UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission File Number 1-13159
ENRON CORP.
(Exact name of registrant as specified in its charter)
Oregon 47-0255140
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
Enron Building
1400 Smith Street
Houston, Texas 77002
(Address of principal executive (Zip Code)
offices)
(713) 853-6161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at July 31, 1997
Common Stock, No Par Value 299,497,957 shares
1 of 28
ENRON CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statement of Income - Three
Months Ended June 30, 1997 and 1996 and
Six Months Ended June 30, 1997 and 1996 3
Consolidated Balance Sheet - June 30, 1997
and December 31, 1996 4
Consolidated Statement of Cash Flows - Six
Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security
Holders 24
ITEM 6. Exhibits and Reports on Form 8-K 25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(In Millions, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
Revenues $3,251 $2,961 $8,595 $6,015
Costs and Expenses
Cost of gas, electricity and other
products 3,386 2,311 8,018 4,652
Operating expenses 308 281 581 578
Oil and gas exploration expenses 24 19 46 38
Depreciation, depletion and
amortization 125 110 249 230
Taxes, other than income taxes 33 32 69 69
3,876 2,753 8,963 5,567
Operating Income (Loss) (625) 208 (368) 448
Other Income and Deductions
Equity in earnings of unconsolidated
subsidiaries 40 40 81 71
Other income, net 37 17 168 161
Income (Loss) Before Interest, Minority
Interests and Income Taxes (548) 265 (119) 680
Interest and Related Charges, net 79 65 149 134
Dividends on Company-Obligated Preferred
Securities of Subsidiaries 16 8 31 16
Minority Interests 17 23 36 38
Income Tax Expense (Benefit) (240) 52 (137) 162
Net Income (Loss) (420) 117 (198) 330
Preferred Stock Dividends 4 4 8 8
Earnings (Loss) on Common Stock $ (424) $ 113 $ (206) $ 322
Earnings (Loss) Per Share of Common Stock
Primary $(1.71) $ 0.46 $(0.83) $ 1.31
Fully Diluted $(1.71) $ 0.43 $(0.83) $ 1.22
Average Number of Common Shares Used in
Primary Computation 248 246 248 245
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
(Unaudited)
June 30, December 31,
1997 1996
ASSETS
Current Assets
Cash and cash equivalents $ 211 $ 256
Trade receivables 1,165 1,841
Other receivables 444 328
Transportation and exchange commodity receivable 266 86
Inventories 121 164
Assets from price risk management activities 1,119 841
Other 496 463
Total Current Assets 3,822 3,979
Investments and Other Assets
Investments in and advances to unconsolidated
subsidiaries 1,927 1,701
Assets from price risk management activities 999 1,632
Other 2,135 1,713
Total Investments and Other Assets 5,061 5,046
Property, Plant and Equipment, at cost 11,539 11,348
Less accumulated depreciation, depletion
and amortization 4,337 4,236
Net Property, Plant and Equipment 7,202 7,112
Total Assets $16,085 $16,137
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
(Unaudited)
June 30, December 31,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,452 $ 1,955
Transportation and exchange commodity payable 273 80
Accrued taxes 49 70
Accrued interest 49 56
Liabilities from price risk management activities 1,006 1,029
Other 451 518
Total Current Liabilities 3,280 3,708
Long-Term Debt 4,537 3,349
Deferred Credits and Other Liabilities
Deferred income taxes 1,980 2,290
Liabilities from price risk management activities 581 980
Other 542 740
Total 3,103 4,010
Minority Interests 770 755
Company-Obligated Preferred Securities of
Subsidiaries 964 592
Shareholders' Equity
Second preferred stock, cumulative, $1 par value 134 137
Common stock, $0.10 par value 26 26
Additional paid in capital 1,881 1,870
Retained earnings 1,692 2,007
Cumulative foreign currency translation
adjustment (129) (127)
Common stock held in treasury (11) (30)
Other (including Flexible Equity Trust) (162) (160)
Total 3,431 3,723
Total Liabilities and Shareholders' Equity $16,085 $16,137
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Millions)
(Unaudited)
Six Months Ended
June 30,
1997 1996
Cash Flows From Operating Activities
Reconciliation of net income (loss) to net cash
provided by (used in) operating activities
Net income (loss) $ (198) $ 330
Depreciation, depletion and amortization 249 230
Oil and gas exploration expenses 46 38
Deferred income taxes (178) 126
Gains on sales of assets (125) (160)
Changes in components of working capital (193) (137)
Amortization of production payment transaction (21) (22)
Net assets from price risk management activities (67) (244)
Other, net (36) (35)
Net Cash Provided by (Used in) Operating Activities (523) 126
Cash Flows From Investing Activities
Proceeds from sales of investments and
other assets 341 197
Capital expenditures (682) (275)
Equity investments (225) (279)
Other, net (81) (28)
Net Cash Used in Investing Activities (647) (385)
Cash Flows From Financing Activities
Net increase in short-term borrowings 958 258
Issuance of long-term debt 409 144
Repayment of long-term debt (302) (139)
Issuance of company-obligated preferred
securities of subsidiaries 372 15
Issuance of common stock - 102
Dividends paid (165) (137)
Net (acquisition) disposition of treasury stock (84) 26
Other, net (63) 8
Net Cash Provided by Financing Activities 1,125 277
Increase (Decrease) in Cash and Cash Equivalents (45) 18
Cash and Cash Equivalents, Beginning of Period 256 115
Cash and Cash Equivalents, End of Period $ 211 $ 133
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 1. FINANCIAL STATEMENTS - (Continued)
ENRON CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements included herein
have been prepared by Enron Corp. (Enron) without audit
pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, these statements reflect
all adjustments (consisting only of normal recurring
entries) which are, in the opinion of management, necessary
for a fair statement of the financial results for the
interim periods. Certain information and notes normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although
Enron believes that the disclosures are adequate to make the
information presented not misleading. These consolidated
financial statements should be read in conjunction with the
financial statements and the notes thereto incorporated into
Enron's Annual Report on Form 10-K for the year ended
December 31, 1996 (Form 10-K).
