that hazardous
substances were released to the environment during the
period in which Enron's predecessor owned the site, and that
Enron's predecessor assumed the liabilities of the company
that operated the plant. Enron contests these allegations.
To date, the EPA has identified no other potentially
responsible parties with respect to this site. Under terms
of administrative orders, Enron replaced affected topsoil
and removed impacted subsurface soils in certain areas of
the tract where the plant was formerly located. Enron
completed the final removal actions at the site in November
1998, and concluded all remaining site activities in the
spring of 1999. Enron has submitted a final report to the
EPA on the work conducted at the site, and expenses incurred
in connection with this matter were not material to its
financial position or results of operations.
By order dated June 27, 1995, the Florida Department
of Environmental Protection approved a remedial action plan
for the Enron Gas Processing Company Brooker Plant in
Bradford County, Florida. Soil and groundwater at the
plant site had been impacted by historical releases of
hydrocarbons from the now inactive liquids extraction
plant. Site remedial work commenced in 1996 and is
expected to be completed in 2000 at a total cost of
approximately $4 million, of which approximately $3.5
million has been paid.
Enron has also received from the EPA an Order issued
under CERCLA alleging that Enron and two other parties are
responsible for the cost of demolition and proper disposal
of two 110-foot towers that apparently had been used in the
manufacture of carbon dioxide at a site called the "City
Bumper Site" in Cincinnati, Ohio. The carbon dioxide
plant, according to agency documents, was in operation from
1926 to 1966. Houston Natural Gas Corporation, a
predecessor of Enron Corp., merged with Liquid Carbonic
Industries (LCI) on January 31, 1969. Liquid Carbonic
Corporation (LCC), a subsidiary of LCI, had title to the
site. Twenty-eight days after the merger, on February 28,
1969, the site was sold to a third party. In 1984, LCC was
sold to an unaffiliated party in a stock sale. Although
Enron does not admit liability with respect to any costs at
this site, it agreed to cooperate with the EPA and other
potentially responsible parties to undertake the work
contemplated by EPA's Order. The tower demolition and
removal activities were completed in October 1998, and a
final project report has been submitted to the EPA. All
activities required by the EPA Order have been completed,
and Enron incurred no material expenditures in connection
with this site.
Enron's natural gas pipeline companies conduct soil
and groundwater remediation of a number of their
facilities. In 1999, these expenses were $2.1 million as
compared with $1.3 million in 1998. Enron does not expect
to incur material expenditures in connection with soil and
groundwater remediation.
In addition, Enron has received requests for
information from the EPA and state environmental agencies
inquiring whether Enron has disposed of materials at other
waste disposal sites. Enron has also received requests for
contribution from other parties with respect to the cleanup
of other sites. Enron may be required to share in the
costs of the cleanup of some of these sites. However,
based upon the amounts claimed and the nature and volume of
materials sent to sites at which Enron has an interest,
management does not believe that any potential costs
incurred in connection with these notices and third party
claims, either taken individually or in the aggregate, will
have a material impact on Enron's financial position or
results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
Common Stock
On August 13, 1999, Enron effected a two-for-one
common stock split on all issued common stock in the form
of a stock dividend. The following table indicates the
high and low sales prices for the common stock of Enron as
reported on the New York Stock Exchange (consolidated
transactions reporting system), the principal market in
which the securities are traded, and dividends paid per
share for the calendar quarters indicated (1998 and first
and second quarter 1999 sales prices and dividends paid per
share have been restated to reflect the stock split). The
common stock is also listed for trading on the Chicago
Stock Exchange and the Pacific Stock Exchange, as well as
The London Stock Exchange and Frankfurt Stock Exchange.
1999 1998
High Low Dividends High Low Dividends
First Quarter............. $35 19/32 $28 3/4 $.1250 $24 $19 1/16 $.1187
Second Quarter............ 41 15/32 30 1/2 .1250 27 5/32 22 25/32 .1187
Third Quarter............. 44 23/32 38 1/16 .1250 29 7/32 20 5/16 .1187
Fourth Quarter............ 44 7/8 34 7/8 .1250 29 3/8 24 3/4 .1250
Cumulative Second Preferred Convertible Stock
The following table indicates the high and low sales
prices for the Cumulative Second Preferred Convertible
Stock ("Second Preferred Stock") of Enron as reported on
the New York Stock Exchange (consolidated transactions
reporting system), the principal market in which the
securities are traded, and dividends paid per share for the
calendar quarters indicated. The Second Preferred Stock is
also listed for trading on the Chicago Stock Exchange.
1999 1998
High Low Dividends High Low Dividends
First Quarter............. -- -- $3.4130 $634 $565 $3.2424
Second Quarter............ -- -- 3.4130 684 13/16 622 3.2424
Third Quarter............. -- -- 3.4130 -- -- 3.2424
Fourth Quarter............ $1,170 1/8 $1,170 1/8 3.4130 732 1/2 718 3.4130
At December 31, 1999, there were approximately 57,895
record holders of common stock and 182 record holders of
Second Preferred Stock.
Other information required by this item is set forth
under Item 6 -- "Selected Financial Data (Unaudited) -
Common Stock Statistics" for the years 1995-1999.
Recent Sales of Unregistered Equity Securities
On September 24, 1999, Enron issued in a private
placement pursuant to Section 4(2) of the Securities Act
250,000 shares of its Mandatorily Convertible Junior
Preferred Stock, Series B, to Whitewing Associates L.P., a
Delaware limited partnership, in exchange for an existing
series of convertible preferred stock previously issued to
Whitewing Associates L.P.
Item 6. SELECTED FINANCIAL DATA (UNAUDITED)
1999 1998 1997 1996 1995
Operating Revenues (millions) $40,112 $31,260 $20,273 $13,289 $ 9,189
Total Assets (millions) $33,381 $29,350 $22,552 $16,137 $13,239
Common Stock Statistics(a)
Income before cumulative effect
of accounting changes
Total (millions) $1,024 $703 $105 $584 $520
Per share - basic $1.36 $1.07 $0.16 $1.16 $1.04
Per share - diluted $1.27 $1.01 $0.16 $1.08 $0.97
Earnings on common stock
Total (millions) $827 $686 $ 88 $568 $504
Per share - basic $1.17 $1.07 $0.16 $1.16 $1.04
Per share - diluted $1.10 $1.01 $0.16 $1.08 $0.97
Dividends on common stock
Total (millions) $355 $312 $243 $212 $205
Per share $0.50 $0.48 $0.46 $0.43 $0.41
Shares outstanding (millions)
Actual at year-end 716 662 614 502 490
Average for the year - basic 705 642 544 492 488
Average for the year - diluted 769 695 555 540 536
Capitalization (millions)
Short-term and long-term debt $ 8,152 $ 7,357 $ 6,254 $3,349 $3,065
Minority interests 2,430 2,143 1,147 755 549
Company-obligated preferred
securities of subsidiaries 1,000 1,001 993 592 377
Shareholders' equity 9,570 7,048 5,618 3,723 3,165
Total capitalization $21,152 $17,549 $14,012 $8,419 $7,156
<FN>
(a) Share and per share amounts have been restated to reflect
the two-for-one stock split effective August 13, 1999.
Item 7. 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 1999 was $893 million compared to $703
million in 1998 and $105 million in 1997. Enron's operating
segments include Transportation and Distribution (Gas Pipeline
Group and Portland General), Wholesale Energy Operations and
Services (Enron's North America, Europe and international energy
businesses and Enron Broadband Services), Retail Energy Services
(Enron Energy Services), Exploration and Production (Enron Oil &
Gas Company) through August 16, 1999 (see Note 2 to the
Consolidated Financial Statements), and Corporate and Other,
which includes certain other businesses. Net income includes the
following:
(In millions) 1999 1998 1997
After-tax results before items
impacting comparability $ 957 $ 698 $ 515
Items impacting comparability:(a)
Gains on sales of subsidiary stock 345 45 61
Charge to reflect impairment of
MTBE assets (278) - -
Charges to reflect losses on
contracted MTBE production - (40) (74)
Charge to reflect impact of amended
J-Block gas contract - - (463)
Gains on sales of liquids and
gathering assets - - 66
Cumulative effect of accounting changes (131) - -
Net income $ 893 $ 703 $ 105
<FN>
(a) Tax affected at 35%, except where a specific tax rate
applied.
Diluted earnings per share of common stock were as follows:
1999 1998 1997
Diluted earnings per share(a):
After-tax results before items
impacting comparability $1.18 $1.00 $0.87
Items impacting comparability:
Gains on sales of subsidiary stock 0.45 0.07 0.11
Charge to reflect impairment of
MTBE assets (0.36) - -
Charges to reflect losses on
contracted MTBE production - (0.06) (0.13)
Charge to reflect impact of
amended J-Block gas contract - - (0.78)
Gains on sales of liquids and
gathering assets - - 0.11
Cumulative effect of accounting changes (0.17) - -
Effect of anti-dilution(b) - - (0.02)
Diluted earnings per share $1.10 $1.01 $0.16
<FN>
(a) Restated to reflect the two-for-one stock split effective
August 13, 1999.
(b) For 1997, the conversion of preferred shares to common
shares for purposes of the diluted earnings per share
calculation was anti-dilutive by $0.02 per share. However, in
order to present comparable results, per share amounts for
each earnings component were calculated using 592 million
shares, which assumes the conversion of preferred shares to
common shares.
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) 1999 1998 1997
Transportation and Distribution:
Gas Pipeline Group $ 380 $ 351 $ 466
Portland General 305 286 114
Wholesale Energy Operations
and Services 1,317 968 654
Retail Energy Services (68) (119) (107)
Exploration and Production 65 128 183
Corporate and Other (4) (32) (745)
Income before interest,
minority interests and taxes $1,995 $1,582 $ 565
Transportation and Distribution
Transportation and Distribution consists of Enron's Gas
Pipeline Group and Portland General. The Gas Pipeline Group
includes Enron's interstate natural gas pipelines, primarily
Northern Natural Gas Company (Northern), Transwestern Pipeline
Company (Transwestern), Enron's 50% interest in Florida Gas
Transmission Company (Florida Gas) and Enron's interests in
Northern Border Pipeline and EOTT Energy Partners, L.P. (EOTT).
Gas Pipeline Group. The following table summarizes total
volumes transported by each of Enron's interstate natural gas
pipelines.
1999 1998 1997
Total volumes transported (BBtu/d)(a)
Northern Natural Gas 3,820 4,098 4,364
Transwestern Pipeline 1,462 1,608 1,416
Florida Gas Transmission 1,495 1,324 1,341
Northern Border Pipeline 2,405 1,770 1,800
<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) 1999 1998 1997
Net revenues $626 $640 $665
Operating expenses 264 276 310
Depreciation and amortization 66 70 69
Equity earnings 38 32 40
Other income, net 46 25 38
IBIT before items impacting
comparability 380 351 364
Gains on sales of liquids
and gathering assets - - 102
Income before interest and taxes $380 $351 $466
Net Revenues
Revenues, net of cost of sales, of Gas Pipeline Group
declined $14 million (2%) during 1999 and $25 million (4%) during
1998 as compared to the applicable preceding year. The decrease
in net revenue in 1999 compared to 1998 was primarily a result of
the expiration, in October 1998, of certain transition cost
recovery surcharges, partially offset by a sale in 1999 of gas
from Northern's gas storage inventory. The decrease in net
revenue in 1998 compared to 1997 was primarily due to the warmer
than normal winter in Northern's service territory and the
reduction of transition costs recovered through a regulatory
surcharge at Northern.
Operating Expenses
Operating expenses, including depreciation and amortization,
of Gas Pipeline Group declined $16 million (5%) during 1999
primarily as a result of the expiration of certain transition
cost recovery surcharges. Operating expenses decreased $33
million (9%) during 1998 primarily as a result of the reduction
of transition costs at Northern and lower overhead costs.
Equity Earnings
Equity in earnings of unconsolidated equity affiliates
increased $6 million in 1999 after decreasing $8 million during
1998 as compared to 1997. The increase in earnings in 1999 as
compared to 1998 was primarily a result of higher earnings from
Northern Border Pipeline and EOTT reflecting Northern Border
Pipeline's expansion project and greater volumes transported by
EOTT due to acquisitions made during the last year. The decrease
during 1998 as compared to 1997 was primarily due to higher 1997
earnings from Citrus Corp. (Citrus), which holds Enron's 50%
interest in Florida Gas. Earnings from Citrus were higher in
1997 due to a contract restructuring.
Other Income, Net
Other income, net increased $21 million in 1999 as compared to
1998 after decreasing $13 million in 1998 as compared to 1997.
Included in 1999 was interest income earned in connection with
the financing of an acquisition by EOTT, while the 1998 amount
included gains of $21 million recognized from the sale of an
interest in an equity investment, substantially offset by charges
related to litigation.
Portland General. Results for Portland General have been
included in Enron's Consolidated Financial Statements beginning
July 1, 1997. Since that date, Portland General realized IBIT as
follows:
(In millions) 1999 1998 1997(a)
Revenues $1,379 $1,196 $746
Purchased power and fuel 639 451 389
Operating expenses 304 295 154
Depreciation and amortization 181 183 91
Other income, net 50 19 2
Income before interest and taxes $ 305 $ 286 $114
<FN>
(a) Represents the period from July 1, 1997 through December 31,
1997.
Revenues and purchased power and fuel costs increased $183
million and $188 million, respectively, 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% 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.
The 1998 results were impacted by a warmer than normal winter
and the transfer of the majority of Portland General's
electricity wholesale business to the Enron Wholesale segment,
partially offset by an increase in sales to retail customers.
Statistics for Portland General are as follows:
1999 1998 1997(a)
Electricity sales (thousand MWh)(b)
Residential 7,404 7,101 3,379
Commercial 7,392 6,781 3,618
Industrial 4,463 3,562 2,166
Total retail 19,259 17,444 9,163
Wholesale 12,612 10,869 13,448
Total electricity sales 31,871 28,313 22,611
Resource mix
Coal 15% 16% 10%
Combustion turbine 8 12 5
Hydro 9 9 5
Total generation 32 37 20
Firm purchases 57 56 74
Secondary purchases 11 7 6
Total resources 100% 100% 100%
Average variable power cost (Mills/KWh)(c)
Generation 9.8 8.6 8.7
Firm purchases 23.2 17.3 18.9
Secondary purchases 19.7 23.6 13.2
Total average variable power cost 19.5 15.6 17.2
Retail customers (end of period, thousands) 719 704 685
<FN>
(a) Represents the period from July 1, 1997 through December 31,
1997.
(b) Thousand megawatt-hours.
