1400 Smith Street
Houston, Texas 77002-7361
www.enron.com
ENRON ANNUAL REPORT 1999
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L R E P O
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©2000 Enron Corp. Enron and the Enron logo are registered trademarks and Endless possibilities, ePowered, ePowered Media Cast, ePowered Media Transport and EnronOnline are trademarks of Enron Corp. or one of its subsidiaries. Other company, product and service names may be trademarks of others.
®
OUR VALUES COMMUNICATION We have an obligation to communicate. Here, we
take the time to talk with one another… and to
listen. We believe that information is meant to
move and that information moves people.
RESPECT We treat others as we would like to be treated
ourselves. We do not tolerate abusive or disrespectful
treatment. Ruthlessness, callousness and arrogance
don’t belong here.
INTEGRITY We work with customers and prospects openly,
honestly and sincerely. When we say we will do
something, we will do it; when we say we cannot
or will not do something, then we won’t do it.
EXCELLENCE We are satisfied with nothing less than the very best
in everything we do. We will continue to raise the
bar for everyone. The great fun here will be for all
of us to discover just how good we can really be.
CONTENTS
1 FINANCIAL HIGHLIGHTS
2 LETTER TO SHAREHOLDERS
6 WHOLESALE ENERGY BUSINESS
14 ENRON BROADBAND SERVICES
18 RETAIL ENERGY SERVICES
22 TRANSPORTATION AND DISTRIBUTION
26 A GLOBAL LOOK AT ENRON (MAPS)
30 FINANCIAL REVIEW
63 ENRON OFFICES
64 BOARD OF DIRECTORS
66 EXECUTIVE COMMITTEE
66 SHAREHOLDER INFORMATION
67 OUR VALUES
ENRON operates networks throughout the world to develop and enhance energy and broadband communication services. Networks, unlike vertically integrated business structures, facilitate the flow of information and expertise. We can spot market signals faster and respond more quickly. Networks empower individuals, freeing them to craft innovative and substantive solutions to customer problems. Networks are the foundation of our knowledge-based businesses, and they provide exceptional returns and value for our shareholders.
On the front and back covers: Five of the 13 Chairman’s Roundtable members of 1999 and the winner of the 1999 Chairman’s Award, Bobbye Brown (far left on front cover).The Chairman’s Award, which includes the selection of Chairman’s Roundtable members, is an annual, employee-driven program that recognizes Enron’s everyday heroes — people who make a difference by living our values of communication, integrity, respect and excellence in everything they do.
(Unaudited: in millions, except per share data) 1999 1998 1997 1996 1995
Revenues $ 40,112 $31,260 $20,273 $13,289 $ 9,189
Net income: Operating results $ 957 $ 698 $ 515 $ 493 $ 489 Items impacting comparability (64) 5 (410) 91 31
Total $ 893 $ 703 $ 105 $ 584 $ 520
Earnings per diluted common share: Operating results $ 1.18 $ 1.00 $ 0.87 $ 0.91 $ 0.91 Items impacting comparability (0.08) 0.01 (0.71) 0.17 0.06
Total $ 1.10 $ 1.01 $ 0.16 $ 1.08 $ 0.97
Dividends paid per common share $ 0.50 0.48 0.46 0.43 0.41
Total assets $ 33,381 29,350 22,552 16,137 13,239
Capital expenditures and equity investments $ 3,085 3,564 2,092 1,483 947
NYSE price range High 44 7⁄8 29 3⁄8 22 9⁄16 23 3⁄6 19 11⁄16 Low 28 3⁄4 19 1⁄16 17 1⁄2 17 5⁄16 14 Close December 31 44 3⁄8 28 17⁄32 20 25⁄32 21 9⁄16 19 1⁄16
FINANCIAL HIGHLIGHTS
1
REVENUES ($ in billions)
31.3
40.1
13.3
20.3
98 9996 97
OPERATING RESULTS
98 99 Earnings per diluted share (in dollars)
698
1.00
1.18957
98 99 Income
($ in millions)
TEN-YEAR CUMULATIVE TOTAL RETURN (through December 31, 1999)
Dividends reinvested
Peer Group
S&P 500
Enron
312%
432%
704%
TO OUR SHAREHOLDERS
Enron is moving so fast that sometimes others have trouble
defining us. But we know who we are. We are clearly a knowledge-
based company, and the skills and resources we used to transform
the energy business are proving to be equally valuable in other
businesses. Yes, we will remain the world’s leading energy company,
but we also will use our skills and talents to gain leadership in
fields where the right opportunities beckon.
In 1999 we witnessed an acceleration of Enron’s staggering
pace of commercial innovation, driven by a quest to restructure
inefficient markets, break down barriers and provide customers
with what they want and need, when they want and need it. We
reported another round of impressive financial and operating
results. In 1999 revenue increased 28 percent to $40 billion, and
net income before non-recurring items increased 37 percent to
reach $957 million. Our total return to shareholders of 58 percent
was eight times higher than our peer group and almost triple the
S&P 500 return.
We believe the future will be even more rewarding. We
remain the world’s leader in wholesale and retail energy services.
Our new broadband subsidiary, Enron Broadband Services, is
redefining Internet performance by designing and supplying a
full range of premium broadband delivery services. The value of
products bought and sold on our new eCommerce platform,
EnronOnlineTM, is destined to exceed the value transacted on any
current eCommerce web site. To reap greater growth and value
in our traditional energy businesses without a parallel increase in
capital spending, we have evolved into a series of global networks
— each of which is a leader in its specific region. These networks
work our physical assets harder and drive more high-return pro-
ducts and services into the market. We believe that our broad
networks will give us unbeatable scale and scope in every business
in every region in which we operate.