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Certain reclassifications have been made in the 1996
amounts to conform with the 1997 presentation.
"Enron" is used from time to time herein as a collective
reference to Enron Corp. and its subsidiaries and
affiliates. In material respects, the businesses of Enron
are conducted by the subsidiaries and affiliates whose
operations are managed by their respective officers.
2. PRICE RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
As more fully discussed in Notes 1 and 3 to the
Consolidated Financial Statements included in Enron's Form
10-K, Enron engages in price risk management activities for
trading and non-trading purposes. Derivative and other
financial instruments utilized in connection with trading
activities are accounted for using the mark-to-market
method, under which changes in the market value of
outstanding financial instruments are recognized as gains or
losses in the period of change. Derivative and other
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 derivative are recognized as gains or losses.
If the hedged item is sold, the value of the derivative is
recognized in income. Gains and losses on derivative
financial instruments used for hedging purposes are
recognized in the Consolidated Income Statement in the
same manner as the hedged item and are recognized in the
Consolidated Balance Sheet as other assets or liabilities.
The cash flow impact of derivative and other financial
instruments used for trading and non-trading purposes is
reflected as cash flows from operating activities in the
Consolidated Statement of Cash Flows.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes for the first half of 1997
and 1996 was $24 million and $73 million, respectively.
Cash paid for interest expense for the same periods, net of
amounts capitalized, was $180 million and $142 million,
respectively.
Changes in components of working capital are as follows
(in thousands):
First Six Months
1997 1996
Receivables $ 381 $(158)
Inventories 43 6
Prepayments 24 55
Payables (310) 128
Accrued taxes (21) (61)
Accrued interest (7) 3
Other (225) (110)
$(115) $(137)
4. MERGER WITH PORTLAND GENERAL CORPORATION
On July 1, 1997, Enron acquired Portland General
Corporation (PGC) by merger pursuant to the Amended and
Restated Agreement and Plan of Merger by and among Enron
Corp., PGC and Enron Oregon Corp. (the Amended Merger
Agreement). Pursuant to the Amended Merger Agreement, on
July 1, 1997, PGC merged with and into Enron, with Enron
continuing in existence as the surviving corporation. Each
share of PGC common stock issued and outstanding was
converted into 0.9825 shares of Enron common stock
(approximately 50.5 million shares of Enron common stock).
Enron will account for the transaction on a purchase
accounting basis and will consolidate PGC's debt of
approximately $1.1 billion at July 1, 1997.
PGC was an electric utility holding company organized in
1985. Portland General Electric (PGE), now a wholly-owned
subsidiary of Enron, was PGC's principal operating
subsidiary which accounted for substantially all of PGC's
assets, revenues and net income. PGE is an electric utility
company 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.
As a condition to the Oregon Public Utility Commission's
(OPUC) approval of the merger, Enron and PGE will file,
within 60 days after the effective date of the merger, a
Customer Choice Plan to separate PGE's competitive
(primarily the electric generation operations) and monopoly
businesses (transmission and distribution operations). The
Customer Choice Plan and related approval process will
entail policy decisions by the OPUC regarding the extent and
methodology by which certain costs referred to as
"transition costs" will be recovered from customers.
Depending on the final proposed structure of the Customer
Choice Plan, approval by the Oregon Legislature may be
required.
5. SETTLEMENT OF CONTRACTUAL ISSUES
On June 2, 1997, Enron announced the settlement of all
contractual issues involving the J-Block contract in the U.
K. North Sea with the J-Block producers, Phillips Petroleum
Company United Kingdom Limited, BG Exploration & Production
Limited and Agip (U. K.) Limited. As reported in the Form
10-K, the J-Block contracts are long-term gas contracts that
an Enron subsidiary entered into in March 1993 with the J-
Block producers. As a consideration for the settlement,
Enron made a cash payment of approximately $440 million to
the producers. Enron recorded a second quarter non-recurring
charge of $675 million ($450 million after tax or $1.81 per
common share), included in cost of gas, electricity and other
products on the Consolidated Income Statement, primarily
reflecting the impact of the amended contract under current
market conditions.
Under the terms of the settlement agreement, the former
take-or-pay depletion contract was amended to become a firm
long-term supply contract, and the fixed contract price for
J-Block gas has been reduced to reflect current market
conditions for long-term gas sales contracts in the U. K.
gas market. The settlement concluded all J-Block litigation
between Enron and the J-Block producers.