(c) Mills (1/10 cent) per kilowatt-hour.
Outlook
The Gas Pipeline Group should continue to provide stable
earnings and cash flows during 2000, including steady growth over
1999 levels. Low operating costs, competitive rates and
continued expansion opportunities enable the Gas Pipeline Group
to continue to be a strong, efficient competitor in all markets.
Transwestern will bring 140 MMcf/d of additional supply from the
San Juan Basin and West Texas into California in 2000. Florida
Gas is currently the only major pipeline serving the rapidly
growing peninsular Florida market where the demand for power is
expected to continue to increase. Florida Gas is seeking
approval from the Federal Energy Regulatory Commission (FERC) to
implement two expansions over the next two years and is expected
to seek approval from the FERC for a third expansion in the near
future, which will increase its capacity by 950 MMcf/d to meet
the expected increase in natural gas demand by power plants.
Northern Border Pipeline is seeking approval from the FERC for
its 545 MMcf/d expansion into Indiana which is to be completed
and in service within the next year.
On November 8, 1999, Enron announced that it had entered into
an agreement to sell Portland General to Sierra Pacific
Resources. The proposed transaction, which is subject to
regulatory approval, is expected to close in late 2000. See Note
2 to the Consolidated Financial Statements.
Wholesale Energy Operations and Services
Enron's wholesale business (Enron Wholesale) includes its
wholesale energy businesses around the world, as well as its
emerging broadband services business. Enron Wholesale operates
in developed markets such as North America and Europe, as well as
developing or newly deregulating markets including South America,
India and Japan.
Enron builds its wholesale businesses through the creation of
networks involving asset ownership, contractual access to third-
party assets and market-making activities. Each market in which
Enron Wholesale operates utilizes these components in a slightly
different manner and is at a different stage of development.
This network strategy has enabled Enron Wholesale to establish a
leading position in its markets. These activities are
categorized into two business lines: (a) Commodity Sales and
Services and (b) Assets and Investments. Often these activities
are integrated into a bundled product offering for Enron's
customers.
Enron Wholesale manages its portfolio of contracts and assets
in order to maximize value, minimize the associated risks and
provide overall liquidity. In doing so, Enron Wholesale uses
portfolio and risk management disciplines, including offsetting
or hedging transactions, to manage exposures to market price
movements (commodities, interest rates, foreign currencies and
equities). Additionally, Enron Wholesale manages its liquidity
and exposure to third-party credit risk through monetization of
its contract portfolio or third-party insurance contracts. Enron
Wholesale also sells interests in certain investments and other
assets to improve liquidity and overall return.
The following table reflects IBIT for each business line:
(In millions) 1999 1998 1997
Commodity sales and services $ 628 $411 $249
Assets and investments 850 709 565
Unallocated expenses (161) (152) (160)
Income before interest,
minority interests and taxes $1,317 $968 $654
The following discussion analyzes the contributions to IBIT
for each business line.
Commodity Sales and Services. Enron Wholesale provides
reliable commodity delivery and predictable pricing to its
customers through forward contracts. This market-making activity
includes the purchase, sale, marketing and delivery of natural
gas, electricity, liquids and other commodities, as well as the
management of Enron Wholesale's own portfolio of contracts.
Enron Wholesale's market-making activity is facilitated through a
network of capabilities including asset ownership. Accordingly,
certain assets involved in the delivery of these services are
included in this business (such as intrastate natural gas
pipelines, power plants and gas storage facilities).
Enron Wholesale markets, transports and provides energy
commodities as reflected in the following table (including
intercompany amounts):
1999 1998 1997
Physical volumes (BBtue/d)(a)(b)
Gas:
United States 8,982 7,418 7,654
Canada 4,398 3,486 2,263
Europe 1,549 1,243 660
Other 23 8 -
14,952 12,155 10,577
Transport volumes 575 559 460
Total gas volumes 15,527 12,714 11,037
Crude oil 5,407 2,960 690
Liquids 753 610 987
Electricity(c) 10,742 11,024 5,256
Total physical volumes (BBtue/d) 32,429 27,308 17,970
Electricity volumes marketed (thousand MWh)
United States 380,518 401,843 191,746
Europe 11,143 483 100
Other 433 46 -
Total 392,094 402,372 191,846
Financial settlements (notional, BBtue/d) 99,337 75,266 49,082
<FN>
(a) Billion British thermal units equivalent per day.
(b) Includes third-party transactions by Enron Energy Services.
(c) Represents electricity volumes marketed, converted to
BBtue/d.
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. Enron Wholesale
strengthened its market share leadership position in the North
American energy markets and continued to expand its presence in
Europe, particularly on the Continent where wholesale markets
began deregulation in early 1999. Enron Wholesale 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. In late 1999, Enron
Wholesale 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. This capability
has positively impacted transaction levels.
The earnings from commodity sales and services operations
increased 65% in 1998 as compared to 1997, reflecting growing
transaction levels during the period. Sales in North America
increased significantly due to increased power marketing
activities (over 100% increase in volumes), along with new and
restructured long-term contracts. European activity declined
during the year, primarily reflecting the effect of regulatory
actions in the United Kingdom that impacted the market for
natural gas.
Assets and Investments. Enron's Wholesale businesses make
investments in various energy and communications-related assets
as a part of its network strategy. Enron Wholesale either
purchases the asset from a third party or develops and constructs
the asset. In most cases, Enron Wholesale operates and manages
such assets. Earnings from these investments principally result
from operations of the assets or sales of ownership interests.
Additionally, Enron Wholesale invests in debt and equity
securities of energy and communications-related businesses, which
may also utilize Enron Wholesale's products and services. With
these merchant investments, Enron's influence is much more
limited relative to assets Enron develops or constructs.
Earnings from these activities result from changes in the market
value of the security. See Note 4 to the Consolidated Financial
Statements for a summary of these investments.
Earnings from assets and investments increased $141 million
(20%) in 1999 as compared to 1998. During 1999, earnings from
Enron Wholesale's 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 (see Note 2 to the Consolidated Financial
Statements) and assets in various other developing markets.
Enron Wholesale's merchant investments increased in value during
the year due to the expansion into certain communications
investments, partially offset by a decline in the value of
certain energy investments. In addition, Enron Wholesale's 1999
earnings increased due to activities related to building and
optimizing its broadband fiber network, while gains on sales of
energy assets declined.
Earnings from assets and investments increased 25% in 1998 as
compared to 1997. This increase reflects earnings from the sale
of interests in certain energy assets including power projects in
Puerto Rico, Turkey, Italy and the United Kingdom, from which
Enron Wholesale realized the value created during the development
and construction phases. Increased development costs in emerging
markets and lower earnings from merchant investments partially
offset such increase. Some of these transactions involved
securitizations in which Enron retained certain interests
associated with the underlying assets.
Unallocated Expenses. Net unallocated expenses include rent,
systems expenses and other support group costs.
Outlook
Enron Wholesale plans to continue to expand its networks in
each of its key energy markets, as well as the market for
broadband services. Worldwide energy markets continue to grow as
governments implement deregulation or privatization plans. The
market for broadband services is expected to increase
significantly as demand increases for high bandwidth applications
such as video. Enron will continue to purchase or develop
selected assets to expand its networks, as well as grow its
portfolio of contracts providing access to third-party assets.
The combination of growing markets and Enron Wholesale's highly
developed market-making skills should continue to enhance market
opportunities globally for Enron over the next several years.
As a result, Enron anticipates continued growth in Enron
Wholesale during 2000. In the commodity sales and services
business, volumes are expected to continue to increase as Enron
Wholesale increases its transaction volume in the growing
unregulated U.S. power market and in the rapidly expanding
European gas and power markets. In addition, EnronOnline is
expected to significantly add to transaction volume and profit
opportunities in the coming year. In the assets and investments
business, Enron Wholesale expects to continue to benefit from
opportunities related to its assets and investments, including
sales or restructurings of appreciated investments, and in
providing capital to energy-intensive customers. Equity earnings
from operations are expected to increase as a result of
commencement of commercial operations of new power plants and
pipeline projects in early 2000. At December 31, 1999, Enron
Wholesale's domestic and international projects under
construction included approximately 2,300 miles of pipelines and
eleven power plants with a combined capacity of approximately
5,700 megawatts, in which Enron owns various interests.
Earnings from Enron Wholesale 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. Enron
Wholesale's 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 Enron Wholesale's 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 Enron
Wholesale's 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 Enron Wholesale.
Retail Energy Services
Enron Energy Services (Energy Services) is extending Enron's
energy expertise and capabilities to end-use retail customers in
the industrial and commercial business sectors to manage their
energy requirements and reduce total energy costs. During 1999,
Energy Services continued to expand its presence in the United
States and entered the international market by setting up
operations in Europe and establishing organizations in South
America, Mexico and Canada.
Energy Services provides natural gas, electricity, liquids and
other commodities to industrial and commercial customers located
throughout the United States and the United Kingdom. In
deregulated locations, Energy Services may either supply
commodities directly to its customers or have the local utilities
supply customers in a manner similar to regulated locations.
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 may include price risk management activities.
Energy Services recognized losses before interest, minority
interests and taxes of $68 million, $119 million and $107 million
for 1999, 1998 and 1997, respectively. The results primarily
reflect the costs associated with developing the commodity,
capital and services capability to deliver on contracts signed to
date. These costs were partially offset by increased earnings
from higher gas and power sales in 1999 resulting from the
origination of new contracts and from outsourcing contracts for
energy management services signed in 1999.
Outlook
During 2000, Energy Services anticipates continued growth in
the demand for retail energy outsourcing solutions, both
domestically and internationally. 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, focusing on the
development of best practices, nationwide procurement
opportunities and efficient use of capital.
Exploration and Production
Enron's exploration and production operations have been
conducted by Enron Oil & Gas Company (EOG). The operating
results of this segment reflect activity through August 16, 1999,
the date of the share exchange transaction with EOG (see Note 2
to the Consolidated Financial Statements).
Exploration and Production's 1999 IBIT of $65 million
reflected increased depreciation, depletion and amortization and
operating expenses for the period through August 16, 1999,
partially offset by decreased exploration expenses. Exploration
and Production's 1998 IBIT decreased $55 million as compared to
1997 primarily as a result of decreased wellhead natural gas,
crude oil and condensate prices, higher operating and exploration
expenses and depreciation, depletion and amortization, partially
offset by increased production volumes.
Corporate and Other
Corporate and Other includes results of Azurix Corp., which
provides water and wastewater services, Enron Renewable Energy
Corp. (EREC), which develops and constructs wind-generated power
projects, and the operations of Enron's methanol and MTBE plants.
Significant components of IBIT are as follows:
(In millions) 1999 1998 1997
IBIT before items impacting comparability $(17) $ 7 $ (31)
Items impacting comparability:
Gain on sale of 7% of Enron Energy
Services shares - - 61
Gains on exchange and sales of Enron
Oil & Gas Company stock 454 22 -
Charge to reflect losses on contracted
MTBE production - (61) (100)
Charge to reflect impairment of
MTBE assets (441) - -
Charge to reflect impact of amended
J-Block gas contract - - (675)
Income before interest, minority
interests and taxes $ (4) $(32) $(745)
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 1999 include 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.
During 1997, Enron recorded a non-recurring charge of $675
million, primarily reflecting the impact of Enron's amended J-
Block gas contract in the U.K., and a $100 million charge to
reflect losses on contracted MTBE production. Also in 1997,
Enron sold approximately 7% of its ownership of Energy Services
for $130 million and recognized an after-tax gain of $61 million.
Interest and Related Charges, Net
Interest and related charges, net of interest capitalized,
increased to $656 million in 1999 from $550 million in 1998 and
$401 million in 1997. The increase in 1999 as compared to 1998
was primarily due to debt issuances and debt related to Elektro,
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.
The increase in 1998 as compared to 1997 was primarily a
result of higher debt levels, including debt issuances and the
consolidation in July 1997 of debt related to Portland General
(see Note 2 to the Consolidated Financial Statements).
Interest capitalized, which totaled $54 million, $66 million
and $18 million for 1999, 1998, and 1997, respectively, increased
in 1998 as a result of the commencement of construction of
several power projects.
Dividends on Company-Obligated Preferred Securities of
Subsidiaries
Dividends on company-obligated preferred securities of
subsidiaries increased from $69 million in 1997 to $77 million in
1998 and $76 million in 1999, primarily due to the issuance of
$372 million of additional preferred securities by Enron
subsidiaries during 1997. Company-obligated preferred securities
of subsidiaries also increased by $29 million in 1997 for
securities of Portland General.
Minority Interests
Minority interests include the following:
(In millions) 1999 1998 1997
Jacare Electrical Distribution Trust $ 39 $ - $ -
Majority-owned limited partnerships 71 - -
Whitewing Associates, L.P. 12 53 -
Enron Oil & Gas Company 2 24 56
Enron Global Power & Pipelines L.L.C. - - 24
Other 11 - -
$135 $ 77 $ 80
Minority interests include Jacare beginning January 1, 1999,
majority-owned limited partnerships since their formation in
December 1998 and July 1999, Whitewing from its formation in
December 1997 until its deconsolidation in March 1999, EOG until
the exchange and sale of Enron's interests in August 1999 and
Enron Global Power & Pipelines L.L.C. until Enron acquired the
minority interest in November 1997 (see Notes 2, 8 and 9 to the
Consolidated Financial Statements).
Income Tax Expense
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.
Income tax expense increased in 1998 as compared to 1997
primarily as a result of increased earnings, partially offset by
differences between the book and tax basis of certain assets and
stock sales.
Cumulative Effect of Accounting Changes
In the first quarter of 1999, Enron recorded an after-tax
charge of $131 million to reflect the initial adoption (as of
January 1, 1999) of two new accounting pronouncements, the AICPA
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities," and the Emerging Issues Task Force Issue
No. 98-10, "Accounting for Contracts Involved in Energy Trading
and Risk Management Activities." The first quarter 1999 charge
was primarily related to the adoption of SOP 98-5. See Note 18
to the Consolidated Financial Statements.
YEAR 2000
A Year 2000 problem was anticipated which could have resulted
from the use in computer hardware and software of two digits
rather than four digits to define the applicable year. The use
of two digits was a common practice for decades when computer
storage and processing was much more expensive than today. When
computer systems must process dates both before and after January
1, 2000, two-digit year "fields" may create processing
ambiguities that can cause errors and system failures. For
example, computer programs that have date-sensitive features may
recognize a date represented by "00" as the year 1900 instead of
2000.