Networks now serve as our business platform. They increase
our agility and speed our response. They produce more and
better options for customers. And they increase returns.
THE NEW ECONOMY
We are participating in a New Economy, and the rules have
changed dramatically. What you own is not as important as what
you know. Hard-wired businesses, such as energy and communi-
cations, have turned into knowledge-based industries that place
a premium on creativity. Enron has been and always will be the
consummate innovator because of our extraordinary people. It is
our intellectual capital—not only our physical assets—that makes
us Enron. Move our assets to another company, and the results
would be markedly different.
When you define a New Economy company, you define
Enron. A New Economy enterprise exhibits four traits:
1. Its strength comes from knowledge, not just from physical assets.
Enron has become a pre-eminent energy and communica-
tions company not only by building and controlling physical
assets, but also from our unique ability to add knowledge to
those assets to create a market-making network, such as our
electricity and natural gas markets in North America and Europe.
2. A New Economy player must operate globally — effortlessly
transferring ideas, people and services from region to region.
Our knowledge and expertise crisscross the globe. What
we’ve learned about natural gas pipelines in the United States
helps us build new natural gas markets in South America and
India. Our knowledge of optimizing capacity in energy networks
will allow us to revolutionize the bandwidth market.
3. New Economy companies understand that constant innovation
is their only defense against competition.
Enron often introduces a product before the competition
even senses a market exists. Cross-commodity trading, weather
derivatives, energy outsourcing and 1999’s two major initiatives
— EnronOnline and Enron Broadband Services — demonstrate our
resourcefulness. No wonder a Fortune survey recently named
Enron the “Most Innovative Company in America” for an
unprecedented fifth year in a row.
4. Success in the New Economy requires the adroit use of infor-
mation to restructure an organization and boost productivity.
The connectivity of our networks allows us to gather
massive amounts of market data to provide instant market
snapshots and to identify emerging trends. This information is
available to, and accessed by, every Enron marketer and originator
in every part of the world, ensuring that we make informed
moves and spot opportunities at the first possible moment.
The fluidity of knowledge and skills throughout Enron
increasingly enables us to capture value in the New Economy.
NETWORK ELEMENTS
Enron continues to be one of the most efficient developers
and builders of physical assets. Assets form the foundation of
network businesses that sell up and down the value chain.
Layered on top of our physical assets are: (1) strategic contractual
relationships, which ensure us access to other people’s physical
assets without owning them ourselves, and (2) our market-making
ability, which allows us to draw on the most flexible, most effi-
cient components to create higher-value products and services
for our customers.
By structuring our operations as flexible networks, we
can accelerate our growth with minimal capital expenditures.
Physical assets play a strategic, but not central, role in the way
we earn our money, and this reduced emphasis on merely
earning a return on physical assets allows us to divest non-
strategic assets and redeploy capital into higher-growth and
stronger-return businesses. This led to several important
transactions last year.
In August we completed a sale and exchange of our interest
in Enron Oil & Gas Company (EOG). As part of this transaction,
Enron retained certain international operations to create a
global upstream function to serve our regional business units.
The transaction generated approximately $1 billion in cash
2
Jeff Skilling, President and COO; Ken Lay, Chairman and CEO; and Joe Sutton, Vice Chairman
3
4
proceeds that will be invested in other areas.
In November, we agreed to sell Portland General Electric
(PGE) to Sierra Pacific Resources. PGE is an excellent organization,
and our relationship has been mutually beneficial. At the time we
acquired PGE, Enron needed additional insight into developing
electricity markets, and we also required credibility to participate
in the markets. We have gained the insight and credibility we
sought, and we believe the sale of PGE represents the best value
to Enron shareholders. After the sale, we will have approximately
$2 billion in cash proceeds to redeploy into businesses with faster
growth and higher returns. The agreement is currently under
regulatory review, with a final sale expected in late 2000.
EnronOnline
Enron’s primary competitive advantage is to identify oppor-
tunities and gain an early lead that we never surrender. Clearly we
have gained the first-mover advantage with our new eCommerce
application, EnronOnline. Other services exist, but EnronOnline is
the only global principal-based system that allows users to view
real-time prices for a range of energy and related commodities
and transact instantaneously. Its ease-of-use and price transparency
have been enthusiastically received by our counterparties.
EnronOnline is increasing our overall volume of transactions
and our market share. Ultimately, EnronOnline will become one
of the world’s largest eCommerce businesses. In 2000, we expect
the notional value of goods bought and sold on EnronOnline to
be at least $40 billion, many times the value sold online by
successful eMerchants such as Dell, Cisco or Intel. Furthermore,
we will leverage EnronOnline to present more products and
services, including many that do not yet exist. Clearly EnronOnline
will be a significant catalyst for growth.
ENRON BROADBAND SERVICES
Enron’s entry into the communications business is a logical
extension of our skills and experience. The industry is strikingly
similar to the natural gas industry of the mid-1980s. At that time,
Enron remade an industry characterized by inflexible and rigid
business relationships and contracts, which caused either crip-
pling shortages or massive inefficiencies. Enron challenged
conventional thinking and helped open the industry for effective
competition. We have the capacity to develop a similar efficient
market for bandwidth.
As EnronOnline demonstrates, the Internet is changing the
way we do business. The public Internet, however, does not have
sufficient bandwidth capacity to carry massive data and rich media
content to the desktop. In 1999 we rolled out Enron Broadband
Services to take the Internet to the next level. Demand for premium
broadband delivery services is expected to soar by 150 percent
annually from now through 2004. This market could easily
surpass the combined markets for natural gas and electricity.