6. LITIGATION AND CONTINGENCIES
On June 3, 1997, Enron announced that the London
Commercial Court had ruled in favor of the "CATS" parties in
their dispute over the availability of the CATS (Central
Area Transmission System) transportation facilities. As
reported in the Form 10-K, the CATS parties sued Teesside
Gas Transportation Limited (TGTL), an Enron subsidiary, and
Enron (on the basis of its guaranty of TGTL's obligations
under the transportation agreement between TGTL and the CATS
parties) for allegedly failing to make quarterly "send-or-
pay" payments under the transportation agreement. TGTL had
refused to make these payments based upon its position that
the transportation facilities were not available as required
by the contract. The effect of the Court's decision is that
TGTL has released withheld "send-or-pay" payments to the
CATS parties in the amount of approximately 81 million
Pounds Sterling, plus interest and costs. This judgment has
no effect on the above referenced settlement of the J-Block
gas sales agreements. Enron is appealing the decision of
the London Commercial Court in the CATS litigation. Enron
believes that the ultimate resolution of this matter will
not have a materially adverse effect on its financial
position or results of operations.
As reported in the Form 10-K, 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 Court has
certified a class action with respect to these ratability
claims. The Enron Defendants have appealed the court's
decision to certify a class action. 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.
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 to connect its natural gas pipeline to the
local distribution pipeline system serving the city of
Decorah. 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. The EPA is interested in determining whether
materials from the plant have adversely affected subsurface
soils at the Decorah Site. Enron has entered into a consent
order with the EPA by which it has agreed, although
admitting no liability, to replace affected topsoil in
certain areas of the tract where the plant was formerly
located, and to take deep soil samples in those areas where
subsurface contamination would most likely be located. To
date, the EPA has identified no other potentially
responsible parties with respect to this site. Enron
believes that expenses incurred in connection with this
matter will not have a materially adverse effect on its
financial position or results of operations.
PART I. FINANCIAL INFORMATION - (Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENRON CORP. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Second Quarter 1997
vs. Second Quarter 1996
The following review of Enron's results of operations
should be read in conjunction with the Consolidated
Financial Statements.
CONSOLIDATED NET INCOME (LOSS)
Enron reported a second quarter 1997 net loss of $420
million as compared to net income of $117 million during the
second quarter of 1996. Included in the second quarter 1997
results are non-recurring charges of $675 million (pretax)
primarily to reflect the impact of Enron's amended J-Block
contract in the United Kingdom North Sea (see Note 5 to the
Consolidated Financial Statements) and $100 million (pretax)
to reflect depressed MTBE margins on committed production.
The domestic gas and power services and international
operations and development segments reported increased
earnings in the second quarter of 1997. These increases
were offset by reduced earnings in the transportation and
operations and exploration and production segments, losses
realized by the newly formed retail energy services group
and increased interest and related charges and dividends on
company-obligated preferred securities of subsidiaries. An
income tax benefit of $251 million partially offset the
effect of the non-recurring charges. Earnings (loss) per
share was $(1.71) in the second quarter of 1997 compared to
$0.46 in the same period in 1996.
INCOME (LOSS) BEFORE INTEREST, MINORITY INTERESTS AND INCOME
TAXES
The following table presents income (loss) before
interest, minority interests and income taxes (IBIT) for
each of Enron's operating segments (in millions).
Second Quarter Increase
1997 1996 (Decrease)
Transportation and Operation $ (21) $101 $(122)
Domestic Gas and Power Services 59 52 7
Retail Energy Services (25) - (25)
International Operations and
Development 62 39 23
Exploration and Production 30 77 (47)
Corporate and Other (653) (4) (649)
Total $(548) $265 $(813)
TRANSPORTATION AND OPERATION
The transportation and operation segment is comprised of
the Enron Gas Pipeline Group, which includes results of
Northern Natural Gas Company (Northern), Transwestern
Pipeline Company (Transwestern) and Enron's 50% interest
in Florida Gas Transmission Company (Florida Gas); and
Enron Ventures Corp., which includes results of Enron
Engineering & Construction Company and the operation of
clean fuels plants. Results from Enron's investment in
crude oil marketing and transportation operations conducted
by EOTT Energy Partners, L.P. (EOTT) are also included in
this segment. The segment's IBIT decreased $22 million in
the second quarter of 1997 as compared to the same period
in 1996, excluding a $100 million pretax charge to reflect
depressed MTBE margins as previously discussed. The
following discussion analyzes the significant changes in
the various components of IBIT for the transportation and
operation segment.
NET REVENUES
Revenues, net of the cost of gas and other products sold,
of the transportation and operation segment declined $99
million (55%) during the second quarter of 1997 as compared
to the same period in 1996. The decline is primarily due to
the $100 million charge to reflect depressed MTBE margins as
previously discussed, partially offset by net revenues
recorded by this segment related to the clean fuels
operations which previously had been reflected in the
domestic gas and power services segment. The decrease also
reflects the turnback of capacity at Transwestern effective
in November 1996 and lower surcharges at Northern in 1997.
COSTS AND EXPENSES
Operating expenses in the transportation and operation
segment increased $31 million to $98 million during the
second quarter of 1997 as compared to the same period in
1996, primarily reflecting operating costs related to the
clean fuels operations which previously had been reflected
in the domestic gas and power services segment as described
above, partially offset by lower surcharges at Northern. In
addition, the 1996 period reflects lower operating expenses
on the interstate pipelines primarily as a result of
favorable resolution related to previously incurred
environmental costs.
OTHER INCOME AND DEDUCTIONS
Equity in earnings of unconsolidated subsidiaries
decreased $7 million to $5 million in the second quarter of
1997 as compared to the same period in 1996 primarily as a
result of losses incurred by EOTT as a result of lower crude
oil gathering margins compared to earnings reported in the
second quarter of 1996.