The Year 2000 problem has caused no material disruption to
Enron's mission-critical facilities or operations, and resulted
in no material costs. Enron will remain vigilant for Year 2000
related problems that may yet occur due to hidden defects in
computer hardware or software at Enron or Enron's mission-
critical external entities. Enron anticipates that the Year 2000
problem will not create material disruptions to its mission-
critical facilities or operations, and will not create material
costs.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging
Activities." See Note 18 to the Consolidated Financial
Statements.
FINANCIAL CONDITION
Cash Flows
(In millions) 1999 1998 1997
Cash provided by (used in):
Operating activities $ 1,228 $ 1,640 $ 211
Investing activities (3,507) (3,965) (2,146)
Financing activities 2,456 2,266 1,849
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 increase of $1,429
million in 1998 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. See Note
4 to the Consolidated Financial Statements.
Net cash used in investing activities primarily reflects
capital expenditures and equity investments, which total $3,085
million in 1999, $3,564 million in 1998 and $2,092 million in
1997. See "Capital Expenditures and Equity Investments" below.
Partially offsetting these uses of cash were proceeds from the
sales of non-merchant assets totaling $294 million in 1999, $239
million in 1998 and $473 million in 1997. Proceeds in 1997 were
primarily from sales of liquids assets.
Cash provided by financing activities in 1999 included $1,504
million from the net issuance of short- and long-term debt, $852
million from the issuance of common stock and $568 million from
the formation of majority-owned limited partnerships, partially
offset by payments of $467 million for dividends. Cash provided
by financing activities in 1998 included $875 million from the
net issuance of short- and long-term debt, $867 million from the
issuance of common stock and $828 million primarily from the sale
of a minority interest in a subsidiary, partially offset by
payments of $414 million for dividends. Cash provided by
financing activities in 1997 was generated from net issuances of
$1,674 million of short- and long-term debt, $372 million of
preferred securities by subsidiary companies and $555 million of
subsidiary equity. These inflows were partially offset by
payments of $354 million for cash dividends and $422 million for
treasury stock.
Capital Expenditures and Equity Investments
Capital expenditures by operating segment are as follows:
2000
(In millions) Estimate 1999 1998 1997
Transportation and Distribution $ 287 $ 316 $ 310 $ 337
Wholesale Energy Operations
and Services 1,517 1,216 706 318
Retail Energy Services 47 64 75 36
Exploration and Production - 226 690 626
Corporate and Other 35 541 124 75
Total $1,886 $2,363 $1,905 $1,392
Capital expenditures increased $458 million in 1999 and $513
million in 1998 as compared to the previous year. During 1999,
Enron Wholesale expenditures increased due primarily to
construction of domestic and international power plants and the
Enron Broadband Services fiber optic network. The 1999 increase
in Corporate and Other reflects the purchase of certain
previously leased MTBE-related assets. During 1998, Enron
Wholesale expenditures increased primarily related to domestic
and international power plant construction.
Cash used for investments in equity affiliates by the
operating segments is as follows:
(In millions) 1999 1998 1997
Transportation and Distribution $ - $ 27 $ 3
Wholesale Energy Operations
and Services 712 703 580
Corporate and Other 10 929 117
Total $722 $1,659 $700
Equity investments in 1999 relate primarily to projects in
Korea and India. Equity investments increased in 1998 as
compared to 1997 primarily due to the acquisitions of Elektro and
Wessex, net of proceeds from transactions reducing Enron's
interests in these investments. See Notes 2 and 9 to the
Consolidated Financial Statements.
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, 1999, Enron had working capital of $496
million. If a working capital deficit should occur, Enron has
credit facilities in place to fund working capital requirements.
At December 31, 1999, those credit lines provided for up to $3.0
billion of committed and uncommitted credit, of which $125
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, 1999 was $21.2 billion.
Debt as a percentage of total capitalization decreased to 38.5%
at December 31, 1999 as compared to 41.9% at December 31, 1998.
The decrease primarily reflects the issuance in February 1999 of
approximately 27.6 million shares of common stock, a net increase
in minority interests and increased preferred stock outstanding
following the deconsolidation of Whitewing Associates, L.P. (see
Note 10 to the Consolidated Financial Statements), partially
offset by increased debt levels and a decrease in equity due to
the devaluation of the Brazilian real (see Note 2 to the
Consolidated Financial Statements).
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 $15.48 to $28.00 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 Baa2 by Moody's
Investor Services. 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 or improve its credit
rating.
ITEM 7A. FINANCIAL RISK MANAGEMENT
Enron Wholesale 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 also offers price risk management
services to its commercial and industrial customers. These
services are provided through a variety of financial instruments
including forward contracts, which may involve physical delivery
of an energy commodity, 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 its energy commodities portfolio are managed using a
variety of financial instruments, including financial futures,
swaps and options.
Enron's other businesses also enter into forwards, swaps and
other contracts primarily for the purpose of hedging the impact
of market fluctuations on assets, liabilities, production 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. Enron's fixed price commodity contract
portfolio is typically balanced to within an annual average of 1%
of the total notional physical and financial transaction volumes
marketed.
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 Wholesale's and Energy
Services' 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 well
as owning and operating production facilities. As discussed
above, Enron actively manages this risk on a portfolio basis to
ensure compliance with Enron's stated risk management policies.
Forwards, futures, swaps and options are utilized to manage
Enron's consolidated exposure to price fluctuations related to
production from its production facilities.
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 primarily from the assets
and investments operations of Enron Wholesale, which provides
capital to customers through equity participations in various
investment activities. 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 assets and liabilities. 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 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 RiskMetricsT 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, 1999
High Low
(In millions) 1999 1998 Average(a) Valuation(a) Valuation(a)
Trading Market Risk:
Commodity price $21 $20 $24 $37(b) $16
Interest rate - - - - -
Foreign currency
exchange rate - - - - -
Equity(c) 26 12 20 29 14
Non-Trading Market Risk(d):
Commodity price(e) 1 10 8 18 1
Interest rate 2 - 2 2 1
Foreign currency
exchange rate 4 - 3 5 -
Equity 3 - - 3 -
<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 1999.
(b) In June 1999, seasonal dynamics in the U.S. power markets
caused Enron's value at risk to increase significantly.
(c) Enron's equity trading market risk primarily relates to
merchant activities (see Note 4 to the Consolidated Financial
Statements). The increase in value at risk in 1999 is due
primarily to greater volatility in investments held throughout
1999, increased levels of more volatile communications
investments and further refinement of Enron's value at risk model
to allow the inclusion of certain partnership interests and other
instruments for the first time.
(d) Includes only the risk related to the financial instruments
that serve as hedges and does not include the related underlying
hedged item.
(e) Enron's hedging activity decreased following the exchange
and sale of Enron's interest in EOG (see Note 2 to the
Consolidated Financial Statements).
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 Annual 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 Gas Pipeline Group, demand in
the market for broadband services and high bandwidth
applications, transaction volumes in the U.S. power market,
commencement of commercial operations of new power plants and
pipeline projects, and growth in the demand for retail energy
outsourcing solutions. When used in this document, the words
"anticipate," "believe," "estimate," "except," "intend," "may,"
"project," "plan," "should" and similar expressions are intended
to be among the statements that identify forward-looking
statements. Although Enron believes that its expectations
reflected in these forward-looking statements are based on
reasonable assumptions, such statements involve risks and
uncertainties and no assurance can be given that actual results
will be consistent with these forward-looking statements.
Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein
include political developments in foreign countries; the ability
of Enron to penetrate new retail natural gas and electricity
markets (including energy outsourcing markets) in the United
States and Europe; the ability to penetrate the broadband
services market; the timing and extent of deregulation of energy
markets in the United States and in foreign jurisdictions; other
regulatory developments in the United States and in foreign
countries, including tax legislation and regulations; the extent
of efforts by governments to privatize natural gas and electric
utilities and other industries; the timing and extent of changes
in commodity prices for crude oil, natural gas, electricity,
foreign currency and interest rates; the extent of success in
acquiring oil and gas properties and in discovering, developing,
producing and marketing reserves; the timing and success of
Enron's efforts to develop international power, pipeline and
other infrastructure projects; the effectiveness of Enron's risk
management activities; the ability of counterparties to financial
risk management instruments and other contracts with Enron to
meet their financial commitments to Enron; the effectiveness of
Enron's Year 2000 Plan and the Year 2000 readiness of outside
entities; and Enron's ability to access the capital markets and
equity markets during the periods covered by the forward-looking
statements, which will depend on general market conditions and
Enron's ability to maintain or increase the credit ratings for
its unsecured senior long-term debt obligations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is included in this
report as set forth in the "Index to Financial Statements"
on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K
relating to directors who are nominees for election as
directors at Enron's Annual Meeting of Shareholders to be
held on May 2, 2000 is set forth under the caption entitled
"Election of Directors" in Enron's Proxy Statement, and is
incorporated herein by reference.
The information required by Item 10 of Form 10-K with
respect to executive officers is set forth in Part I of this
Form 10-K under the heading "Current Executive Officers of
the Registrant".
Section 16(a) of the Securities Exchange Act of 1934
requires Enron's executive officers and directors, and
persons who own more than 10% of a registered class of
Enron's equity securities, to file reports of ownership and
changes in ownership with the SEC and the New York Stock
Exchange. Based solely on its review of the copies of such
reports received by it, or written representations from
certain reporting persons that no Forms 5 were required for
those persons, Enron believes that during 1999, its
executive officers, directors and greater than 10%
shareholders complied with all applicable filing
requirements, with the exception that Ronnie C. Chan did not
timely file one report containing two transactions, and
Frank Savage did not timely file one report containing one
transaction.
There are no family relationships among the officers
listed, and there are no arrangements or understandings
pursuant to which any of them were elected as officers.
Officers are appointed or elected annually by the Board of
Directors at its first meeting following the Annual Meeting
of Shareholders, each to hold office until the corresponding
meeting of the Board in the next year or until a successor
shall have been elected, appointed or shall have qualified.
Item 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is set
forth in the Proxy Statement under the captions
"Compensation of Directors and Executive Officers --Director
Compensation; Executive Compensation; Stock Option Grants
During 1999; Aggregated Stock Option/SAR Exercises During
1999 and Stock Option/SAR Values as of December 31, 1999;
Retirement and Supplemental Benefit Plans; Severance Plans;
Employment Contracts; Certain Transactions; and Compensation
Committee Interlocks and Insider Participation", and is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
(a) Security ownership of certain beneficial owners
The information regarding security ownership of certain
beneficial owners is set forth in the Proxy Statement
under the caption "Election of Directors - Security
Ownership of Certain Beneficial Owners", and is
incorporated herein by reference.
(b) Security ownership of management
The information regarding security ownership of
management is set forth in the Proxy Statement under
the caption "Election of Directors - Stock Ownership
of Management and Board of Directors as of February 15,
2000", and is incorporated herein by reference.
(c) Changes in control
None.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and
related transactions is set forth in the Proxy Statement
under the caption "Certain Transactions" and "Compensation
Committee Interlocks and Insider Participation", and is
incorporated herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Financial Statement
Schedules. See "Index to Financial Statements" set forth on
page F-1.
(a)(3) Exhibits:
*3.01 - Amended and Restated Articles of
Incorporation of Enron Oregon Corp. (Annex E
to the Proxy Statement/Prospectus included in
Enron's Registration Statement on Form S-4 -
File No. 333-13791).
*3.02 - Articles of Merger of Enron Oregon Corp.,
an Oregon corporation, and Enron Corp., a
Delaware corporation (Exhibit 3.02 to Post-
Effective Amendment No. 1 to Enron's
Registration Statement on Form S-3 - File No.
33-60417).
*3.03 - Articles of Merger of Enron Corp., an
Oregon corporation, and Portland General
Corporation, an Oregon corporation (Exhibit
3.03 to Post-Effective Amendment No. 1 to
Enron's Registration Statement on Form S-3 -
File No. 33-60417).
*3.04 - Bylaws of Enron (Exhibit 3.04 to Post-
Effective Amendment No. 1 to Enron's
Registration Statement on Form S-3 - File No.
33-60417).
*3.05 - Articles of Amendment of Enron: Form of
Series Designation for the Enron Convertible
Preferred Stock (Annex F to the Proxy
Statement/Prospectus included in Enron's
Registration Statement on Form S-4 - File No.
333-13791).
*3.06 - Articles of Amendment of Enron: Form of
Series Designation for the Enron 9.142%
Preferred Stock (Annex G to the Proxy
Statement/Prospectus included in Enron's
Registration Statement on Form S-4 - File No.
333-13791).
*3.07 - Articles of Amendment of Enron:
Statement of Resolutions Establishing Series A
Junior Voting Convertible Preferred Stock
(Exhibit 3.07 to Enron's Registration
Statement on Form S-3 - File No. 333-44133).
*3.08 - Articles of Amendment of Enron:
Statement of Resolutions Establishing A
Series of Preferred Stock of Enron Corp. -
Mandatorily Convertible Single Reset
Preferred Stock, Series A (Exhibit 4.01 to
Enron's Form 8-K filed on January 26, 1999).
*3.09 - Articles of Amendment of Enron:
Statement of Resolutions Establishing A
Series of Preferred Stock of Enron Corp. -
Mandatorily Convertible Single Reset
Preferred Stock, Series B (Exhibit 4.02 to
Enron's Form 8-K filed on January 26, 1999).
*3.10 - Articles of Amendment of Enron amending
Article IV of the Articles of Incorporation
(Exhibit 3.10 to Post-Effective Amendment No.
1 to Enron's Registration Statement on Form S-
3 - File No. 333-70465).
*3.11 - Articles of Amendment of Enron:
Statement of Resolutions Establishing A
Series of Preferred Stock of Enron Corp. -
Mandatorily Convertible Junior Preferred
Stock, Series B (Exhibit 3.11 to Post-
Effective Amendment No. 1 to Enron's
Registration Statement on Form S-3 - File No.
333-70465).
*4.01 - Indenture dated as of November 1, 1985,
between Enron and Harris Trust and Savings
Bank, as supplemented and amended by the First
Supplemental Indenture dated as of December 1,
1995 (Form T-3 Application for Qualification
of Indentures under the Trust Indenture Act of
1939, File No. 22-14390, filed October 24,
1985; Exhibit 4(b) to Form S-3 Registration
Statement No. 33-64057 filed on November 8,
1995). There have not been filed as exhibits
to this Form 10-K other debt instruments
defining the rights of holders of long-term
debt of Enron, none of which relates to
authorized indebtedness that exceeds 10% of
the consolidated assets of Enron and its
subsidiaries. Enron hereby agrees to furnish
a copy of any such instrument to the
Commission upon request.