Enron Broadband Services is off to a tremendous start: we
own and operate a superior intelligent fiber optic network that
is focused on delivering bandwidth-intensive content, such as
TV-quality video, over the Internet. Our goal is to be the premier
98
ENRON BROADBAND SERVICES – ROUTE MILES OWNED OR ACCESSIBLE BY CONTRACT (miles in thousands) *estimated
5.5
12.3
15.0
99 00*
8,900 8,800 9,200
97 98 99
TRANSPORTATION AND DISTRIBUTION – TOTAL VOLUMES TRANSPORTED (billion British thermal units per day)
WHOLESALE ENERGY OPERATIONS AND SERVICES – PHYSICAL VOLUMES (trillion British thermal units equivalent per day)
18.0
27.3
32.4
97 98 99
Other Electricity Natural gas
1.2
3.8
8.5
97 98 99
ENRON ENERGY SERVICES – CONTRACTS ORIGINATED ($ in billions)
completion of Phase I of the Dabhol Power Project in India and
the successful financing of Phase II, we are well on our way to
developing a natural gas network on the west coast of India.
In South America, we have established natural gas pipelines and
power plants and we operate electricity and natural gas distri-
bution networks. Our vision of building an energy network
throughout the Southern Cone is now a reality.
THE ENRON CULTURE
Creativity is a fragile commodity. Put a creative person in a
bureaucratic atmosphere, and the creative output will die. We
support employees with the most innovative culture possible,
where people are measured not by how many mistakes they make
but how often they try.
Our culture of innovation is difficult to duplicate. Individ-
uals are empowered to do what they think is best, and most of
our outstanding initiatives in 1999 came directly from our own
ranks. Our philosophy is to not stand in the way of our employ-
ees, so we don’t insist on hierarchical approval. We do, however,
keep a keen eye on how prudent they are, and rigorously evalu-
ate and control the risk involved in each of our activities. We
insist on results, and the results have been quite good. Through-
out this annual report, you will see how enthusiastic, motivated
people have created their own networks of Enron-wide talent
and resources to quickly advance ideas.
We are doing something that is recognized outside the
company. This year, in addition to again naming us “America’s
Most Innovative Company,”Fortune ranked Enron “No.1 in
Quality of Management” and “No. 2 in Employee Talent” of all
American companies. The magazine also acknowledged us as one
of the 25 best places to work in America. We recognize that our
intellectual capital is our most important asset, and we cherish it.
All employees are shareholders. Our values of communication,
integrity, respect and excellence are equally applicable to our
dealings with each other as with our customers and suppliers.
Increasingly, energy will serve as our entrée to customers
who can benefit from Enron’s intellectual capital and services.
The fundamental skills and expertise we use to develop energy and
communications solutions can be applied to many situations that
inhibit our customers’ profits and growth. It is that core of exper-
tise, rather than tradition, that will define Enron in the future.
Kenneth L. Lay
Jeffrey K. Skilling
Joseph W. Sutton
5
provider of high-bandwidth services and applications worldwide.
The business model we follow is the one we used to create liquid
markets for natural gas and electricity. We are establishing bench-
mark bandwidth contracts and making a market in bandwidth. We
initiated the first bandwidth trade in December 1999. The market
for bandwidth intermediation will grow from $30 billion in 2000
to $95 billion in 2004. With our head start, we expect to become
the leader in this field.
1999 ACCOMPLISHMENTS
In addition to executing our plans for Enron Broadband
Services and EnronOnline, our employees helped us reach several
significant milestones in 1999:
Enron Energy Services
In 1999 we proved that Enron’s retail business works. We
exceeded our goal by signing energy outsourcing contracts
representing $8.5 billion in total contract value, more than double
the $3.8 billion achieved in 1998. Enron Energy Services achieved
positive earnings in the fourth quarter, and its profitability is
expanding rapidly.
Our persistence in the retail energy market has given us
an unassailable competitive advantage. While many companies
waited on the sidelines to see how domestic electricity deregu-
lation would progress, we built a business independent of
deregulation. Now the retail energy outsourcing market is gain-
ing momentum, and for the competition, catch-up will be a hard
game to play.
The widening of our lead in the North American wholesale
energy markets
We viewed 1999 as a milestone for Enron North America.
Our position as No. 1 in multiple energy markets grew so strong
that it no longer is challenged by any single competitor. Our
volume of day-to-day merchant activities is extraordinary, and
that volume will grow sharply as electricity deregulation accelerates
and natural gas demand increases. In 1999 we executed our plan
to quickly develop, site and build three peaking power plants,
which were up and running in less than a year, to meet last
summer’s peak demand. These plants, designed to operate only
when justified by electricity prices, are switched on directly from
our power marketing floor in Houston.
Enron Europe
When fully opened, the size of Europe’s wholesale elec-
tricity market will rival that of the United States, and Enron will
be ready. We have had a presence in Europe since 1989; today
we have 1,750 Enron employees throughout Europe to provide
commodities marketing, risk management, gas services and
wholesale electricity sales. We command a leading position in
every energy market that has opened. With our competitors
just opening up shop, we have a clear first-mover advantage.
Developing Wholesale Networks
Our wholesale networks in India and South America gained
critical mass in 1999, paving the way for integrated, region-wide
activities in both energy and broadband services. With the
6
WHOLESALE ENERGY BUSINESS
Wholesale Developed Networks
ENRON NORTH AMERICA
Enron’s footprint is everywhere in the North American
wholesale energy business. We conduct hundreds of daily trans-
actions, touching every part of the energy market. Generators,
distributors, marketers and producers rely on us to make markets,
transport, provide logistics and deliver the commodity. Wholesale
competition thrives on services we provide, including risk manage-
ment and capital.