DOMESTIC GAS AND POWER SERVICES
The domestic gas and power services segment reflects
results of operations for Enron Capital & Trade Resources
(ECT), which conducts Enron's energy commodity marketing,
purchasing and financing activities and the management of
the portfolio of physical and financial commitments arising
from these activities. ECT can be categorized into three
business lines: cash and physical, risk management and
finance. ECT's IBIT for the second quarter of 1997
increased $7 million to $59 million as compared with the
same period in 1996. The following discussion analyzes the
contributions to IBIT for each of these business lines.
Statistics for ECT (including intercompany amounts) are
as follows:
Second Quarter
1997 1996
Natural Gas and Crude Oil
Physical/Notional Quantities (BBtue/d) (1)
Firm (2) 7,865 6,838
Interruptible 2,614 1,907
Transport Volumes 686 595
Subtotal 11,165 9,340
Financial Settlements (Notional) 45,595 28,865
Total 56,760 38,205
Production Payments and Financings
Arranged (In Millions) $56 $235
Fixed Price Contract Originations
(TBtue) (3) 801 608
Electricity (Thousand Megawatt hours)
Owned Production 615 768
Transaction Volumes Marketed 38,636 11,008
<FN>
(1) Billion British thermal units equivalent per day.
(2) Commitments to deliver a specified volume of gas at a
fixed or market responsive price.
(3) Trillion British thermal units equivalent.
The cash and physical operations include earnings from
physical contracts of one year or less involving marketing
and transportation of physical natural gas, liquids,
electricity and other commodities, earnings from the
management of ECT's contract portfolio and earnings related
to the physical assets of ECT. Also reported in this
business are the effects of actual settlements of ECT's long-
term physical and notional quantity-based contracts. The
cash and physical operations' earnings before overhead
expenses were $43 million in the second quarter of 1997 and
$38 million in the same period in 1996. The earnings from
this business unit increased in the second quarter of 1997
primarily due to increased earnings from the management of
ECT's portfolio of European contracts, partially offset by a
decrease in North American commodity marketing and contract
portfolio management.
The risk management operations consist of market
origination activity on new long-term contracts
(transactions greater than one year) and restructuring of
existing long-term contracts. Second quarter earnings
before overhead expenses from this unit were $27 million in
1997 compared to $22 million in 1996. Earnings from this
unit increased primarily due to originations in the European
market.
ECT's finance operations provide capital to customers
through various product offerings. The finance operations
had earnings before overhead expenses of $20 million in the
second quarter of 1997 as compared to $18 million in 1996.
This increase in earnings resulted primarily from increased
activity in the Canadian market.
ECT's overhead expenses such as rent, systems expenses
and other support group costs were $31 million in the second
quarter of 1997 and $26 million in the same period in 1996.
The increase is primarily due to continued expansion into
new markets and system upgrades.
RETAIL ENERGY SERVICES
Enron's retail energy services are provided by Enron
Energy Services (EES), which was formed in late 1996 to
serve the U.S. retail natural gas and electricity markets.
EES has participated successfully in selected natural gas
and electric retail marketing pilots. EES reported a loss
of $25 million in the second quarter of 1997 as a result of
significant systems, regulatory and branding costs related
to positioning EES to aggressively market natural gas and
electricity to end users.
Enron expects that losses in both the third and fourth
quarters of 1997 will approximate those incurred in the
second quarter. While no assurances can be given, Enron is
evaluating the potential sale of up to 10% of its retail
energy business in a private transaction in 1997, to offset
these losses and in an effort to establish a valuation
benchmark. An additional percentage may be sold in 1998.
INTERNATIONAL OPERATIONS AND DEVELOPMENT
Enron's international operations and development
activities are conducted by Enron International (EI). Such
activities include the development of power, pipeline and
other energy infrastructure in emerging markets.
Additionally, EI manages and operates the projects once
commercial operation has been achieved. The segment
includes results of Enron Global Power & Pipelines L.L.C.
(EPP) and Enron Americas, Inc.
The segment's second quarter IBIT increased $23 million
to $62 million in the 1997 period. The following discussion
analyzes the significant changes in the segment's results.
NET REVENUES
Revenues, net of cost of sales, for the international
segment increased $29 million to $64 million in the second
quarter of 1997 as compared with 1996, primarily due to the
increase in value of EI's investment portfolio. The
increase also reflects management fees earned in connection
with the operation of power plants as well as earnings from
the development of the Guam power project. These increases
were partially offset by revenues in the second quarter of
1996 of $16 million from the sale of a portion of Enron's
interest in its power assets at Teesside in the United
Kingdom.
COSTS AND EXPENSES
Operating expenses increased $3 million (16%) in the
second quarter of 1997 compared with the same period in 1996
due primarily to expenses related to the operation of power
plants.
OTHER INCOME AND DEDUCTIONS
Equity in earnings of unconsolidated subsidiaries
declined from $28 million in the second quarter of 1996 to
$21 million in the same period in 1997 due primarily to the
1996 sale of a portion of Enron's interest in Teesside,
partially offset by earnings from Enron's increased
ownership of Compania de Inversiones de Energia S.A.
(CIESA), which operates and owns 70% of Transportadora de
Gas del Sur S.A. (TGS), a 4,104 mile natural gas pipeline
system in Argentina.