*4.02 - Supplemental Indenture, dated as of
May 8, 1997, by and among Enron Corp., Enron
Oregon Corp. and Harris Trust and Savings
Bank, as Trustee (Exhibit 4.02 to Post-
Effective Amendment No. 1 to Enron's
Registration Statement on Form S-3, File No.
33-60417).
*4.03 - Third Supplemental Indenture, dated as of
September 1, 1997, between Enron Corp. and
Harris Trust and Savings Bank, as Trustee
(Exhibit 4.03 to Enron Registration Statement
on Form S-3, File No. 333-35549).
*4.04 - Fourth Supplemental Indenture, dated as
of August 17, 1999, between Enron Corp. and
Harris Trust and Savings Bank, as Trustee
(Exhibit 4.05 to Enron Registration Statement
on Form S-3 - File No. 333-83549).
Executive Compensation Plans and Arrangements Filed as
Exhibits Pursuant to Item 14(c) of Form 10-K: Exhibits
10.01 through 10.57
*10.01 - Enron Executive Supplemental Survivor
Benefits Plan, effective January 1, 1987
(Exhibit 10.01 to Enron Form 10-K for 1992).
10.02 - First Amendment to Enron Executive
Supplemental Survivor Benefits Plan.
*10.03 - Enron Corp. 1988 Stock Plan (Exhibit 4.3
to Form S-8 Registration Statement No. 33-
27893).
*10.04 - Second Amendment to Enron Corp. 1988
Stock Plan (Exhibit 10.04 to Enron Form 10-K
for 1996).
*10.05 - Enron Corp. 1988 Deferral Plan (Exhibit
10.19 to Enron Form 10-K for 1987).
*10.06 - First Amendment to Enron Corp. 1988
Deferral Plan (Exhibit 10.06 to Enron Form
10-K for 1995).
*10.07 - Second Amendment to Enron Corp. 1988
Deferral Plan (Exhibit 10.07 to Enron Form
10-K for 1995).
*10.08 - Third Amendment to Enron Corp. 1988
Deferral Plan (Exhibit 10.09 to Enron Form
10-K for 1996).
*10.09 - Fourth Amendment to Enron Corp. 1988
Deferral Plan (Exhibit 10.10 to Enron Form
10-K for 1996).
*10.10 - Fifth Amendment to Enron Corp. 1988
Deferral Plan (Exhibit 10.11 to Enron Form
10-K for 1996).
10.11 - Sixth Amendment to Enron Corp. 1988
Deferral Plan.
*10.12 - Enron Corp. 1991 Stock Plan (Exhibit
10.08 to Enron Form 10-K for 1991).
*10.13 - Amended and Restated Enron Corp. 1991
Stock Plan (Exhibit A to Enron Proxy Statement
filed pursuant to Section 14(a) on March 24,
1997).
*10.14 - First Amendment to Enron Corp. Amended
and Restated 1991 Stock Plan (Exhibit 10.13 to
Enron Form 10-K for 1997).
*10.15 - Second Amendment to Enron Corp. Amended
and Restated 1991 Stock Plan (Exhibit 10.14 to
Enron Form 10-K for 1997).
*10.16 - Enron Corp. 1991 Stock Plan (As Amended
and Restated Effective May 4, 1999) (Exhibit B
to Enron Proxy Statement filed pursuant to
Section 14(a) on March 30, 1999).
10.17 - First Amendment to Enron Corp. 1991 Stock
Plan (As Amended and Restated Effective May 4,
1999).
10.18 - Second Amendment to Enron Corp. 1991
Stock Plan (As Amended and Restated Effective
May 4, 1999).
10.19 - Third Amendment to Enron Corp. 1991 Stock
Plan (As Amended and Restated Effective May 4,
1999).
*10.20 - Enron Corp. 1992 Deferral Plan (Exhibit
10.09 to Enron Form 10-K for 1991).
*10.21 - First Amendment to Enron Corp. 1992
Deferral Plan (Exhibit 10.10 to Enron Form
10-K for 1995).
*10.22 - Second Amendment to Enron Corp. 1992
Deferral Plan (Exhibit 10.11 to Enron Form
10-K for 1995).
*10.23 - Enron Corp. Directors' Deferred Income
Plan (Exhibit 10.09 to Enron Form 10-K for
1992).
*10.24 - Split Dollar Life Insurance Agreement
between Enron and the KLL and LPL Family
Partnership, Ltd., dated April 22, 1994
(Exhibit 10.17 to Enron Form 10-K for 1994).
*10.25 - Employment Agreement between Enron Corp.
and Kenneth L. Lay, executed December 18, 1996
(Exhibit 10.25 to Enron Form 10-K for 1996).
10.26 - First Amendment to Employment Agreement
between Enron Corp. and Kenneth L. Lay, dated
February 7, 2000.
*10.27 - Consulting Services Agreement between
Enron and John A. Urquhart dated August 1,
1991 (Exhibit 10.23 to Enron Form 10-K for
1991).
*10.28 - First Amendment to Consulting Services
Agreement between Enron and John A. Urquhart,
dated August 27, 1992 (Exhibit 10.25 to Enron
Form 10-K for 1992).
*10.29 - Second and Third Amendments to Consulting
Services Agreement between Enron and John A.
Urquhart, dated November 24, 1992 and February
26, 1993, respectively (Exhibit 10.26 to Enron
Form 10-K for 1992).
*10.30 - Fourth Amendment to Consulting Services
Agreement between Enron and John A. Urquhart
dated as of May 9, 1994 (Exhibit 10.35 to
Enron Form 10-K for 1995).
*10.31 - Fifth Amendment to Consulting Services
Agreement between Enron and John A. Urquhart
(Exhibit 10.36 to Enron Form 10-K for 1995).
*10.32 - Sixth Amendment to Consulting Services
Agreement between Enron and John A. Urquhart
(Exhibit 10.37 to Enron Form 10-K for 1995).
*10.33 - Seventh Amendment to Consulting Services
Agreement between Enron and John A. Urquhart,
dated October 27, 1997 (Exhibit 10.27 to Enron
Form 10-K for 1997).
*10.34 - Eighth Amendment to Consulting Services
Agreement between Enron and John A. Urquhart,
dated May 27, 1998 (Exhibit 10.28 to Enron
Form 10-K for 1998).
*10.35 - Ninth Amendment to Consulting Services
Agreement between Enron and John A. Urquhart,
dated December 31, 1998 (Exhibit 10.29 to
Enron Form 10-K for 1998).
10.36 - Tenth Amendment to Consulting Services
Agreement between John A. Urquhart and Enron
Corp. dated January 1, 2000.
*10.37 - Enron Corp. Performance Unit Plan
(Exhibit A to Enron Proxy Statement filed
pursuant to Section 14(a) on March 25, 1994).
*10.38 - Enron Corp. Annual Incentive Plan
(Exhibit B to Enron Proxy Statement filed
pursuant to Section 14(a) on March 25, 1994).
*10.39 - Enron Corp. Annual Incentive Plan dated
May 4, 1999 (Exhibit A to Enron Proxy
Statement filed pursuant to Section 14(a) on
March 30, 1999).
*10.40 - Enron Corp. Performance Unit Plan (as
amended and restated effective May 2, 1995)
(Exhibit A to Enron Proxy Statement filed
pursuant to Section 14(a) on March 27, 1995).
*10.41 - First Amendment to Enron Corp.
Performance Unit Plan (Exhibit 10.46 to Enron
Form 10-K for 1995).
*10.42 - Enron Corp. Restated 1994 Deferral Plan
(Exhibit 4.3 to Enron Form S-8 Registration
Statement, File No. 333-48193).
*10.43 - Employment Agreement between Enron
Capital Trade & Resources Corp. and Jeffrey K.
Skilling, dated January 1, 1996 (Exhibit 10.63
to Enron Form 10-K for 1996).
*10.44 - First Amendment effective January 1,
1997, by and among Enron Corp., Enron Capital
& Trade Resources Corp., and Jeffrey K.
Skilling, amending Employment Agreement
between Enron Capital & Trade Resources Corp.
and Jeffrey K. Skilling dated January 1, 1996
(Exhibit 10.64 to Enron Form 10-K for 1996).
*10.45 - Split Dollar Agreement between Enron and
Jeffrey K. Skilling dated May 23, 1997
(Exhibit 10.41 to Enron Form 10-K for 1997).
*10.46 - Second Amendment effective October 13,
1997, to Employment Agreement between Enron
Corp. and Jeffrey K. Skilling (Exhibit 10.42
to Enron Form 10-K for 1997).
*10.47 - Loan Agreement effective October 13,
1997, between Enron Corp. and Jeffrey K.
Skilling (Exhibit 10.43 to Enron Form 10-K for
1997).
10.48 - Third Amendment to Employment Agreement
between Enron Corp. and Jeffrey K. Skilling,
dated February 7, 2000.
*10.49 - Employment Agreement dated July 20, 1996
(effective July 1, 1997) between Enron and Ken
L. Harrison (Exhibit 10.1 to Post-Effective
Amendment No. 1 to Enron's Registration
Statement on Form S-4, File No. 333-13791).
*10.50 - Executive Employment Agreement between
Enron Corp. and Rebecca P. Mark, effective May
4, 1998 (Exhibit 10.41 to Enron Form 10-K for
1998).
10.51 - First Amendment to Executive Employment
Agreement by and between Enron Corp., Azurix
Corp. and Rebecca P. Mark, dated February 1,
1999.
*10.52 - Executive Employment Agreement between
Enron Corp. and Joseph W. Sutton, effective
June 23, 1998 (Exhibit 10.42 to Enron Form
10-K for 1998).
10.53 - Amendment to Executive Employment
Agreement between Enron Corp. and Joseph W.
Sutton, dated May 5, 1999.
10.54 - Second Amendment to Executive Employment
Agreement between Enron Corp. and Joseph W.
Sutton, dated July 1, 1999.
*10.55 - Executive Employment Agreement between
Enron Operations Corp. and Stanley C. Horton,
dated as of October 1, 1999 (Exhibit 10.45 to
Enron Form 10-K for 1997).
10.56 - First Amendment to Executive Employment
Agreement by and between Enron Operations
Corp., Enron Corp. and Stanley C. Horton,
dated December 27, 1999.
10.57 - Executive Employment Agreement between
Enron Corp. and Mark A. Frevert, effective
June 1, 1998.
12 - Statement re computation of ratios of
earnings to fixed charges.
21 - Subsidiaries of registrant.
23 - Consent of Arthur Andersen LLP.
24 - Powers of Attorney for the directors
signing this Form 10-K.
27 - Financial Data Schedule.
* Asterisk indicates exhibits incorporated by reference.
(b) Reports on Form 8-K
None.
INDEX TO FINANCIAL STATEMENTS
ENRON CORP.
Page No.
Consolidated Financial Statements
Report of Independent Public Accountants F-2
Consolidated Income Statement and Consolidated Statement
of Comprehensive Income for the years ended December 31,
1999, 1998 and 1997 F-3
Consolidated Balance Sheet as of December 31, 1999 and
1998 F-4
Consolidated Statement of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 F-6
Consolidated Statement of Changes in Shareholders'
Equity Accounts for the years ended December 31,
1999, 1998 and 1997 F-7
Notes to the Consolidated Financial Statements F-8
Financial Statements Schedule
Report of Independent Public Accountants on
Financial Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
Other financial statement schedules have been omitted
because they are inapplicable or the information required
therein is included elsewhere in the financial statements or
notes thereto.
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998,
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, 1999, 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
March 13, 2000
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
Year ended December 31,
(In millions, except per share amounts) 1999 1998 1997
Revenues
Natural gas and other products $19,536 $13,276 $13,211
Electricity 15,238 13,939 5,101
Transportation 588 627 652
Other 4,750 3,418 1,309
Total revenues 40,112 31,260 20,273
Costs and Expenses
Cost of gas, electricity and
other products 34,761 26,381 17,311
Operating expenses 2,996 2,352 1,406
Oil and gas exploration expenses 49 121 102
Depreciation, depletion and
amortization 870 827 600
Taxes, other than income taxes 193 201 164
Impairment of long-lived assets 441 - -
Contract restructuring charge - - 675
Total costs and expenses 39,310 29,882 20,258
Operating Income 802 1,378 15
Other Income and Deductions
Equity in earnings of unconsolidated
equity affiliates 309 97 216
Gains on sales of assets and investments 541 56 186
Interest income 162 88 70
Other income, net 181 (37) 78
Income Before Interest, Minority
Interests and Income Taxes 1,995 1,582 565
Interest and related charges, net 656 550 401
Dividends on company-obligated preferred
securities of subsidiaries 76 77 69
Minority interests 135 77 80
Income tax expense (benefit) 104 175 (90)
Net income before cumulative effect of
accounting changes 1,024 703 105
Cumulative effect of accounting changes,
net of tax (131) - -
Net Income 893 703 105
Preferred stock dividends 66 17 17
Earnings on Common Stock $ 827 $ 686 $ 88
Earnings Per Share of Common Stock
Basic
Before cumulative effect of
accounting changes $ 1.36 $ 1.07 $ 0.16
Cumulative effect of accounting
changes (0.19) - -
Basic earnings per share $ 1.17 $ 1.07 $ 0.16
Diluted
Before cumulative effect of
accounting changes $ 1.27 $ 1.01 $ 0.16
Cumulative effect of accounting
changes (0.17) - -
Diluted earnings per share $ 1.10 $ 1.01 $ 0.16
Average Number of Common Shares Used
in Computation
Basic 705 642 544
Diluted 769 695 555
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year ended December 31,
(In millions) 1999 1998 1997
Net Income $ 893 $ 703 $ 105
Other comprehensive income:
Foreign currency translation
adjustment and other (579) (14) (21)
Total Comprehensive Income $ 314 $ 689 $ 84
<FN>
The accompanying notes are an integral part of these consolidated
financial statements.