For years, we have led the market. We view 2000, however,
as a breakaway year when we will further widen the distance
between Enron and the competition. No one can read the markets
as we do, and no one responds as quickly. Together with Enron
Europe we launched EnronOnline, our Internet-based commodity
transaction service, in 1999. EnronOnline allows us to move more
products to more customers than ever before. The system is revo-
lutionizing the way energy commodities are traded, and we will
benefit from increased volume and market share. Since debuting
last November, EnronOnline has significantly increased our daily
volume of transactions. In its first two-and-a-half months of opera-
tion, the system completed more than 25,000 global transactions
and did approximately $9 billion of business.
Natural Gas
Although natural gas is our most mature business, we antic-
ipate continued growth in volume and market share in 2000.
The demand for gas itself is on the upswing, the result of a surge
in new gas-fired electricity generation. Gas consumption by gener-
ators will increase to 8.8 trillion cubic feet (Tcf) in 2010 from 5 Tcf
today. EnronOnline will be a magnet for much of this new business.
In 1999 we retained our position as the No. 1 gas merchant
in the United States and Canada, with physical volume of approxi-
mately 13.3 billion cubic feet equivalent (Bcfe) per day.
Electricity
Enron marketed 381 million megawatt-hours of North
American power in 1999. We clearly lead the market in whole-
sale electricity in the U.S., and that market is growing rapidly.
As utilities divest their generation assets, the level of available
merchant power increases. Today merchant power accounts for
25 percent of capacity. Within four years, we estimate that
number will exceed 50 percent. As the No. 1 electricity marketer
in the United States, Enron is positioned to obtain a good
portion of the increase in transactions.
In 1999 we built three single-cycle gas-fired power plants to
produce 1,340 megawatts of peaking power. This power supports
our market positions when power is scarce. The power provides
greater flexibility to our merchant operations and increases
reliability in previously underserved markets. In 2000 we will add
three more plants with total capacity of approximately 1,600
megawatts. These six peaking units, located in Tennessee, Missis-
sippi, Indiana and Illinois, serve the nation’s most active and
volatile electricity and natural gas markets.
Other Markets
Enron offers innovative products and services in different
markets to meet the needs of high-volume energy producers
and consumers.
We have developed a liquid market in coal, where we
optimize commodity positions for producers and consumers. We
have become the largest coal market-maker in the United States
with more than 24 million tons delivered in 1999. We
provide risk management tools to stabilize earnings
and make capital available to producers as well.
We have brought new liquidity and risk
management skills to the pulp and paper industry.
By making a commodity market in pulp and paper,
we can supply financial risk management tools to
shield paper companies from historic price volatility.
Our clients include leading publishers, food packag-
ing companies and paper and container board mills.
Other key markets include emission credits, crude
petroleum products and weather derivatives. In addition, Enron
has the financial strength to provide equity and debt investments
in energy-related businesses, which can serve as our entrée to
providing additional products.
ENRON EUROPE
Enron has seized the first-mover advantage in Europe. With
no comparable competition in sight as the Continental European
market opens to energy competition, Enron’s pan-European net-
work of assets, contracts and market-making ability is in place and
ready for exponential growth.
A presence since 1989, Enron has 18 offices in 16 countries,
staffed by 1,750 employees representing 42 nationalities. With all
of Enron’s intellectual capital and abilities, Enron Europe is thor-
oughly European and thoroughly Enron.
In just a few years, the competitive European wholesale
power market will rival the size of the power sector in the
United States. Enron expects to assume the leading position in
Europe as it has done in North America.
We are the largest merchant of natural gas and power in
the U.K., which liberalized its markets in 1992. Our gas volumes
increased 21 percent in 1999 to reach 1,500 billion British thermal
units equivalent (BBbtue) a day, while power volumes more than
continued on page 10
During the summer there are still brownouts in the U.S.
ENRON NORTH AMERICA
7
ENRON ASKS WHY?
tripled to 53 million megawatt-hours. In the Nordic region, the
world’s most deregulated electricity market, we are the largest
power merchant. Our volume grew 48 percent from 1998 to
reach 31 million megawatt-hours in 1999 —10 times our
marketing volumes in 1996.
Technology is used to fortify our market position. We offer
PriceDesk, an online power pricing mechanism for utilities in the
Nordic region, and Strommarkt, an online electricity pricing
system in Germany. EnronOnline’s unique transaction capability
has further advanced Enron’s technology lead. The system allows
counterparties to buy and sell U.K. and Continental power and
gas as well as other products. EnronOnline will revolutionize our
business in Europe as well as in North America, helping us to
gain significant market share. A truly global system, EnronOnline
is available in different currencies, making it suitable for many of
our diverse customers.
The European Union mandated liberalization of the power
market in member states by February 2000. Competition is having
a dramatic effect on Continental prices: for instance, in Germany
wholesale prices have dropped 35 percent in less than a year. In
that environment, we are a natural partner for utilities that need
greater wholesale expertise to manage power supply and risk. As
competition takes hold on the Continent, we are completing
more transactions than any other company.
With Enron’s broad array of products, we can find a way
to sell energy services in almost any market. Our first transaction
in Spain involved oil, our initial contract in Poland was for coal,
France was receptive to a weather derivative transaction and
natural gas has always been our strength in the U.K.
As Europe’s appetite for wholesale transactions is whetted,
Enron’s business grows accordingly. Our numbers nearly tripled
from 1998 to 1999. In 1999, we completed 24,240 transactions;
marketing power volumes of 91 million megawatt-hours for the
year and an average of 1,554 BBtue of gas per day.
Some European markets need additional assets to increase
market liquidity, and we will build those assets where they make
economic sense and add strategic value. Last year we completed
construction of the 116-megawatt Nowa Sarzyna power plant in
Poland and the 478-megawatt Marmara plant in Turkey. The 551-
megawatt Sarlux combined-cycle oil gasification plant within the
Saras oil refinery in Southern Sardinia, Italy, will be completed in
2000. We are developing the 240-megawatt Jertovec plant in
Croatia as well as a 1,200-megawatt plant in Arcos, Spain.