EXPLORATION AND PRODUCTION
Enron's exploration and production activities are
conducted by Enron Oil & Gas Company (EOG). The exploration
and production segment's IBIT decreased to $30 million in
the second quarter of 1997 from $77 million in the same
period of 1996. The following discussion analyzes the
significant changes in the segment's results.
Wellhead volume and price statistics (including
intercompany amounts) are as follows:
Second Quarter
1997 1996
Natural Gas Volumes (MMcf/d) (1)
North America (2) 781 700
Trinidad 114 140
India 1 -
Total 896 840
Average Natural Gas Prices ($/Mcf)
North America (3) $1.80 $1.72
Trinidad 1.04 1.00
India 2.97 -
Composite 1.70 1.60
Crude Oil/Condensate Volumes (MBbl/d) (1)
North America 13.6 11.0
Trinidad 3.5 5.4
India - 2.7
Total 17.1 19.1
Average Crude Oil/Condensate Prices ($/Bbl)
North America $18.89 $20.62
Trinidad 16.09 19.61
India - 20.56
Composite 18.31 20.33
<FN>
(1) Million cubic feet per day or thousand barrels per day,
as applicable.
(2) Includes 48 MMcf per day for the three-month periods
ended June 30, 1997 and 1996 delivered under the terms of
a volumetric production payment agreement effective
October 1, 1992, as amended.
(3) Includes an average equivalent wellhead value of
$1.24/Mcf and $0.76/Mcf for the three-month periods ended
June 30, 1997 and 1996, respectively, for the volumes
described in note (2), net of transportation costs.
NET REVENUES
The exploration and production segment's revenues, net of
gas sold in connection with natural gas marketing, decreased
$29 million (14%) during the second quarter of 1997 as
compared to the same period in 1996. Wellhead revenues
increased 7% to $170 million in the second quarter of 1997
as compared to $159 million in the second quarter of 1996.
This increase reflects increased North America volumes and
increased average wellhead prices for natural gas, partially
offset by lower volumes in Trinidad and India and lower
overall crude oil and condensate average wellhead prices
compared to the second quarter of 1996.
Other marketing activities associated with sales and
purchases of natural gas, natural gas and crude oil price
hedging and trading transactions and margins related to the
volumetric production payment reduced net operating revenues
by $7 million during the second quarter of 1997, compared to
increases to revenues of $19 million in the second quarter
of 1996. This decrease reflected losses of $6 million
related to natural gas commodity price hedging activities in
the second quarter of 1997 compared to $14 million of gains
in the comparable prior period, as well as a decrease in
margins due to higher costs of natural gas delivered in
1997. Deferred revenue reductions of $15 million related to
the early closing of 1997 natural gas price hedging
transactions will be recognized by EOG during the remainder
of 1997.
EOG's sale of selected reserves and related assets in the
second quarter of 1997 resulted in gains of $7 million
compared to $18 million in gains in the second quarter of
1996.
COSTS AND EXPENSES
Operating expenses increased $4 million (11%) in the
second quarter of 1997 as compared with the 1996 quarter,
primarily due to expanded operations and additional workover
expenses in North America in the second quarter of 1997.
Exploration expenses increased $5 million (23%) in the
second quarter of 1997 compared with the second quarter of
1996, primarily reflecting increased exploration activities
worldwide. Depreciation, depletion and amortization (DD&A)
expense increased $10 million (17%), primarily reflecting
the increase in production volumes previously discussed.
CORPORATE AND OTHER
The corporate and other segment realized earnings, before
non-recurring charges, of $22 million in the second quarter
of 1997 as compared to a loss of $4 million in the second
quarter of 1996, due primarily to lower unallocated
operating and lease expenses during the second quarter of
1997. As discussed in Note 5 to the Consolidated Financial
Statements, the second quarter 1997 results include a non-
recurring charge of $675 million, primarily reflecting the
impact of Enron's amended J-Block contract in the U. K.
MINORITY INTERESTS
Minority interests decreased to $17 million in the second
quarter of 1997 from $23 million in the comparable prior
period, primarily due to decreased net income from EOG.
DIVIDENDS ON COMPANY-OBLIGATED PREFERRED SECURITIES OF
SUBSIDIARIES
Dividends on company-obligated preferred securities of
subsidiaries increased from $8 million in the second quarter
of 1996 to $16 million in the same period of 1997, primarily
due to the issuance of $587 million of additional preferred
securities during 1996 and the first half of 1997.
INCOME TAX EXPENSE (BENEFIT)
Income taxes decreased during the second quarter of 1997
as compared with the same period of 1996 primarily as a
result of pretax losses due to the non-recurring charges for
the restructuring of Enron's J-Block contract and for
depressed MTBE margins on committed production.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997
vs. Six Months Ended June 30, 1996
The following review of Enron's results of operations
should be read in conjunction with the Consolidated
Financial Statements.
CONSOLIDATED NET INCOME (LOSS)
Enron reported a net loss of $198 million for the first
six months of 1997 compared to net income of $330 million
during the same period in 1996. Included in the results for
the first half of 1997 are non-recurring charges of $675
million (pretax) primarily to reflect the impact of Enron's
amended J-Block contract and $100 million (pretax) to
reflect depressed MTBE margins on committed production. The
domestic gas and power services and international operations
and development segments contributed improved income before
interest, minority interests and income taxes for the six
months ended June 30, 1997. These increases were offset by
decreased earnings in the transportation and operation and
exploration and production segments, losses realized by the
newly formed retail energy services group and increased
interest and related charges and dividends on company-
obligated preferred securities of subsidiaries. An income
tax benefit partially offset the effect of the non-recurring
charges. Earnings (loss) per share was $(0.83) in the first
six months of 1997 compared to $1.31 in the same period in
1996.