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
(In millions) 1999 1998
ASSETS
Current Assets
Cash and cash equivalents $ 288 $ 111
Trade receivables (net of allowance
for doubtful accounts of $40 and
$14, respectively) 3,030 2,060
Other receivables 518 833
Assets from price risk management
activities 2,205 1,904
Inventories 598 514
Other 616 511
Total current assets 7,255 5,933
Investments and Other Assets
Investments in and advances to
unconsolidated equity affiliates 5,036 4,433
Assets from price risk management
activities 2,929 1,941
Goodwill 2,799 1,949
Other 4,681 4,437
Total investments and other assets 15,445 12,760
Property, Plant and Equipment, at cost
Natural gas transmission 6,948 6,936
Electric generation and distribution 3,552 2,061
Construction in progress 1,491 989
Oil and gas, successful efforts method 690 4,814
Other 1,231 992
13,912 15,792
Less accumulated depreciation,
depletion and amortization 3,231 5,135
Property, plant and equipment, net 10,681 10,657
Total Assets $33,381 $29,350
<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) 1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,154 $ 2,380
Liabilities from price risk
management activities 1,836 2,511
Short-term debt 1,001 -
Other 1,768 1,216
Total current liabilities 6,759 6,107
Long-Term Debt 7,151 7,357
Deferred Credits and Other Liabilities
Deferred income taxes 1,894 2,357
Liabilities from price risk
management activities 2,990 1,421
Other 1,587 1,916
Total deferred credits and
other liabilities 6,471 5,694
Commitments and Contingencies
(Notes 3, 13, 14 and 15)
Minority Interests 2,430 2,143
Company-Obligated Preferred Securities
of Subsidiaries 1,000 1,001
Shareholders' Equity
Second preferred stock, cumulative, no par
value, 1,370,000 shares authorized,
1,296,184 shares and 1,319,848 shares of
Cumulative Second Preferred Convertible
Stock issued, respectively 130 132
Mandatorily Convertible Junior Preferred
Stock, Series B, no par value, 250,000
shares issued 1,000 -
Common stock, no par value, 1,200,000,000
shares authorized, 716,865,081 shares
and 671,094,552 shares issued, respectively 6,637 5,117
Retained earnings 2,698 2,226
Accumulated other comprehensive income (741) (162)
Common stock held in treasury, 1,337,714
shares and 9,333,322 shares,
respectively (49) (195)
Restricted stock and other (105) (70)
Total shareholders' equity 9,570 7,048
Total Liabilities and Shareholders' Equity $33,381 $29,350
<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) 1999 1998 1997
Cash Flows From Operating Activities
Reconciliation of net income to net
cash provided by operating activities
Net income $ 893 $ 703 $ 105
Cumulative effect of accounting changes 131 - -
Depreciation, depletion and amortization 870 827 600
Oil and gas exploration expenses 49 121 102
Impairment of long-lived assets 441 - -
Deferred income taxes 21 87 (174)
Gains on sales of assets and investments (541) (82) (195)
Changes in components of working
capital (1,000) (233) (65)
Net assets from price risk management
activities (395) 350 201
Merchant assets and investments:
Realized gains on sales (756) (628) (136)
Proceeds from sales 2,217 1,434 339
Additions and unrealized gains (827) (721) (308)
Other operating activities 125 (218) (258)
Net Cash Provided by Operating
Activities 1,228 1,640 211
Cash Flows From Investing Activities
Capital expenditures (2,363) (1,905) (1,392)
Equity investments (722) (1,659) (700)
Proceeds from sales of investments and
other assets 294 239 473
Acquisition of subsidiary stock - (180) -
Business acquisitions, net of cash
acquired (see Note 2) (311) (104) (82)
Other investing activities (405) (356) (445)
Net Cash Used in Investing Activities (3,507) (3,965) (2,146)
Cash Flows From Financing Activities
Issuance of long-term debt 1,776 1,903 1,817
Repayment of long-term debt (1,837) (870) (607)
Net increase (decrease) in
short-term borrowings 1,565 (158) 464
Issuance of company-obligated
preferred securities of subsidiaries - 8 372
Issuance of common stock 852 867 -
Issuance of subsidiary equity 568 828 555
Dividends paid (467) (414) (354)
Net (acquisition) disposition of
treasury stock 139 13 (422)
Other financing activities (140) 89 24
Net Cash Provided by Financing
Activities 2,456 2,266 1,849
Increase (Decrease) in Cash and
Cash Equivalents 177 (59) (86)
Cash and Cash Equivalents,
Beginning of Year 111 170 256
Cash and Cash Equivalents,
End of Year $ 288 $ 111 $ 170
Changes in Components of Working Capital
Receivables $ (662) $(1,055) $ 351
Inventories (133) (372) 63
Payables (246) 433 (366)
Other 41 761 (113)
Total $(1,000) $ (233) $ (65)
<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 1999 1998 1997
amounts; shares in thousands) Shares Amount Shares Amount Shares Amount
Cumulative Second Preferred
Convertible Stock
Balance, beginning of year 1,320 $ 132 1,338 $ 134 1,371 $ 137
Exchange of common stock for
convertible preferred stock (24) (2) (18) (2) (33) (3)
Balance, end of year 1,296 $ 130 1,320 $ 132 1,338 $ 134
Mandatorily Convertible Junior
Preferred Stock, Series B
Balance, beginning of year - $ - - $ - - $ -
Issuances 250 1,000 - - - -
Balance, end of year 250 $1,000 - $ - - $ -
Common Stock
Balance, beginning of year 671,094 $5,117 636,594 $4,224 511,890 $ 26
Exchange of common stock for
convertible preferred stock 465 (1) - (7) 764 -
Issuances related to benefit
and dividend reinvestment plans 10,054 258 - 45 - (3)
Sales of common stock 27,600 839 34,500 836 - -
Issuances of common stock in
business acquisitions (see Note 2) 7,652 250 - - 123,940 2,281
Issuance of no par stock in
reincorporation merger - - - - - 1,881
Other - 174 - 19 - 39
Balance, end of year 716,865 $6,637 671,094 $5,117 636,594 $4,224
Additional Paid-in Capital
Balance, beginning of year $ - $ - $1,870
Sales and issuances of common stock - - 10
Issuance of no par stock in
reincorporation merger - - (1,881)
Other - - 1
Balance, end of year $ - $ - $ -
Retained Earnings
Balance, beginning of year $2,226 $1,852 $2,007
Net income 893 703 105
Cash dividends
Common stock ($0.5000, $0.4812
and $0.4562 per share in 1999,
1998 and 1997, respectively) (355) (312) (243)
Cumulative Second Preferred
Convertible Stock ($13.652,
$13.1402 and $12.4584 per share
in 1999, 1998 and 1997,
respectively) (17) (17) (17)
Series A and B Preferred Stock (49) - -
Balance, end of year $2,698 $2,226 $1,852
Accumulated Other Comprehensive Income
Balance, beginning of year $ (162) $ (148) $ (127)
Translation adjustments and other (579) (14) (21)
Balance, end of year $ (741) $ (162) $ (148)
Treasury Stock
Balance, beginning of year (9,334) $ (195) (14,102) $ (269) (1,642) $ (30)
Shares acquired (1,845) (71) (2,236) (61) (19,580) (374)
Exchange of common stock
for convertible preferred stock 181 4 486 9 140 3
Issuances related to benefit
and dividend reinvestment plans 9,660 213 6,426 124 5,676 106
Issuances of treasury stock in
business acquisitions (see Note 2) - - 92 2 1,304 26
Balance, end of year (1,338) $ (49) (9,334) $ (195) (14,102) $ (269)
Restricted Stock and Other
Balance, beginning of year $ (70) $ (175) $ (160)
Issuances related to benefit
and dividend reinvestment plans (35) 105 (15)
Balance, end of year $ (105) $ (70) $ (175)
Total Shareholders' Equity $9,570 $7,048 $5,618
<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, unless control is temporary.
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 Enron Corp.'s
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.
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 tax 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 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. The values are adjusted to reflect the potential
impact of liquidating Enron's position in an orderly manner over
a reasonable period of time under present market conditions.
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 Oil and Gas Producing Activities. Enron
accounts for oil and gas exploration and production activities
under the successful efforts method of accounting. All
development wells and related production equipment and lease
acquisition costs are capitalized when incurred. Unproved
properties are assessed regularly and any impairment in value is
recognized. Lease rentals and exploration costs, other than the
costs of drilling exploratory wells, are expensed as incurred.
Unsuccessful exploratory wells are expensed when determined to be
non-productive.
Exploration costs and dry hole costs are included in the
Consolidated Statement of Cash Flows as investing 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. Enron's accounting policy for the costs of
computer software (all of which is for internal use only) is to
capitalize 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. 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, 1999 and
1998, Enron has capitalized $240 million and $189 million,
respectively, of software costs covering numerous systems,
including trading and settlement, billing and payroll systems 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.
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.
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
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. EOGI-India, Inc. indirectly owns oil and gas
operations in India and China and $600 million of cash. 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. Enron retained 11.5 million shares of EOG stock (now EOG
Resources, Inc.) which will be exchanged at the maturity of the
debt. As of August 16, 1999, EOG is no longer included in
Enron's consolidated financial statements. As a result, net
property, plant and equipment decreased by approximately $2,400
million, short- and long-term debt decreased by approximately
$1,800 million and minority interests decreased by approximately
$600 million. EOGI-India, Inc. is included in the consolidated
financial statements within the Wholesale Energy Operations and
Services following the exchange and sale.
In August 1998, Enron, through a wholly-owned subsidiary,
completed the acquisition of a controlling interest in Elektro
Eletricidade e Servicos S.A. (Elektro), an electricity
distributor in Brazil, for approximately $1.3 billion. Enron's
interest in Elektro is held by Jacare Electrical Distribution
Trust (Jacare) and was initially accounted for using the equity
method based on temporary control. In December 1998, Enron
financially closed the Elektro financial restructuring, reducing
its interest in Jacare to 51%. Following the decision by Enron
to acquire additional interests in Elektro, Enron consolidated
Jacare effective January 1, 1999. Jacare's balance sheet at that
date consisted of net assets of approximately $1,340 million,
including goodwill of approximately $990 million, net property,
plant and equipment of approximately $1,100 million and debt of
approximately $900 million. As a result of the consolidation, as
of January 1, 1999, Enron's investment in unconsolidated
affiliates decreased by approximately $450 million and minority
interests increased by approximately $890 million. During 1999,
the exchange rate for the Brazilian real to the U.S. dollar
declined, resulting in a non-cash foreign currency translation
adjustment which reduced Enron's Brazilian assets (primarily
Elektro) and shareholders' equity by approximately $600 million.
In November 1997, Enron acquired the minority interest in
Enron Global Power & Pipelines L.L.C. (EPP) in a stock-for-stock
transaction. Enron issued approximately 23 million common shares
in exchange for the EPP shares held by the minority shareholders.
Effective July 1, 1997, Enron merged with Portland General
Corporation (PGC) in a stock-for-stock transaction. Enron issued
approximately 101 million common shares to shareholders of PGC
and assumed PGC's outstanding debt of approximately $1.1 billion.
Additionally, during 1999, 1998 and 1997, 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 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) 1999 1998(a) 1997
Fair value of assets acquired,
other than cash $ 376 $ 269 $ 3,829
Goodwill (71) 94 1,847
Fair value of liabilities assumed 6 (259) (3,235)
Common stock of Enron and
subsidiary issued - - (2,359)
Net cash paid $ 311 $ 104 $ 82
<FN>
(a) Excludes amounts related to the 1998 acquisition of
Elektro prior to the consolidation of Jacare.
If the PGC and EPP acquisitions had occurred at the beginning
of 1997, Enron's 1997 consolidated revenues would have been
$20,950 million, income before interest, minority interests and
income taxes would have been $716 million, net income would have
been $181 million and earnings per share would have been $0.27
(basic) and $0.26 (diluted). These unaudited pro forma results
are for illustrative purposes only and are not necessarily
indicative of the operating results that would have occurred had
the business acquisitions been consummated at that date, nor are
they necessarily indicative of future operating results.
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, comprised of $2.02 billion in
cash and the assumption of Enron's approximately $80 million
merger payment obligation. Sierra Pacific Resources will also
assume approximately $1 billion in PGE debt and preferred stock.
The proposed transaction, which is subject to customary
regulatory approvals, is expected to close in late 2000. Enron's
carrying amount of PGE is approximately $1.4 billion. Income
before interest, minority interest and income taxes for PGE was
$298 million and $284 million for 1999 and 1998, respectively,
and $114 million for the six months ended December 31, 1997.
3 PRICE RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS
Trading Activities. Enron, through its Wholesale Energy
Operations and Services (Enron Wholesale) and Retail Energy
Services (Energy Services) segments, 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 of an energy
commodity, 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, 1999 are shown below (volumes
in trillions of British thermal units equivalent (TBtue), dollars
in millions):
Fixed Price Fixed Price Maximum
Payor Receiver Terms in Years
Commodities
Natural gas 6,642 5,921 24
Crude oil and liquids 1,342 749 7
Electricity 1,853 1,606 25
Other 352 541 10
Financial products
Interest rate(a) $2,151 $4,288 29
Foreign currency 619 88 15
Equity investments 2,195 882 14
<FN>
(a) 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.
Enron Wholesale and Energy Services include sales and purchase
commitments associated with commodity contracts based on market
prices totaling 9,013 TBtue, with terms extending up to 21 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, 1999 was approximately 2.0
years.
Fair Value. The fair value as of December 31, 1999 and the
average fair value of instruments related to price risk
management activities, including energy related commodities
together with the related foreign currency and interest rate
instruments, other commodities and equities held during the year
are set forth below:
Average Fair Value
Fair Value for the Year Ended
as of 12/31/99 12/31/99(a)
(In millions) Assets Liabilities Assets Liabilities
Natural gas $3,267 $2,335 $3,080 $2,506
Crude oil and liquids 649 1,832 806 1,486
Electricity 906 380 726 352
Other commodities 163 32 219 129
Equity 486 247 165 149
Total $5,471 $4,826 $4,996 $4,622
<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 1999
was $765 million.
Credit Risk. In conjunction with the valuation of its
financial instruments, Enron provides reserves for risks
associated with such activity, including credit risk. 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, 1999 and 1998 are summarized as
follows:
1999 1998
Investment Investment
(In millions) Grade(a) Total Grade(a) Total
Gas and electric utilities $1,461 $1,510 $1,181 $1,251
Energy marketers 544 768 684 795
Financial institutions 1,016 1,273 505 505
Independent power producers 471 641 416 613
Oil and gas producers 379 688 365 549
Industrials 336 524 229 341
Other 59 67 101 116
Total $4,266 5,471 $3,481 4,170
Credit and other reserves (337) (325)
Assets from price risk
management activities(b) $5,134 $3,845
<FN>
(a) "Investment Grade" is primarily determined using publicly
available credit ratings along with consideration of
collateral, which encompass 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) Two customers' exposures at December 31, 1999 and 1998
comprise greater than 5% of Assets From Price Risk Management
Activities and are included above as Investment Grade.
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 and other reserves, Enron
does not anticipate a materially adverse effect on financial
position or results of operations as a result of counterparty
nonperformance.
Non-Trading Activities. Enron's other businesses also enter
into 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, 1999, Enron was
a party to energy commodity price swaps covering 15.4 TBtu, 3.5
TBtu and 15.0 TBtu of natural gas for the years 2000, 2001 and
2002, respectively, and 2.2 million barrels of crude oil for the
year 2000.