Our goal is to build liquidity across Europe and serve as a
strong catalyst for liberalization. As our European network
expands, we will be able to lower costs, increase flexibility and
expand our base of services to the marketplace, securing Enron’s
first-place position for the long-term.
Wholesale Developing Networks
Enron is developing wholesale energy networks throughout
the world with a current focus on four regions: India, South
America, Asia Pacific/Africa/China and Caribbean/Middle East.
FINANCIAL EXPERTS
How profitable will the peaking units be? Enron’s financial experts work with the research team to run thousands of financial simulations to project the best-, worst- and middle- course scenarios. The result is a comprehensive risk-adjusted return on capital analysis, which allows Enron to know with certainty whether building peaking units is a judicious use of company capital.
GENERATION SERVICES GROUP
The Generation Services Group — Mike Miller, Greg Whalley and Dave Delainey — looks closely at the U.S. generation market. At first glance, it looks bleak. With deregulation, electricity could become a low-margin commodity. But the group won’t say no until it exhausts all possibilities. It uncovers a fantastic opportunity — developing peaking units that would be turned on only when justified by electricity prices. It draws on Enron resources to respond in record time to develop three plants in two states simultaneously.
RESEARCH TEAM
Enron’s in-house mathematicians and physicists analyze power-supply-and-demand patterns throughout the United States. The team uncovers two regions—the Southeast Reliability Council and the Midwest Reliability Council—that are likely to face shortages within two or three years. A plan of action emerges: site three plants in the Southeast in 1999 and additional plants in the Midwest in 2000.
STRATEGY: DRAWING ON TALENT AND SKILL THROUGHOUT THE ORGANIZATION, ENRON SITED, BUILT and brought three peaking units online within 12 months to successfully capture the high margins of Summer 1999.
8
POWER-ON-DEMAND
ENRON ENGINEERING & CONSTRUCTION COMPANY
Enron Engineering & Construction Company (EE&CC) drives Enron’s global development activities. Engineers design the perfect plant to deliver peaking power—a low-cost, single-cycle natural gas-fired plant that can be fired up within 30 minutes to an hour. Faced with a shortage of turbines in the U.S., EE&CC uses its world- wide contacts to scout out used turbines in South Korea. EE&CC disassembles and transports them to Pensacola, Florida, where it hires subcontractors to refurbish the equipment.
THE POWER TEAM
Kevin Presto and Roger Herndon use their knowledge and experience in electricity trading and generation to review historical data and project forward demand for electricity. They know during peak times electricity prices will soar from $17 or $22 per megawatt hour to $35, $60 or even thousands of dollars per megawatt hour. At peak prices, the profit margins are enormous. Once the plants are finished, the trading group makes the decision to dispatch power. It turns on the plants right from the Houston trading floor.
GOVERNMENT AFFAIRS AND PUBLIC RELATIONS
With widespread knowledge of state and local regulations, the regulatory affairs group suggests locations and strategies to accelerate the process of securing permits for the new sites. The group helps shorten the review time for air permits by qualifying plants as limited-run operations. Public relations professionals work with local civic groups, government officials and media to introduce Enron and foster understanding of the project.
RESULT: THREE PEAKING UNITS ARE AVAILABLE TO OFFER A TOTAL OF 1,340 MEGAWATTS DURING PEAK power demand:
Brownsville Power, Brownsville, Tennessee, 475 megawatts Caledonia Power, Caledonia, Mississippi, 475 megawatts New Albany Power, New Albany, Mississippi, 390 megawatts
9
10
In 1999 we started up the first phase of the Dabhol Power
Project, an 826-megawatt power plant, and completed the
financing of the second phase, which consists of an additional
1,624 megawatts and India’s first liquefied natural gas (LNG)
facility. Phase II lays the cornerstone for a vast India energy
network that will serve as a springboard for multiple Enron
businesses, including broadband services, in the region.
Since coming to India in 1992, Enron has become
synonymous with commitment, responsibility, excellence and
action. This image has allowed us to rapidly develop network
assets, enter markets and ultimately will enable us to participate
in every stage of the natural gas and electricity energy value
chain as well as in the communications business.
India is a technologically advanced society, populated by
sophisticated computer users, and is a large consumer of
entertainment such as movies and television. Enron Broadband
Services is in India to develop a fiber optic network, high-
bandwidth applications and data centers. Our familiarity with
the country and its regulations, our dynamic India network and
our reputation will hasten the development of this market.
In Asia we are concentrating on two mature economies
that are restructuring their energy markets: Japan, the fourth-
largest energy market in the world, and South Korea, the 13th.
The Japanese power market is scheduled to open in March and is
a natural market for specialty products such as coal and crude oil
intermediation and financial risk management instruments.
Enron will assemble a network of assets, alliances and market
activities to offer as broad a range of products as possible.
We have staked out an excellent position in South Korea,
which soon will open its electricity and gas markets. In 1999 we
formed SK-Enron, a joint venture with SK Corporation, one of
South Korea’s largest conglomerates, to manage SK’s natural gas
and liquefied petroleum businesses. Additionally, we acquired
interests in three gas utilities and a cogeneration power plant,
positioning ourselves for significant growth.
Our Australian office, launched in late 1998, is capitalizing
on that country’s open power market. EnronOnline will begin to
transact Australian power in March. The market for gas is
deregulating concurrently, and our merchant efforts will grow
with the market.
In South America, Enron has built an integrated asset base
of natural gas pipelines, local gas distributors, power plants and
electricity distribution in the Southern Cone countries of Brazil,
Argentina and Bolivia. Now that the network is complete, we are
initiating wholesale merchant transactions from offices in Buenos
Aires and Rio de Janeiro.