INCOME (LOSS) BEFORE INTEREST, MINORITY INTERESTS AND INCOME
TAXES
The following table presents income (loss) before
interest, minority interests and income taxes (IBIT) for
each of Enron's operating segments (in millions).
Six Months Increase
1997 1996 (Decrease)
Transportation and Operation $ 228 $334 $(106)
Domestic Gas and Power Services 182 150 32
Retail Energy Services (39) - (39)
International Operations and
Development 100 79 21
Exploration and Production 72 107 (35)
Corporate and Other (662) 10 (672)
Total $(119) $680 $(799)
TRANSPORTATION AND OPERATION
The transportation and operation segment realized a $6
million decrease in IBIT for the first half of 1997 as
compared to the same period in 1996, excluding a $100
million charge to reflect depressed MTBE margins as
previously discussed. The following discussion analyzes the
significant changes in the various components of IBIT for
the transportation and operation segment.
NET REVENUES
Revenues, net of cost of gas and other products sold, of
the transportation and operation segment decreased $105
million, to $300 million in the first half of 1997 as
compared to $405 million in the same period in 1996. The
decrease in revenues primarily reflects the $100 million
charge to reflect depressed MTBE margins as previously
discussed, partially offset by net revenues recorded by this
segment related to the clean fuels operations which
previously had been reflected in the domestic gas and power
services segment. In addition, revenues declined due to the
turnback of capacity at Transwestern effective in November
1996.
COSTS AND EXPENSES
Operating expenses in the transportation and operation
segment increased by $18 million (12%) during the first half
of 1997 as compared to the same period in 1996. The decline
primarily reflects operating costs on clean fuels operations
which previously had been reflected in the domestic gas and
power services segment.
OTHER INCOME AND DEDUCTIONS
Equity in earnings of unconsolidated subsidiaries
declined by $3 million to $18 million during the first half
of 1997 as compared to the same period in 1996, reflecting
decreased earnings from EOTT as a result of lower crude oil
gathering margins.
Other income, net increased $12 million to $130 million.
Income of $102 million was recorded in the first quarter of
1997 related to the sales of the natural gas liquids assets,
compared with gains of $90 million on the sale of non-
strategic natural gas processing and gathering facilities in
the first quarter of 1996.
DOMESTIC GAS AND POWER SERVICES
The domestic gas and power segment reflected a $32
million increase in income before interest, minority
interests and income taxes for the six months ended June 30,
1997 as compared to the same period in 1996. The following
discussion analyzes the contributions to IBIT for each of
these businesses.
Statistics for ECT (including intercompany amounts) are
as follows:
Six Months Ended
June 30,
1997 1996
Natural Gas and Crude Oil
Physical/Notional Quantities (BBtue/d) (1)
Firm (2) 8,280 6,594
Interruptible 2,877 1,844
Transport Volumes 448 504
Subtotal 11,605 8,942
Financial Settlements (Notional) 42,771 32,274
Total 54,376 41,216
Production Payments and Financings
Arranged (In Millions) $70 $472
Fixed Price Contract Originations
(TBtue) (3) 1,153 1,079
Electricity (Thousand Megawatt hours)
Owned Production 1,334 1,572
Transaction Volumes Marketed 71,928 20,876
<FN>
(1) Billion British thermal units equivalent per day.
(2) Commitments to deliver a specified volume of gas at a
fixed or market responsive price.
(3) Trillion British thermal units equivalent.
The cash and physical operations' earnings before
overhead expenses were $156 million and $130 million in the
first six months of 1997 and 1996, respectively. The
earnings from this business unit increased in the first six
months of 1997 primarily due to increased earnings from the
management of ECT's European contract portfolio, partially
offset by a decrease in North American commodity marketing
and contract portfolio management.
Earnings before overhead expenses for the risk management
business were $61 million in the first six months of 1997
and $60 million in the same period in 1996. Earnings from
this unit were generated primarily from increased
originations in the European market offset by lower
originations from long-term contracts in North America for
both gas and power.
ECT's finance operations had earnings before overhead
expenses of $24 million in the first six months of 1997
compared with $14 million for the same period in 1996. The
1997 earnings primarily reflect increased earnings from
ECT's investment portfolio and increased activity in the
Canadian market.
ECT's overhead expenses were $59 million in the first
half of 1997 and $54 million in the same period in 1996.
The increase is primarily due to continued expansion into
new markets and system upgrades.
RETAIL ENERGY SERVICES
EES reported a loss of $39 million in the first half of
1997 as a result of significant systems, regulatory and
branding costs related to positioning EES to aggressively
market natural gas and electricity to end users.
INTERNATIONAL OPERATIONS AND DEVELOPMENT
The international segment's IBIT increased $21 million to
$100 million in the first six months of 1997 compared to the
same period in 1996. The following discussion analyzes the
significant changes in the segment's results.
NET REVENUES
Revenues, net of cost of sales, for the international
segment increased $33 million to $98 million in the first
half of 1997 as compared with 1996, primarily due to the
increase in value of EI's investment portfolio. The
increase also reflects management fees earned in connection
with the operation of power plants as well as earnings from
the development of the Guam power project. These increases
were partially offset by revenues in the second quarter of
1996 of $16 million from the sale of a portion of Enron's
interest in its power assets at Teesside in the United
Kingdom.