Interest Rate Swaps. At December 31, 1999, Enron had entered
into interest rate swap agreements with an aggregate notional
principal amount of $2.2 billion to manage interest rate
exposure. These swap agreements are scheduled to terminate $1.4
billion in 2000 and $0.8 billion in the period 2001 through 2008.
Equity Contracts. At December 31, 1999, Enron had entered
into Enron common stock swaps, with an aggregate notional amount
of $60 million, to hedge certain incentive-based compensation
plans. Such contracts will expire in 2000.
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. Counterparties to
forwards, futures and other contracts are equivalent to
investment grade financial institutions. 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.
Enron has concentrations of customers in the electric and gas
utility and oil and gas exploration and production industries.
These concentrations of customers may impact Enron's overall
exposure to credit risk, either positively or negatively, in that
the customers may be similarly affected by changes in economic or
other conditions. However, Enron's management believes that its
portfolio of receivables is well diversified and that such
diversification minimizes any potential credit risk. Receivables
are generally not collateralized.
Financial Instruments. The carrying amounts and estimated
fair values of Enron's financial instruments, excluding trading
activities which are marked to market, at December 31, 1999 and
1998 were as follows:
1999 1998
Carrying Estimated Carrying Estimated
(In millions) Amount Fair Value Amount Fair Value
Short- and long-term debt
(Note 7) $8,152 $8,108 $7,357 $7,624
Company-obligated preferred
securities of subsidiaries
(Note 10) 1,000 937 1,001 1,019
Energy commodity price swaps - (3) - (5)
Interest rate swaps - (55) - 12
Equity contracts 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 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 wholesale merchant
investments and energy assets at December 31, 1999 and 1998 is as
follows:
December 31,
(In millions) 1999 1998
Merchant investments
Held directly by Enron (a)
Energy $ 516 $ 279
Energy-intensive industries 218 331
Natural gas transportation - 132
Other 352 334
1,086 1,076
Held through unconsolidated
affiliates(b)
Energy 401 610
Power generation 98 -
Oil services 25 123
Other 88 50
612 783
1,698 1,859
Merchant assets (c)
Independent power plants 152 148
Natural gas transportation 35 38
187 186
Total $1,885 $2,045
<FN>
(a) Investments are recorded at fair value in "Other Assets"
with fair value adjustments reflected in "Other Revenues."
(b) Investments held through unconsolidated equity affiliates
and recorded in "Investment in and Advances to Unconsolidated
Equity Affiliates" with earnings reflected in "Equity in
Earnings of Unconsolidated Equity Affiliates." Amounts
represent Enron's interest.
(c) Amounts represent Enron's investment in unconsolidated
equity affiliates with earnings reflected in "Equity in
Earnings of Unconsolidated Equity Affiliates."
Through the Enron Wholesale segment, Enron provides capital
primarily to energy and communications-related businesses seeking
debt or equity financing. The merchant investments made by Enron
and carried at fair value include public and private equity,
debt, production payments, government securities with maturities
of more than 90 days 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.
From time to time, Enron sells interests in these merchant
assets and investments. Some of these sales are completed in
securitizations, in which Enron retains certain interests through
swaps associated with the underlying assets. 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. See Note 3. For the years
ended December 31, 1999, 1998 and 1997, respectively, pre-tax
gains from sales of merchant assets and investments totaling $756
million, $628 million and $136 million are included in "Other
Revenues," and proceeds were $2,217 million, $1,434 million and
$339 million.
5 INCOME TAXES
The components of income before income taxes are as follows:
(In millions) 1999 1998 1997
United States $ 357 $197 $96
Foreign 771 681 (81)
$1,128 $878 $15
Total income tax expense (benefit) is summarized as follows:
(In millions) 1999 1998 1997
Payable currently
Federal $ 29 $ 30 $ 29
State 6 8 9
Foreign 48 50 46
83 88 84
Payment deferred
Federal (159) (14) (39)
State 23 11 (42)
Foreign 157 90 (93)
21 87 (174)
Total income tax expense (benefit) $104 $175 $ (90)
The differences between taxes computed at the U.S. federal
statutory tax rate and Enron's effective income tax rate are as
follows:
(In millions, except percentages) 1999 1998 1997
Statutory federal income tax
provision 35.0% 35.0% 35.0% $ 5
Net state income taxes 1.8 1.7 (140.0) (21)
Tight gas sands tax credit (0.5) (1.4) (80.0) (12)
Foreign tax rate differential (7.0) 0.8 13.3 2
Equity earnings (10.1) (4.3) (253.3) (38)
Minority interests 0.8 0.8 186.7 28
Basis and stock sale differences (10.8) (14.2) (526.7) (79)
Cash value in life insurance (0.9) (1.1) (46.7) (7)
Goodwill amortization 1.6 2.0 60.0 9
Audit settlement related to
Monthly Income Preferred Shares (1.8) - - -
Other 1.1 0.7 153.4 23
9.2% 20.0% (598.3)% $(90)
The principal components of Enron's net deferred income tax
liability are as follows:
December 31,
(In millions) 1999 1998
Deferred income tax assets
Alternative minimum tax credit
carryforward $ 220 $ 238
Net operating loss carryforward 1,302 605
Other 188 111
1,710 954
Deferred income tax liabilities
Depreciation, depletion
and amortization 1,807 1,940
Price risk management activities 1,133 645
Other 782 700
3,722 3,285
Net deferred income tax liabilities(a) $2,012 $2,331
<FN>
(a) Includes $118 million and $(26) million in other current
liabilities for 1999 and 1998, respectively.
Enron has an alternative minimum tax (AMT) credit carryforward
of approximately $220 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 federal consolidated net operating loss
carryforward for tax purposes of approximately $2.9 billion,
which will begin to expire in 2011. Enron also has a net
operating loss carryforward applicable to non-U.S. subsidiaries
of approximately $874 million, of which $673 million can be
carried forward indefinitely. The remaining $201 million of net
operating loss carryfoward will begin to expire in 2002 but is
projected to be utilized before its expiration period. The
benefits of the domestic and foreign net operating losses have
been recognized as deferred tax assets.
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 $1.2 billion are considered to be
indefinitely 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) 1999 1998 1997
Income taxes (net of refunds) $ 51 $ 73 $ 68
Interest (net of amounts capitalized) 678 585 420
Non-Cash Activity. In December 1999, Enron and a third-party
investor each contributed assets valued at approximately $500
million for interests in an Enron-controlled limited partnership.
See Note 8.
In June 1999, Enron entered into a series of transactions with
a third party, LJM Cayman, L.P., which resulted in an exchange of
assets. See Note 16.
During 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 to property, plant and equipment of $111
million.
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. During 1997, Enron issued common stock in
connection with other business acquisitions. See Note 2.
In December 1998, Enron extinguished its 6.25% Exchangeable
Notes with 10.5 million shares of EOG common stock.
Additionally, Enron's investment in Jacare has been
consolidated effective January 1, 1999 (see Note 2) and Whitewing
Associates, L.P. (Whitewing) and EOG are no longer consolidated
by Enron (see Notes 9 and 2).
7 CREDIT FACILITIES AND DEBT
Enron has credit facilities with domestic and foreign banks
which provide for an aggregate of $1.0 billion in long-term
committed credit and $1.8 billion in short-term committed credit.
Expiration dates of the committed facilities range from April
2000 to November 2001. 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, 1999, no
amounts were outstanding under these facilities.
Enron has also entered into agreements which provide for
uncommitted lines of credit totaling $225 million at December 31,
1999. 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,
1999, $125 million was 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, 1999 and 1998, short-term borrowings of $330 million and $680
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 subject to overall
reductions in debt levels. Similarly, at December 31, 1999 and
1998, $670 million and $541 million, respectively, of long-term
debt due within one year remained classified as long-term.
Weighted average interest rates on short-term debt outstanding at
December 31, 1999 and 1998 were 6.4% and 5.5%, respectively.
Detailed information on long-term debt is as follows:
December 31,
(In millions) 1999 1998
Enron Corp.
Senior debentures
6.75% to 8.25% due 2005 to 2012 $ 318 $ 350
Notes payable
7.00% exchangeable notes due 2002 239 -
6.45% to 9.88% due 2001 to 2028 4,209 3,342
Floating rate notes due 1999 to 2004 329 400
Other 34 38
Northern Natural Gas Company
Notes payable
6.75% to 8.00% due 2005 to 2011 500 500
Transwestern Pipeline Company
Notes payable
7.55% to 9.20% due 2000 to 2004 142 147
Portland General
First mortgage bonds
6.47% to 9.46% due 1999 to 2023 398 502
Pollution control bonds
Various rates due 2010 to 2033 200 200
Other 150 160
Enron Oil & Gas Company
Notes payable various rates due 1999
to 2028 - 780
Other 356 302
Amount reclassified from short-term debt 330 680
Unamortized debt discount and premium (54) (44)
Total long-term debt $7,151 $7,357
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, 1999 were $670 million, $569 million, $432
million, $494 million and $493 million for 2000 through 2004,
respectively.
8 MINORITY INTERESTS
Enron's minority interests at December 31, 1999 and 1998
include the following:
(In millions) 1999 1998
Majority-owned limited partnerships $1,773 $ 750
Jacare Electrical Distribution Trust
(see Note 2) 475 -
Enron Oil & Gas Company (see Note 2) - 596
Whitewing Associates, L.P. (see Note 9) - 500
Other 182 297
$2,430 $2,143
Enron has formed separate limited partnerships 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.
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.
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 to a
second newly-formed limited partnership in exchange for a 53%
interest; a third-party investor contributed $750 million in
exchange for a 47% interest. The assets held by the wholly-owned
limited partnership represent collateral for a $750 million note
receivable held by the second limited partnership. In 1999, the
wholly-owned and second limited partnerships sold assets valued
at approximately $460 million 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. If Enron does not acquire the minority holders'
interests before December 2004 through May 2009, or earlier upon
certain specified events, the entities will liquidate their
assets and dissolve.
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
Ownership December 31,
(In millions) Interest 1999 1998
Azurix Corp. 34% $ 762 $ 918
Citrus Corp. 50% 480 455
Companhia Distribuidora de Gas do Rio de
Janeiro, S.A. 25% 118 192
Dabhol Power Company(a) 60% 466 285
Enron Teesside Operations Limited 50% 129 118
Jacare Electrical Distribution Trust(a)
(see Note 2) 51% - 447
Joint Energy Development Investments L.P.
(JEDI)(b) 50% 211 356
Joint Energy Development Investments II
L.P. (JEDI II)(b) 50% 162 54
SK - Enron Co. Ltd. 50% 269 -
Transportadora de Gas del Sur S.A. 35% 452 463
Whitewing Associates, L.P. 50% 662 -
Other 1,325 1,145
$5,036(c) $4,433
<FN>
(a) Accounted for under the equity method based on temporary
control.
(b) JEDI and JEDI II account for their investments at fair
value.
(c) At December 31, 1999 and 1998, the unamortized excess of
Enron's investment in unconsolidated affiliates was $179
million and $203 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) 1999 1998 1997
Citrus Corp. $ 25 $ 23 $ 27
Dabhol Power Company 30 - -
Joint Energy Development Investments L.P. 11 (45) 68
Joint Energy Development Investments II, L.P. 92 (4) -
Transportadora de Gas del Sur S.A. 32 36 45
Other 119 87 76
$309 $ 97 $216
Summarized combined financial information of Enron's
unconsolidated affiliates is presented below:
December 31,
(In millions) 1999 1998
Balance sheet
Current assets(a) $ 3,168 $ 2,309
Property, plant and equipment, net 14,356 12,640
Other noncurrent assets 9,459 7,176
Current liabilities(a) 4,401 3,501
Long-term debt(a) 8,486 7,621
Other noncurrent liabilities 2,402 2,016
Owners' equity 11,694 8,987
<FN>
(a) Includes $327 million and $196 million receivable from
Enron and $84 million and $296 million payable to Enron at
December 31, 1999 and 1998, respectively.
\
(In millions) 1999 1998 1997
Income statement(a)
Operating revenues $11,568 $8,508 $11,183
Operating expenses 9,449 7,244 10,246
Net income 1,857 142 336
Distributions paid to Enron 482 87 118
<FN>
(a) Enron recognized revenues from transactions with
unconsolidated equity affiliates of $161 million in 1999, $142
million in 1998 and $219 million in 1997.
In 1998, Enron, through a wholly-owned subsidiary, acquired
Wessex Water Plc (Wessex), which provides water supply and
wastewater services in southern England, for approximately $2.4
billion. Wessex is held through Azurix Corp. As a result of a
financial restructuring in late 1998 and a public offering in
1999, Enron has reduced its ownership in Azurix to 34%.
In 1997, Enron and a third-party investor contributed
approximately $579 million and $500 million, respectively, for
interests in Whitewing. Whitewing purchased 250,000 shares of
Enron Series A Junior Convertible Preferred Stock (Series A
Preferred Stock) from Enron. In March 1999, Whitewing was amended
to allow, among other things, control to be shared equally
between Enron and the third-party investor. Consequently,
Whitewing was deconsolidated by Enron, resulting in an increase
in Enron's investment in unconsolidated equity affiliates of
approximately $500 million, an increase in preferred stock of
$1.0 billion and a decrease in minority interests of $500
million. In September 1999, Enron entered into a series of
transactions that resulted in the restructuring of Whitewing,
including the exchange of all outstanding shares of Series A
Preferred Stock held by Whitewing for 250,000 shares of Enron
Mandatorily Convertible Junior Preferred Stock, Series B (Series
B Preferred Stock) (see Note 10). In addition, 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. 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 outside investors'
interests. If Enron does not acquire the outside investors'
interests before January 2003, or earlier upon certain specified
events, Whitewing will liquidate its assets and dissolve.
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. Following Enron's reincorporation in Oregon
on July 1, 1997, Enron has authorized 16,500,000 shares of
preferred stock, no par value. At December 31, 1999, Enron had
outstanding 1,296,184 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 1999,
1998 and 1997, 23,664 shares, 17,797 shares and 33,069 shares,
respectively, of the Convertible Preferred Stock were converted
into common stock.
In September 1999, Enron entered into a series of transactions
that resulted in exchange of all outstanding shares of Series A
Preferred Stock held by Whitewing for 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. See Note 9.