In 1999, 30 million cubic meters, or 1.06 million cubic feet
of gas, per day began to flow through the Bolivia-to-Brazil
pipeline, developed in partnership with others. The first 480-
megawatt phase of our Cuiabá generating station in Brazil
began to produce 150 megawatts of electricity on an emergency
basis; the second phase is set to start up by mid-2000.
DABHOL PHASE I
Enron responds to India’s private power initiative in 1992 to develop the country’s first internationally owned independent power project. Enron becomes India’s largest foreign direct investor and an early participant in the country’s dynamic economic development. The first phase of the Dabhol Project, with 826 megawatts of generation capacity, begins operat- ing in May 1999.
DABHOL PHASE II
Enron closes the US $1.87 billion financing of the second phase of the Dabhol project in May 1999. The financing includes a liquefied natural gas (LNG) terminal and regasification plant, allowing India to import natural gas for the first time. Enron contracts to purchase 2.1 million tons of LNG from Oman and Abu Dhabi to supply Dabhol when the second phase of 1,624 megawatts is completed in fourth quarter 2001. Dabhol will generate 2,450 mega- watts of power, making it the world’s largest independent natural gas-fired power plant.
LNG TRANSPORT
To ensure smooth delivery of LNG from the Middle East, Enron partners with Mitsui OSK Lines and the Shipping Corporation of India to finance and begin construction of an LNG shipping vessel dedicated to transporting fuel to Dabhol. This marks the first involve- ment of an Indian company in LNG shipping, as well as the first project financing of an LNG vessel.
ENRON GLOBAL EXPLORATION & PRODUCTION
To boost India’s indigenous supply of natural gas, Enron is developing natural gas and oil reserves in three west coast offshore fields. Current production is approximately 290 million cubic feet per day of gas and 25.5 thousand barrels per day of oil. Domestic gas can be blended with imported gas to increase the volume of gas sold and improve pricing.
MERCHANT OPPORTUNITIES
Enron is positioned to extend its market- making capabilities to India as that country’s wholesale market for energy develops. It will introduce gas supply agreements, energy price risk manage- ment and other energy services as the India market liberalizes further.
METROPOLIS NATURAL GAS PROJECT (METGAS)
Dabhol’s LNG facilities can receive and process 5 million tons of LNG annually, about 3 million tons more than the power plant will consume. Enron forms Metgas to transport and market additional gas capacity to third-party buyers, such as other power producers and various manufacturers. Metgas is developing a pipeline north of Dabhol and southward to Karnataka and is well positioned to become the leading gas distribution company in the state of Maharashtra.
ENRON COMMUNICATIONS INDIA
Enron’s foray in communications in India is centered on providing integrated and complete end-to-end broadband capacity and applications. This includes developing international fiber and satellite capacity and establishing an intelligent terrestrial fiber network that will link up with data centers in large metropolitan centers. On this enabling platform, Enron plans to deliver broadband capacity and cutting- edge broadband applications developed by Enron and leading software companies. Furthermore, Enron has great confidence in India’s potential as an information technology superpower, and aims to play a role in facilitating its growth.
GAS AUTHORITY OF INDIA LTD.
Enron participates in the Indian Government’s disinvestment program and purchases 5.1 percent of the Gas Authority of India Ltd. (GAIL) through a Global Depository Receipt offering. GAIL operates the country’s only long-distance gas pipeline, which runs from Hazira on the west coast to the country’s capital, New Delhi.
The Dabhol Power Project, located on the coast approximately 100 miles south of Mumbai in the state of Maharashtra, is Enron’s entry into India. With the financial close of the second phase of the Dabhol Power Project in May 1999, Enron has gained a pre-eminent position in the west coast natural gas market of India and is poised to launch India’s first broadband network. Here is how Enron’s India network was built:
DABHOL: THE FOUNDATION OF ENRON’S INDIA NETWORK
11
EnronOnline
No one trades energy over the Internet. ENRON ASKS WHY?
In 1999 we were able to increase our owner-
ship of Elektro Eletricidade e Serviços from 47
percent to nearly 100 percent. Elektro is Brazil’s
sixth-largest electricity distributor, serving São Paulo
State. We are leveraging Elektro’s excellent
reputation and customer reach to begin originating
individual wholesale transactions in its service
territory.
In the Caribbean in 2000, we will begin
operating EcoEléctrica, a combination 500-mega-
watt power plant and LNG receiving facility in
Puerto Rico. EcoEléctrica creates the common-
wealth’s first natural gas supply and will help
develop Enron’s global LNG business.
Enron is pursuing development opportunities
in Africa. As with all asset development, we will
proceed with infrastructure projects that will serve
strategic interests over time.
ENRON WIND CORP.
Enron provides vertically integrated wind
power solutions through Enron Wind Corp., one
of the world's largest commercial wind turbine
manufacturers. We have sold and/or developed
more than 4,300 wind turbines, comprising more
than 1,400 megawatts of capacity globally.
With the robust European wind market, an
extension of the renewable energy production
tax credit in the United States and the world's
growing environmental concern, wind power is
forecast to continue expanding at a rapid rate.
Through our manufacturing facilities in California
and Germany, a new plant currently under con-
struction in Spain and our advanced wind turbine
technologies for on- and off-shore use, Enron is
meeting increased demand for wind power.
GLOBAL TRADING OPERATION
Without Enron’s strong presence and volume in international commodity markets, it would not have the liquidity to make markets in hundreds of products, or the experience and pricing knowledge to operate throughout the world. Each trading group helps design the suite of systems that main- tains prices on the web site, while individual traders specify special product requirements. EnronOnline becomes a system for traders designed by traders. Training on EnronOnline begins in August 1999, with traders participating in global simulations to ensure a flawless launch. The first trans- action is completed at 9:52 a.m. on November 29 by the traders on the U.S. Natural Gas Central Desk.