COSTS AND EXPENSES
Operating expenses increased $10 million (31%) during the
first half of 1997 as compared to the first half of 1996 due
primarily to expenses related to the operation of power
plants.
OTHER INCOME AND DEDUCTIONS
Equity in earnings of unconsolidated subsidiaries
decreased $3 million to $43 million in the first half of
1997, primarily as a result of the 1996 sale of a portion of
Enron's interest in Teesside, partially offset by earnings
from Enron's increased ownership of CIESA.
EXPLORATION AND PRODUCTION
The exploration and production segment's IBIT decreased
to $72 million in the first half of 1997 from $107 million
in the same period of 1996. The following discussion
analyzes the significant changes in the segment's results.
Wellhead volume and price statistics (including
intercompany amounts) are as follows:
Six Months Ended
June 30,
1997 1996
Natural Gas Volumes (MMcf/d)
North America (1) 759 708
Trinidad 113 136
India 1 -
Total 873 844
Average Natural Gas Prices ($/Mcf)
North America (2) $2.18 $1.73
Trinidad 1.04 1.00
India 2.97 -
Composite 2.03 1.61
Crude Oil/Condensate Volumes (MBbl/d)
North America 13.3 11.1
Trinidad 3.6 6.2
India 1.4 2.9
Total 18.3 20.2
Average Crude Oil/Condensate Prices ($/Bbl)
North America $20.19 $19.50
Trinidad 18.86 18.67
India 22.99 18.88
Composite 20.15 19.16
<FN>
(1) Includes 48 MMcf per day for the six-month periods ended
June 30, 1997 and 1996 delivered under the terms of a
volumetric production payment agreement effective October 1,
1992, as amended.
(2) Includes an average equivalent wellhead value of
$1.85/Mcf and $0.84/Mcf for the six-month periods ended
June 30, 1997 and 1996, respectively, for the volumes
described in note (1), net of transportation costs.
REVENUES
The exploration and production segment's revenues, net of
gas sold in connection with natural gas marketing, decreased
$5 million (1%) during the first half of 1997 as compared to
the same period in 1996. Wellhead revenues increased 23% to
$396 million in the first half of 1997 as compared to $322
million in the same period of 1996. This increase primarily
reflects increased North America volumes and increased
average wellhead prices for natural gas, crude oil and
condensate and natural gas liquids compared to the first
half of 1996.
Other marketing activities associated with sales and
purchases of natural gas, natural gas and crude oil price
hedging and trading transactions and margins related to the
volumetric production payment reduced net operating revenues
by $53 million during the first half of 1997, compared to
increases to revenues of $11 million in the first half of
1996. This decrease reflected losses of $42 million related
to natural gas commodity price hedging activities in the
first six months of 1997 compared to less than $1 million in
gains in the comparable prior period, as well as a decrease
in margins due to higher costs of natural gas delivered in
1997.
EOG's sale of selected reserves and related assets in the
first six months of 1997 resulted in gains of $7 million
compared to $20 million in gains in the same period of 1996.
COSTS AND EXPENSES
Operating expenses increased $8 million (12%) in the
first half of 1997 as compared with the 1996 period,
primarily due to increased production activity. Exploration
expenses increased $8 million (20%) in the first six months
of 1997 compared with the same period of 1996, primarily
reflecting increased exploration activities worldwide.
Depreciation, depletion and amortization (DD&A) expense
increased $10 million (8%), primarily reflecting the
increase in production volumes discussed earlier.
CORPORATE AND OTHER
The corporate and other segment's IBIT before non-
recurring charges increased $3 million to $13 million in the
first half of 1997 as compared to the first half of 1996.
As discussed in Note 5 to the Consolidated Financial
Statements, included in the results for the first six months
of 1997 is a non-recurring charge of $675 million, primarily
reflecting the impact of Enron's amended J-Block contract in
the U. K.
MINORITY INTERESTS
Minority interests decreased to $36 million in the second
half of 1997 from $38 million in the comparable prior
period, primarily due to lower net income from EOG,
partially offset by increased net income from EPP.
DIVIDENDS ON COMPANY-OBLIGATED PREFERRED SECURITIES OF
SUBSIDIARIES
Dividends on company-obligated preferred securities of
subsidiaries increased from $16 million in the first six
months of 1996 to $31 million in the same period of 1997,
primarily due to the issuance of $587 million of additional
preferred securities during 1996 and the first half of 1997.
INCOME TAX EXPENSE (BENEFIT)
Income taxes decreased during the first half of 1997 as
compared with the same period of 1996 primarily as a result
of pretax losses due to the non-recurring charges for the
restructuring of Enron's J-Block contract and for depressed
MTBE margins on committed production.
OUTLOOK
During the remainder of 1997 and through 1998, Enron
anticipates continued strong growth performance from its
wholesale electricity business, production increases from
EOG and completion of key power projects by the
international operations and development segment and by
Enron Renewable Energy Corp.
Enron has recently revised downward its expectations of
primary earnings per share for the years 1997 and 1998 and
removed official targets for years 1999 and beyond. The
1997 downward revision reflects the impact of three factors:
(1) interest requirements on the debt incurred in connection
with the J-Block contract settlement; (2) delay of a planned
divestiture of Enron's interest in EOTT; and (3) increased
exposure to oil and gas prices by the exploration and
production segment due to the removal of hedges at the EOG
and Enron Corp. levels and uncertainty of commodity prices.