In connection with the Elektro and Wessex financings, which
yielded proceeds of approximately $1.6 billion (see Notes 2 and
9, respectively), Enron committed to cause the sale of Enron
convertible preferred stock, with the number of common shares
issuable upon conversion determined based on future common stock
prices, if certain debt obligations of the related entities
acquiring such interests are defaulted upon, or in certain
events, including, among other things, Enron's credit ratings
falling below specified levels. If the sale of stock were not
sufficient to retire such obligations, Enron would be liable for
the shortfall. The obligations will mature in December 2000 and
2001 for Elektro and Wessex, respectively.
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 December 31, Value
amounts and shares) 1999 1998 Per Share
Enron Capital LLC
8% Cumulative Guaranteed Monthly Income
Preferred Shares (MIPS) (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)(b) 200 200 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 58 59
$1,000 $1,001
<FN>
(a) Redeemable under certain circumstances after specified
dates.
(b) Mature in 2046.
(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) 1999 1998 1997
Numerator:
Basic
Income before cumulative effect
of accounting changes $1,024 $ 703 $ 105
Preferred stock dividends:
Second Preferred Stock (17) (17) (17)
Series A Preferred Stock (30) - -
Series B Preferred Stock (19) - -
Income available to common share-
holders before cumulative effect
of accounting changes 958 686 88
Cumulative effect of accounting
changes (131) - -
Income available to common
share holders $ 827 $ 686 $ 88
Diluted
Income available to common share-
holders before cumulative effect
of accounting changes $ 958 $ 686 $ 88
Effect of assumed conversion of
dilutive securities:
Second Preferred Stock(a) 17 17 -
Series A Preferred Stock(b) - - -
Series B Preferred Stock(b) - - -
Income before cumulative effect
of accounting changes 975 703 88
Cumulative effect of accounting
changes (131) - -
Income available to common share-
holders after assumed conversions $ 844 $ 703 $ 88
Denominator:
Denominator for basic earnings per
share - weighted-average shares 705 642 544
Effect of dilutive securities:
Preferred stock(a) 36 36 -
Stock options 28 17 11
Dilutive potential common shares 64 53 11
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 769 695 555
Basic earnings per share:
Before cumulative effect of accounting
changes $1.36 $1.07 $0.16
Cumulative effect of accounting changes (0.19) - -
Basic earnings per share $1.17 $1.07 $0.16
Diluted earnings per share
Before cumulative effect of accounting
changes $1.27 $1.01 $0.16
Cumulative effect of accounting changes (0.17) - -
Diluted earnings per share $1.10 $1.01 $0.16
<FN>
(a) For 1997, the dividends and conversion of preferred stock
have been excluded from the computation because the conversion
is antidilutive.
(b) The Series A Preferred Stock and the Series B Preferred
Stock were not included in the calculation of diluted earnings
per share because conversion of these shares would be
antidilutive (see Note 10).
On July 13, 1999, Enron announced a two-for-one common stock
split effective August 13, 1999, to shareholders of record July
23, 1999. All share and per share amounts have been restated to
reflect the stock split, and appropriate adjustments have been
made in market prices of stock, conversion ratios of shares of
convertible preferred stock and exercise price and number of
shares subject to stock options. Effective with the stock split,
the annual cash dividend rate on the common stock is $0.50 per
share.
Forward Contracts and Options. At December 31, 1999, Enron
had forward contracts to purchase 22.6 million shares of Enron
Corp. common stock, including approximately 12 million shares
with JEDI, at an average price of $41.52 per share. Enron may
purchase the shares pursuant to the forward contracts with cash
or an equivalent value of Enron common stock until April 2001.
Shares potentially deliverable to the counterparty under the
contracts are assumed to be outstanding in calculating diluted
earnings per share unless they are antidilutive. At December 31,
1999, Enron also had 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 1999, 1998 and 1997 was $131
million, $58 million and $14 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 $827 million ($1.08 per share basic, $1.01
per share diluted) in 1999, $674 million ($1.02 per share basic,
$0.97 per share diluted) in 1998 and $66 million ($0.09 per share
basic, $0.09 per share diluted) in 1997.
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 1999, 1998 and 1997,
respectively: (i) dividend yield of 2.4%, 2.5% and 2.5%; (ii)
expected volatility of 20.0%, 18.3% and 17.4%; (iii) risk-free
interest rates of 5.6%, 5.0% and 5.9%; and (iv) expected lives of
3.7 years, 3.8 years and 3.7 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. The Plans provide for options to be granted with a stock
appreciation rights feature; however, Enron does not presently
intend to issue options with this feature. 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:
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
Outstanding,
beginning of year 79,604 $19.60 78,858 $17.89 50,952 $16.35
Granted 35,118 37.49 15,702 24.99 35,316 19.32
Exercised (19,705) 18.08 (13,072) 15.70 (4,330) 11.65
Forfeited (1,465) 24.51 (1,498) 19.77 (3,028) 17.63
Expired (21) 18.79 (386) 19.76 (52) 17.30
Outstanding,
end of year 93,531 26.74 79,604 19.60 78,858 17.89
Exercisable,
end of year 52,803 22.56 45,942 $18.16 42,504 $16.78
Available for grant,
end of year(a) 24,864 10,498 26,094
Weighted average
fair value of
options granted $7.24 $4.20 $3.55
<FN>
(a) Includes up to 22,140,962 shares, 10,497,670 shares and
24,492,080 shares as of December 31, 1999, 1998 and 1997,
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, 1999 (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 12/31/99 Life Price at 12/31/99 Price
$ 6.58 to $18.03 13,327 3.7 $14.90 13,130 $14.88
18.38 to 19.94 14,477 5.4 18.90 10,969 18.97
20.00 to 22.50 20,806 5.1 21.10 14,555 21.17
23.19 to 28.72 10,687 7.7 26.65 4,480 26.67
30.03 to 50.48 34,234 7.3 38.12 9,669 37.24
93,531 6.1 $26.74 52,803 $22.56
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) 1999 1998 1997
Outstanding, beginning of year 6,034 5,074 1,650
Granted 2,672 2,122 4,176
Released to participants (1,702) (1,064) (642)
Forfeited (223) (98) (110)
Outstanding, end of year 6,781 6,034 5,074
Available for grant, end of year 22,141 10,498 24,492
Weighted average fair value of
restricted stock granted $37.38 $23.70 $19.13
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 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, 1999 and 1998, 17,241,731
shares and 21,838,100 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 and the Portland General 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) 1999 1998 1999 1998
Change in benefit obligation
Benefit obligation, beginning of year $687 $617 $134 $148
Service cost 32 27 2 2
Interest cost 49 44 9 9
Plan participants' contributions - - 3 3
Plan amendments 6 - - 3
Actuarial loss (gain) (51) 26 (12) (16)
Acquisitions and divestitures 36 - - -
Effect of curtailment and settlements(a) (8) - - -
Benefits paid (43) (27) (16) (15)
Benefit obligation, end of year $708 $687 $120 $134
Change in plan assets
Fair value of plan assets, beginning
of year(b) $774 $727 $ 60 $ 54
Actual return on plan assets 80 41 7 3
Acquisitions and divestitures 37 - - -
Employer contribution 5 33 6 8
Plan participants' contributions - - 3 3
Benefits paid (43) (27) (8) (8)
Fair value of plan assets, end of year(b) $853 $774 $ 68 $ 60
Reconciliation of funded status, end of year
Funded status, end of year $145 $ 87 $(52) $(74)
Unrecognized transition obligation (asset) (13) (18) 48 58
Unrecognized prior service cost 32 33 14 17
Unrecognized net actuarial loss (gain) 11 79 (29) (10)
Prepaid (accrued) benefit cost $175 $181 $(19) $ (9)
Weighted-average assumptions at December 31
Discount rate 7.75% 6.75% 7.75% 6.75%
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 $ 32 $ 27 $ 2 $ 2
Interest cost 49 44 9 9
Expected return on plan assets (70) (63) (4) (3)
Amortization of transition obligation
(asset) (6) (6) 4 4
Amortization of prior service cost 5 5 1 1
Recognized net actuarial loss (gain) 3 2 - -
Effect of curtailment and settlements(a) (6) - 6 -
Net periodic benefit cost $ 7 $ 9 $ 18 $ 13
<FN>
(a) Represents one-time nonrecurring events associated with the
exchange and sale of EOG (see Note 2) and with certain employees
ceasing participation in the Portland General Plan as a result of
union negotiations.
(b) Includes plan assets of the ESOP of $121 million and $139
million at December 31, 1999 and 1998, respectively.
(c) Long-term rate of return on assets is assumed to be 10.5%
for the Enron Plan and 9.0% for the Portland General 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 and 4.0% to 9.5% for the Portland General Plan.
Included in the above amounts are the unfunded obligations for
the supplemental executive retirement plans. At December 31,
1999 and 1998, respectively, the projected benefit obligation for
these unfunded plans was $56 million and $57 million and the fair
value of assets was $1 million and $2 million.
The measurement date of the Enron Plan and the ESOP is
September 30, and the measurement date of the Portland General
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 in 2000 for the Enron and Portland General postretirement
plans, respectively. The rates were assumed to decrease to 5% by
2001 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 $5.2 $(4.7)
Additionally, certain Enron subsidiaries maintain various
incentive based compensation plans for which participants may
receive a combination of cash or stock options of the
subsidiaries, 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
$250 million and $241 million at December 31, 1999 and 1998,
respectively, and are expected to be recovered over varying time
periods.
The electric utility operations' net regulatory assets were
$494 million at December 31, 1999 and 1998. Based on rates in
place at December 31, 1999, Enron estimates that it will collect
substantially all of its regulatory assets within the next 12
years.
Pipeline Operations. On May 1, 1998, Northern Natural Gas
Company (Northern) filed a general rate case proceeding with the
FERC which fulfilled a commitment made in a previous settlement.
The FERC accepted the rate case for filing and suspended the
filed rates. Northern implemented the filed rates effective
November 1, 1998, subject to refund. An uncontested Stipulation
and Agreement of Settlement (Settlement) was filed with the
Commission on April 16, 1999 and an order approving the
Settlement was issued by the Commission on June 18, 1999.
Northern issued refunds on September 1, 1999. Northern
effectuated new rates, which reflected seasonality, on November
1, 1999.
On November 1, 1999, Transwestern Pipeline Company implemented
a rate escalation of settled transportation rates in accordance
with its May 1995 global settlement, as amended in May 1996.
Electric Utility Operations. PGE is a 67.5% owner of the
Trojan Nuclear Plant (Trojan). In March 1995, the OPUC issued an
order authorizing PGE to recover all of the estimated costs of
decommissioning Trojan and 87% of its remaining investment in the
plant. At December 31, 1999, PGE's regulatory asset related to
recovery of Trojan costs from customers was $398 million.
Amounts are to be collected over Trojan's original license period
ending in 2011. An effort is being made to negate new
legislation allowing PGE's recovery of a return on its
undepreciated investment in Trojan, and a referendum will appear
on the November 2000 ballot. See Note 14.
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 its results of
operations.
Litigation. In 1995, several parties (the Plaintiffs) filed
suit in Harris County District Court in Houston, Texas, against
Intratex Gas Company (Intratex), Houston Pipe Line Company and
Panhandle Gas Company (collectively, the Enron Defendants), each
of which is a wholly-owned subsidiary of Enron. The Plaintiffs
were either sellers or royalty owners under numerous gas purchase
contracts with Intratex, many of which have terminated. Early in
1996, the case was severed by the Court into two matters to be
tried (or otherwise resolved) separately. In the first matter,
the Plaintiffs alleged that the Enron Defendants committed fraud
and negligent misrepresentation in connection with the "Panhandle
program," a special marketing program established in the early
1980s. This case was tried in October 1996 and resulted in a
verdict for the Enron Defendants. In the second matter, the
Plaintiffs allege that the Enron Defendants violated state
regulatory requirements and certain gas purchase contracts by
failing to take the Plaintiffs' gas ratably with other producers'
gas at certain times between 1978 and 1988. The trial court has
certified a class action with respect to ratability claims. On
April 30, 1999, the Texas Supreme Court granted Enron's petition
for review and agreed to consider Enron's appeal of the class
certification. The Enron Defendants deny the Plaintiffs' claims
and have asserted various affirmative defenses, including the
statute of limitations. The Enron Defendants believe that they
have strong legal and factual defenses, and intend to vigorously
contest the claims. Although no assurances can be given, Enron
believes that the ultimate resolution of these matters will not
have a material adverse effect on its financial position or
results of operations.
On November 21, 1996, an explosion occurred in or around the
Humberto Vidal Building in San Juan, Puerto Rico. The explosion
resulted in fatalities, bodily injuries and damage to the
building and surrounding property. San Juan Gas Company, Inc.
(San Juan), an Enron subsidiary, operated a propane/air
distribution system in the vicinity. Although San Juan did not
provide service to the building, the National Transportation
Safety Board (NTSB) concluded that the probable cause of the
incident was propane leaking from San Juan's distribution system.
San Juan and Enron strongly disagree. The NTSB found no path of
migration of propane from San Juan's system to the building and
no forensic evidence that propane fueled the explosion. Enron,
San Juan, and four San Juan affiliates have been named, along
with several third parties, as defendants in numerous lawsuits
filed in U.S. District Court for the district of Puerto Rico and
the Superior Court of Puerto Rico. These suits, which seek
damages for wrongful death, personal injury, business
interruption and property damage, allege that negligence of
Enron, San Juan and its affiliates, among others, caused the
explosion. Enron, San Juan and its affiliates are vigorously
contesting the claims. Although no assurances can be given,
Enron believes that the ultimate resolution of these matters will
not have a material adverse effect on its financial position or
results of operations.
Trojan Investment Recovery. In early 1993, PGE ceased
commercial operation of Trojan. In April 1996 a circuit court
judge in Marion County, Oregon, found that the OPUC could not
authorize PGE to collect a return on its undepreciated investment
in Trojan, contradicting a November 1994 ruling from the same
court. The ruling was the result of an appeal of PGE's March
1995 general rate order which granted PGE recovery of, and a
return on, 87% of its remaining investment in Trojan. The 1994
ruling was appealed to the Oregon Court of Appeals and was stayed
pending the appeal of the OPUC's March 1995 order. Both PGE and
the OPUC have separately appealed the April 1996 ruling, which
appeals were combined with the appeal of the November 1994 ruling
at the Oregon Court of Appeals. On June 24, 1998, the Court of
Appeals of the State of Oregon ruled that the OPUC does not have
the authority to allow PGE to recover a rate of return on its
undepreciated investment in the Trojan generating facility. The
court upheld the OPUC's authorization of PGE's recovery of its
undepreciated investment in Trojan.