PROJECT HEAD
In late April 1999 Enron’s head traders sense the time is right to advance to the next level of wholesale energy transactions. Louise Kitchen, then head of European Gas Trading, takes up the challenge to execute the launch of a global Internet-based commodity transaction system. Louise draws on Enron’s global network of intellectual capital to mobilize a team. Its goal is to break down geographical boundaries and connect Enron’s worldwide trading capability and customer base via the Internet, while ensuring compliance with international regulatory and cultural restrictions. For the next seven months Louise’s core team drives the development, design and implemen- tation of a web site that simplifies and expedites transactions with Enron.
EnronOnline OPERATIONS
To ensure a first-class customer experience, a dedicated operations team is created from Enron’s broad business support network. EnronOnline Operations is a global group with expertise in marketing, contract management, customer data processing and more. The immense volume of data — from the 120 different contracts to the changing of customer addresses — is maintained on a continual basis. Providing premier service to internal and external customers is the driving force behind this group, which offers 24-hour HelpDesk support in more than 140 languages to assist in the registration and transaction processes.
STRATEGY: eCOMMERCE OVER THE INTERNET IS THE NEW STANDARD FOR BUSINESS-TO-BUSINESS transactions; Enron creates EnronOnline, the first global transaction system to bring worldwide energy markets into the Internet age. Customers have complete 24-hour-a-day computer access to Enron’s prices in all Enron global wholesale markets. They can execute transactions with Enron instantly with a click of their mouse. To establish first-mover advantage, Enron’s traders set an aggressive timetable — just seven months — to launch EnronOnline. A global team of more than 350 traders, technology experts, lawyers and other Enron experts is assembled to design a secure, legally sound and easy-to-use service.
EnronOnline
12
RESULT: EnronOnline DEBUTS ON NOVEMBER 29, 1999, COMPLETING TRANSACTIONS WITH A NOTIONAL value of more than $9 billion during its first two-and-a-half months. All of the hundreds of wholesale products that Enron currently offers, ranging from Canadian natural gas and German power to weather derivatives and pulp and paper, can be transacted through EnronOnline. Customers navigate across the web site to manage their energy portfolios free of charge. Already, Enron envisions EnronOnline as a portal with much more potential. As Enron enters new markets with additional products, the scalability of EnronOnline will allow new customers to “click and transact” almost anything Enron can offer.
CREDIT/FOREIGN EXCHANGE/RISK ASSESSMENT AND CONTROL (RAC) Online transactions happen so fast and volumes can be so great that credit decisions are required on a continual basis. Therefore, automated credit and risk assessment control functions are built into the EnronOnline system. Each cus- tomer transacting on EnronOnline requires a continuously updated customer profile with credit and term limits for every product type. All transactions are automatically and instantly screened for credit approval before acceptance. Because this is a global system, Enron’s Foreign Exchange Desk quotes currency rates that are then incorporated into the commodity pricing on a real-time basis to ensure that prices reflect the underlying exchange rates. Any completed currency-related transactions flow automatically into the foreign exchange systems.
INFORMATION TECHNOLOGY (IT)
Enron, recognized as an innovative user of technology by Information Week and a leading player in the New Economy by Wired magazine, faces an unusual challenge with Enron- Online: it must ensure that prices posted by traders are up- to-the-minute and transactions can occur securely across the Internet. Chief Technology Officer Philippe Bibi mobi- lizes his global team, led by Jay Webb. It is no small feat to provide a continual stream of price updates for hundreds of products, each requiring individual design and support. IT not only ensures the smooth integration of EnronOnline into the existing IT network infrastructure but also seam- lessly connects it to the back office systems for contract settlement, risk management and commodity scheduling. Finally, IT manages the web site day to day as markets open and close across the globe.
LEGAL AND TAX
What turns a mouse click into a legally binding contract? Enron’s legal team works with the project leaders to create a framework for online transactions that meets global requirements. Legal teams in each country engineer special- ized electronic commodity trading agreements that can be accepted by the customer online. The team must deal with hundreds of legal issues and regulatory standards for each country. The tax group ensures that EnronOnline accommo- dates the statues of all international as well as domestic jurisdictions, and both teams monitor ever-changing regula- tions for eCommerce.
13
14
ENRON BROADBAND SERVICES
In a world where the Internet can’t keep up with the
demand to deliver high-bandwidth, rich media content, Enron
Broadband Services is moving boldly to establish a global plat-
form for premium broadband delivery services.
Enron Broadband Services is leveraging a pure fiber optic
domestic network with exceptional applications to make high-
bandwidth content delivery—such as video and intensive data
transfer—more efficient, cost-effective and convenient than
ever before possible.
High-bandwidth content delivery is the next level of
Internet performance and an essential platform for eCommerce.
Today, graphic-intensive rich media ads account for 1 percent of
Internet ads. By 2002, 60 percent of all Internet banner ads will
be rich media, according to Jupiter Communications, which will
heighten the demand for faster data delivery. The market for
premium broadband delivery services is expected to soar by
150 percent annually from 2000 to 2004.
We are a unique, single source for every broadband
service: a mixture of hardware, software, market-making,
finance and applications. Virtually anyone involved in
communications is a potential customer—content providers,
application developers, network carriers, Internet service
providers and corporate end-users. We are approaching this
sizable market with the same scale and scope we success-
fully bring to every single Enron business.