FINANCIAL CONDITION
Cash used in operating activities totaled $523 million
during the first half of 1997 as compared to $126 million of
cash provided by operating activities during the same period
in 1996. The 1997 amount reflects payments made in connection
with the J-Block settlement and higher working capital
requirements. Partially offsetting the impact of these
payments were lower funds used in price risk management
activities.
Cash used in investing activities totaled $647 million
during the first half of 1997 as compared to $385 million
during the same period in 1996. The increase primarily
reflects increased capital expenditures, partially offset by
increased proceeds from the sale of assets and investments.
Cash provided by financing activities totaled $1,125
million during the first half of 1997 as compared to $277
million during the same period in 1996. During the first
half of 1997, net issuances of short- and long-term debt
totaled $1,065 million. Additionally, $372 million of
company-obligated preferred securities of subsidiaries was
issued. Proceeds from these issuances were used primarily
to fund payments made in connection with the J-Block
settlement and CATS litigation and for capital and other
expenditures. These amounts were partially offset by net
repurchases of $84 million of Enron and EOG common stock
in the open market during the first half of 1997.
Enron has announced its intention to repurchase up to
10 million shares of its common stock in the open market
during the second half of 1997.
Enron is able to fund its normal working capital
requirements mainly through operations or, when necessary,
through the utilization of credit facilities and its ability
to sell commercial paper and accounts receivable.
Total capitalization at June 30, 1997 was $9.7 billion.
Debt as a percentage of total capitalization was 46.8% at
June 30, 1997 as compared to 39.8% at year-end 1996 and
39.6% at March 31, 1997. The increase from year-end
primarily reflects decreased retained earnings and the
increased debt incurred related to the J-Block settlement
and the CATS litigation. Giving effect to the merger with
PGC on July 1, 1997 and assuming the mandatory conversion in
late 1998 of 10.5 million Exchangeable Notes into EOG shares
held by Enron, the proforma debt to capitalization
percentage would be approximately 43.1% at June 30, 1997.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward
looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Although Enron believes that its
expectations are based on reasonable assumptions, it can
give no assurance that its goals will be achieved. Important
factors that could cause actual results to differ materially
from those in the forward looking statements herein include
political developments in foreign countries, the pace of
deregulation of retail natural gas and electricity markets
in the United States, the timing and extent of changes in
commodity prices for crude oil, natural gas, electricity and
interest rates, the extent of EOG's success in acquiring oil
and gas properties and in discovering, developing and
producing reserves, the timing and success of Enron's
efforts to develop international power, pipeline and other
infrastructure projects and conditions of the capital
markets and equity markets during the periods covered by the
forward looking statements.
PART II. OTHER INFORMATION
ENRON CORP. AND SUBSIDIARIES
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of Enron Corp. was
held on May 6, 1997 in Houston, Texas, for the purpose of
electing a board of directors and approving the Amended and
Restated Enron Corp. 1991 Stock Plan and the appointment of
auditors. In addition, a proposal was introduced by a
stockholder to adopt a policy of cumulative voting for all
elections of directors by stockholders. Proxies for the
meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934 and there was no
solicitation in opposition to management's solicitations.
(a) All of management's nominees for directors as listed in
the proxy statement were elected with the following vote:
Nominee Shares FOR Shares WITHHELD
Robert A. Belfer 223,701,962 8,762,567
Norman P. Blake, Jr. 229,688,120 2,776,409
Ronnie C. Chan 223,150,689 9,313,840
John H. Duncan 229,670,543 2,793,986
Joe H. Foy 222,758,277 9,706,252
Wendy L. Gramm 229,773,097 2,691,432
Robert K. Jaedicke 229,572,191 2,892,338
Kenneth L. Lay 229,784,272 2,680,257
Charles A. LeMaistre 229,563,971 2,900,558
Jeffrey K. Skilling 229,737,988 2,726,541
John A. Urquhart 223,551,745 8,912,784
John Wakeham 229,632,460 2,832,069
Charls E. Walker 229,602,896 2,861,633
Herbert S. Winokur, Jr. 229,680,738 2,783,791
(b) The Amended and Restated Enron Corp. 1991 Stock Plan
was approved by the following vote:
Shares FOR Shares AGAINST Shares ABSTAINING
208,897,096 21,040,814 2,526,619
(c) The appointment of Arthur Andersen LLP as independent
auditor was approved by the following vote:
Shares FOR Shares AGAINST Shares ABSTAINING
229,658,938 1,701,209 1,104,382
(d) The stockholder proposal to adopt a policy of
cumulative voting for all elections of directors by
stockholders was defeated by the following vote:
Shares FOR Shares AGAINST Shares ABSTAINING Broker NON-VOTES
58,847,046 143,570,084 4,036,604 26,010,795
PART II. OTHER INFORMATION - (Concluded)
ENRON CORP. AND SUBSIDIARIES
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11 Calculation of Earnings Per Share
Exhibit 12 Computation of Ratio of Earnings to
Fixed Charges
(b) Reports on Form 8-K
Current Report on Form 8-K filed June 5, 1997 to
announce the settlement of contractual issues involving
the J-Block contract.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
ENRON CORP.
(Registrant)
Date: August 13, 1997 By: RICHARD A. CAUSEY
Richard A. Causey
Senior Vice President and
Chief Accounting and Information
Officer
(Principal Accounting Officer)