PGE and the OPUC each filed petitions for review with the
Oregon Supreme Court. On August 26, 1998, the Utility Reform
Project filed a petition for review with the Oregon Supreme Court
seeking review of that portion of the Oregon Court of Appeals
decision relating to PGE's recovery of its undepreciated
investment in Trojan. On April 29, 1999, the Oregon Supreme
Court accepted the petitions for review. On June 16, 1999,
Oregon House Bill 3220 authorizing the OPUC to allow recovery of
a return on the undepreciated investment in property retired from
service was signed. One of the effects of the bill is to affirm
retroactively the OPUC's authority to allow PGE's recovery of a
return on its undepreciated investment in the Trojan generating
facility.
Relying on the new legislation, on July 2, 1999, PGE requested
the Oregon Supreme Court to vacate the June 24, 1998, adverse
ruling of the Oregon Court of Appeals, affirm the validity of the
OPUC's order allowing PGE to recover a return on its
undepreciated investment in Trojan and to reverse its decision
accepting the Utility Reform Project's petition for review. The
Utility Reform Project and the Citizens Utility Board, another
party to the proceeding, opposed such request and submitted to
the Oregon Secretary of State sufficient signatures in support of
placing a referendum to negate the new legislation on the
November 2000 ballot. The Oregon Supreme Court has indicated it
will defer hearing the matter until after the November 2000
elections. Enron cannot predict the outcome of these actions.
Additionally, due to uncertainties in the regulatory process,
management cannot predict, with certainty, what ultimate rate-
making action the OPUC will take regarding PGE's recovery of a
rate of return on its Trojan investment. Although no assurances
can be given, Enron believes that the ultimate resolution of
these matters will not have a material adverse effect on its
financial position or results of operations.
Environmental Matters. Enron is subject to extensive federal,
state and local environmental laws and regulations. These laws
and regulations require expenditures in connection with the
construction of new facilities, the operation of existing
facilities and for remediation at various operating sites. The
implementation of the Clean Air Act Amendments is expected to
result in increased operating expenses. These increased
operating expenses are not expected to have a material impact on
Enron's financial position or results of operations.
The Environmental Protection Agency (EPA) has informed Enron
that it is a potentially responsible party at the Decorah Former
Manufactured Gas Plant Site (the Decorah Site) in Decorah, Iowa,
pursuant to the provisions of the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA, also commonly
known as Superfund). The manufactured gas plant in Decorah
ceased operations in 1951. A predecessor company of Enron
purchased the Decorah Site in 1963. Enron's predecessor did not
operate the gas plant and sold the Decorah Site in 1965. The EPA
alleges that hazardous substances were released to the
environment during the period in which Enron's predecessor owned
the site, and that Enron's predecessor assumed the liabilities of
the company that operated the plant. Enron contests these
allegations. To date, the EPA has identified no other
potentially responsible parties with respect to this site. Under
the terms of administrative orders, Enron replaced affected
topsoil and removed impacted subsurface soils in certain areas of
the tract where the plant was formerly located. Enron completed
the final removal actions at the site in November 1998 and
concluded all remaining site activities in the spring of 1999.
Enron submitted a final report on the work conducted at the site
to the EPA. Enron does not expect to incur material expenditures
in connection with this site.
Enron also received from the EPA an Order issued under CERCLA
alleging that Enron and two other parties are responsible for the
cost of demolition and proper disposal of two 110 foot towers
that apparently had been used in the manufacture of carbon
dioxide at a site called the "City Bumper Site" in Cincinnati,
Ohio. The carbon dioxide plant, according to agency documents,
was in operation from 1926 to 1966. Houston Natural Gas
Corporation, a predecessor of Enron Corp., merged with Liquid
Carbonic Industries (LCI) on January 31, 1969. Liquid Carbonic
Corporation (LCC), a subsidiary of LCI, had title to the site.
Twenty-eight days after the merger, on February 28, 1969, the
site was sold to a third party. In 1984, LCC was sold to an
unaffiliated party in a stock sale. Although Enron does not
admit liability with respect to any costs at this site, it agreed
to cooperate with the EPA and other potentially responsible
parties to undertake the work contemplated by the EPA's Order.
The tower demolition and removal activities were completed in
October 1998, and a final project report has been submitted to
the EPA. The EPA has confirmed through correspondence that all
activities required by the order are complete.
Enron's natural gas pipeline companies conduct soil and
groundwater remediation on a number of their facilities. Enron
does not expect to incur material expenditures in connection with
soil and groundwater remediation.
15 COMMITMENTS
Firm Transportation Obligations. Enron has firm
transportation agreements with various joint venture pipelines.
Under these agreements, Enron must make specified minimum
payments each month. At December 31, 1999, the estimated
aggregate amounts of such required future payments were $65
million, $68 million, $69 million, $70 million and $74 million
for 2000 through 2004, respectively, and $515 million for later
years.
The costs recognized under firm transportation agreements,
including commodity charges on actual quantities shipped, totaled
$55 million, $30 million and $27 million in 1999, 1998 and 1997,
respectively. Enron has assigned firm transportation contracts
with two of its joint ventures to third parties and guaranteed
minimum payments under the contracts averaging approximately $36
million annually through 2001 and $3 million in 2002.
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, 1999 were $266 million, $88 million, $78 million,
$53 million and $48 million for 2000 through 2004, respectively,
and $370 million for later years. Guarantees under the leases
total $715 million at December 31, 1999.
Total rent expense incurred during 1999, 1998 and 1997 was
$143 million, $147 million and $156 million, respectively.
In November 1999, a subsidiary of Enron made a contribution
leaseback of assets in return for a preferred interest in an
unconsolidated equity affiliate of Enron. As a result of this
transaction, Enron has net future obligations of $5 million each
year for 2000 through 2004 and $49 million thereafter.
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, 1999,
a total of $303 million of such guarantees were outstanding,
including $144 million on behalf of EOTT. In addition, Enron is
a guarantor on certain liabilities of unconsolidated equity
affiliates and other companies totaling approximately $1,501
million at December 31, 1999, including $427 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 $420 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 2000.
16 RELATED PARTY TRANSACTIONS
In June 1999, Enron entered into a series of transactions
involving a third party and LJM Cayman, L.P. (LJM). LJM is a
private investment company which engages in acquiring or
investing in primarily energy-related investments. A senior
officer of Enron is the managing member of LJM's general partner.
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) LJM received 6.8 million shares of Enron common stock
subject to certain restrictions and (iii) Enron received a note
receivable 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, LJM agreed that the Enron officer would have no
pecuniary interest in such Enron common shares and would be
restricted from voting on matters related to such shares. LJM
repaid the note receivable in December 1999.
LJM2 Co-Investment, L.P. (LJM2) was formed in December 1999 as
a private investment company which engages in acquiring or
investing in primarily energy-related or communications-related
businesses. In the fourth quarter of 1999, LJM2, which has the
same general partner as LJM, acquired, directly or indirectly,
approximately $360 million of merchant assets and investments
from Enron, on which Enron recognized pre-tax gains of
approximately $16 million. In December 1999, LJM2 entered into
an agreement to acquire Enron's interests in an unconsolidated
equity affiliate for approximately $34 million. Additionally,
LJM acquired other assets from Enron for $11 million.
At December 31, 1999, JEDI held approximately 12 million
shares of Enron Corp. common stock. The value of the Enron Corp.
common stock has been hedged. In addition, an officer of Enron
has invested in the limited partner of JEDI and from time to time
acts as agent on behalf of the limited partner's management.
In 1999, Whitewing acquired approximately $192 million of
merchant assets from Enron. Enron recognized no gains or losses
in connection with these transactions.
Management believes that the terms of the transactions with
related parties are representative of terms that would be
negotiated with unrelated third parties.
17 ASSET IMPAIRMENT
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 September 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 the first quarter
of 1999, Enron recorded an after-tax charge of $131 million to
reflect the initial adoption (as of January 1, 1999) of two new
accounting pronouncements. In 1998, the AICPA issued Statement
of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities," which requires that costs for all start-up
activities and organization costs be expensed as incurred and not
capitalized in certain instances, as had previously been allowed.
Also in 1998, the Emerging Issues Task Force reached consensus on
Issue No. 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities," requiring energy trading
contracts, including energy transportation contracts, to be
recorded at fair value on the balance sheet, with the changes in
fair value included in earnings. The first quarter 1999 charge
was primarily related to the adoption of SOP 98-5.
Recently Issued Accounting Pronouncements. In 1998, the
Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded
on the balance sheet as either an asset or liability measured at
its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document,
designate and assess the effectiveness of transactions that
receive hedge accounting.
In June 1999, the FASB issued SFAS No. 137, which deferred the
effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. A company may implement SFAS No. 133 as of the
beginning of any fiscal quarter after issuance, however, the
statement cannot be applied retroactively. Enron does not plan
to early adopt SFAS No. 133. Enron believes that SFAS No. 133
will not have a material impact on its accounting for price risk
management activities but has not yet quantified the effect on
its hedging activities or physical based contracts.
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)
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
1998
Revenues $5,682 $6,557 $11,320 $ 7,701 $31,260
Income before interest,
minority interests and
income taxes 471 345 405 361 1,582
Net income 214 145 168 176 703
Earnings per share:
Basic $ 0.34 $ 0.22 $ 0.25 $ 0.26 $ 1.07
Diluted 0.32 0.21 0.24 0.25 1.01
<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, which consists of the
Chairman, President and Vice 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. 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.
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 Energy Operations and 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 and communications assets including broadband services.
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.
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, 1999.
Geographic Segments
Year Ended December 31,
(In millions) 1999 1998 1997
Operating revenues from
unaffiliated customers
United States $30,176 $25,247 $17,328
Foreign 9,936 6,013 2,945
$40,112 $31,260 $20,273
Income (loss) before interest,
minority interests and income
taxes
United States $ 1,273 $ 1,008 $ 601
Foreign 722 574 (36)
$ 1,995 $ 1,582 $ 565
Long-lived assets
United States $ 8,286 $ 9,382 $ 8,425
Foreign 2,395 1,275 745
$10,681 $10,657 $ 9,170
Business Segments
Wholesale
Transportation Energy Retail Exploration Corporate
and Operations Energy and and
(In millions) Distribution and 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 246 294 29 213 88 870
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
1997
Unaffiliated revenues(a) $1,402 $17,344 $ 683 $ 789 $ 55 $20,273
Intersegment revenues(b) 14 678 2 108 (802) -
Total revenues 1,416 18,022 685 897 (747) 20,273
Depreciation, depletion and
amortization 160 133 7 278 22 600
Operating income (loss) 398 376 (105) 185 (839) 15
Equity in earnings of
unconsolidated equity affiliates 40 172 (1) - 5 216
Gains on sales of assets
and investments 120 (1) - - 67 186
Interest income 8 57 - 1 4 70
Other income, net 14 50 (1) (3) 18 78
Income (loss) before interest,
minority interests and
income taxes 580 654 (107) 183 (745) 565
Capital expenditures 337 318 36 626 75 1,392
Identifiable assets 7,115 8,661 322 2,668 1,130 19,896
Investments in and advances to
unconsolidated equity affiliates 521 1,932 - - 203 2,656
Total assets $7,636 $10,593 $ 322 $2,668 $1,333 $22,552
<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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 28th day of
March, 2000.
ENRON CORP.
(Registrant)
By: RICHARD A. CAUSEY
(Richard A. Causey)
Executive Vice President
and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this Report has been signed below on March 28,
2000 by the following persons on behalf of the Registrant
and in the capacities indicated.
Signature Title
KENNETH L. LAY Chairman of the Board, Chief
(Kenneth L. Lay) Executive Officer and Director
(Principal Executive Officer)
RICHARD A. CAUSEY Executive Vice President and
(Richard A. Causey) Chief Accounting Officer
(Principal Accounting Officer)
ANDREW S. FASTOW Executive Vice President and
(Andrew S. Fastow) Chief Financial Officer
(Principal Financial Officer)
ROBERT A. BELFER* Director
(Robert A. Belfer)
NORMAN P. BLAKE, JR.* Director
(Norman P. Blake, Jr.)
RONNIE C. CHAN* Director
(Ronnie C. Chan)
JOHN H. DUNCAN* Director
(John H. Duncan)
JOE H. FOY* Director
(Joe H. Foy)
WENDY L. GRAMM* Director
(Wendy L. Gramm)
KEN L. HARRISON* Director
(Ken L. Harrison)
ROBERT K. JAEDICKE* Director
(Robert K. Jaedicke)
CHARLES A. LeMAISTRE* Director
(Charles A. LeMaistre)
REBECCA MARK-JUSBASCHE* Director
(Rebecca Mark-Jusbasche)
JOHN MENDELSOHN* Director
(John Mendelsohn)
JEROME J. MEYER* Director
(Jerome J. Meyer)
PAULO V. FERRAZ PEREIRA* Director
(Paulo V. Ferraz Pereira)
FRANK SAVAGE* Director
(Frank Savage)
JEFFREY K. SKILLING* Director and President and
(Jeffrey K. Skilling) Chief Operating Officer
JOHN A. URQUHART* Director
(John A. Urquhart)
JOHN WAKEHAM* Director
(John Wakeham)
HERBERT S. WINOKUR, JR.* Director
(Herbert S. Winokur, Jr.)
*By: REBECCA C. CARTER
(Rebecca C. Carter)
(Attorney-in-fact for persons indicated)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of Enron Corp.:
We have audited in accordance with generally accepted
auditing standards, the consolidated financial statements of
Enron Corp. and subsidiaries included in this Form 10-K and
have issued our report thereon dated March 13, 2000. Our
audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule
listed in Item 14(a)2 is the responsibility of the company's
management and is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data
required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Houston, Texas
March 13, 2000
SCHEDULE II
ENRON CORP. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In Millions)
Column A Column B Column C Column D Column E
Additions Deductions
Balance at Charged to Charged For Purpose For
Beginning Costs and to Other Which Reserves Balance at
Description of Year Expenses Accounts Were Created End of Year
1999
Reserves deducted from
assets from price risk
management activities $325 $185 $ 19 $192 $337
Reserves for regulatory issues 247 35 23 104 201
Other reserves(a) 49 27 9 37 48
1998
Reserves deducted from
assets from price risk
management activities $282 $141 $ - $ 98 $325
Reserves for regulatory issues 262 15 27 57 247
Other reserves(a) 45 20 1 17 49
1997
Reserves deducted from
assets from price risk
management activities $249 $ 50 $ 6 $ 23 $282
Reserves for regulatory issues 8 28 249 23 262
Other reserves(a) 35 13 3 6 45
<FN>
(a) Consists of allowance for doubtful accounts and reserve for insurance
claims and losses.