Three components lie at the heart of Enron
Broadband Services:
• The Enron Intelligent Network. A state-of-the-art high-
capacity fiber optic network, based on a distributed server
architecture, the Enron Intelligent Network’s global fiber and
satellite distribution and embedded software intelligence sets
it apart from other network providers. The Enron Intelligent
Network bypasses traditional fragmented and bottlenecked
public Internet routes to deliver faster, higher-quality data.
Enron’s Broadband Operating System (BOS) provides the
intelligence to the Enron Intelligent Network and connects
to all physical and software network elements.
• Bandwidth intermediation for real-time bandwidth-on-
demand. Unless it travels a dedicated network, data must pass
through a relay of several separate network operators to its
final destination. It can take months to negotiate capacity
purchases with so many parties involved. Enron can serve as a
bandwidth market-maker, buying pooling-point-to-pooling-
point bandwidth inventory that it will resell on an as-needed
basis at real-time market rates. Buyers will dramatically cut
costs by paying for only the bandwidth they use, at prices that
reflect the current market.
• Enron’s content services for managing and delivering high-
bandwidth applications. The Enron Intelligent Network and
Enron’s BOS enable a new genre of application services, called
ePowered™ Services, which transport rich media and live, stream-
ing video up to 50 times faster than the public Internet. A
carrier using Enron’s technology could transmit a broadcast-
quality five-gigabyte video file, such as a full-length movie, in
16 seconds—something that takes seven hours on a T-1 line.
Customers for ePowered Services include media and enter-
tainment, financial services, general enterprise and technology
companies.
THE ENRON INTELLIGENT NETWORK
Enron Broadband Services has gained instant credibility,
striking alliances with the biggest and brightest names in the
industry, including Lucent Technologies, Cisco Systems and
Inktomi. In a move to accelerate development of the business,
Sun Microsystems has agreed to help build out the Enron
Intelligent Network. Enron and Sun will jointly market Enron
Intelligent Network services to enterprises, software developers
and service providers.
Our history and our track record also adds credibility. We
have proven that we can make markets that others thought
impossible, such as in electricity, natural gas and pulp and paper.
We have, or have acquired, the requisite skills to develop new
types of broadband services, to market bandwidth capacity and
to launch ePowered applications. We have the intellectual capital
to build this business.
A network business model gives Enron Broadband Services
scalability and flexibility. In the United States, we own or have
contractual access to a 14,300-mile network, which is scheduled
to expand to 18,000 miles in 2001. The network connects to
every major U.S. city and soon will be linked to Tokyo and six
major European cities.
BANDWIDTH INTERMEDIATION
From this asset base, we are building a robust merchant
operation. Bandwidth intermediation opportunities are enor-
mous. Analysts predict that the market will exceed the combined
markets for electricity and natural gas. As the first-mover, Enron
is shaping this market as it emerges. We are creating the “pool-
ing points,” where data is transferred from the public Internet
to broadband fiber networks. Pooling points are to bandwidth
what Henry Hub is to gas and COB is to electricity—a city gate
uptake and download, a necessary reference point on which to
base trading.
The Internet is too slow and unreliable to support high- bandwidth content and the rich media needs of eCommerce.
ENRON BROADBAND SERVICES
15
ENRON ASKS WHY?
We completed the first bandwidth trade in December, a
monthly incremental contract for DS-3 bandwidth between New
York City and Los Angeles on a Global Crossing network. (DS-3
can move 45 megabits per second, enough for streaming video.)
We are establishing and pricing that contract as a benchmark. In
the second quarter, we will launch a second benchmark, a monthly
contract between New York and London. In 2000 we know that
bandwidth trading will gain acceptance in the market, and by
2001 we believe the market will reach critical mass.
The same skills apply to the bandwidth market as to
merchant energy services, and we have transferred some of our
most dynamic trading professionals from our North American
and European energy networks to Enron Broadband Services.
Our plans call for providing risk management products, struc-
tured finance, investment and bandwidth portfolio management
to the broadband market. We envision working with data-
dependent customers to outsource their broadband assets and
needs. As quickly as this market develops, we will introduce more
innovative products and services.
CONTENT SERVICES
Enron Broadband Services is strategically positioned where
traditional television broadcast and the web converge. Companies
want to stream entertainment and information on the Internet,
and we can make it happen. Deploying ePowered applications
over the Enron Intelligent Network, we can convey rich media
content at high quality with no delay. Using our services, media
companies can deliver broadcast-quality programming on the
web, and financial services firms can present more compelling
content. The Country Music Association used the Enron Intelligent
Network to webcast additional footage from its annual Country
Music Awards in 1999. We also facilitated a simulcast webcast of
Warner Brothers’ The Drew Carey Show last fall. Latinsoccer.net,
a premier Latin American Internet portal for soccer fans, has
selected Enron to carry live soccer matches to viewers’ desktops.
The entertainment market is only the beginning. eCommerce
looms large as a driver of demand. Not only can Enron enable
retailers to enhance their shopping sites with video, we also can
help them manage data with storing and archiving assistance. In
an information-based society, broadband services is becoming an
essential, high-growth business.
STRATEGY: ENRON ASSEMBLES A FIBER OPTIC NETWORK TO DELIVER HIGH-QUALITY RICH MEDIA content to end-users. It connects the network to the public Internet via the Enron Intelligent Network and develops the Broadband Operating System to control the network’s physical and software elements. Enron sees that bandwidth capacity can be traded as a commodity and conducts the first bandwidth trade in 1999.
16
ENRON INTELLIGENT NETWORK (EIN)
Enron acquires Modulus, the creator of InterAgent software, which adds embedded ePoweredTM intelligence to the network. The EIN’s unique hardware architecture works off a chain of servers and distributed servers to avoid the delay of sending data through multiple routers. The EIN can be accessed on demand and users pay according to use, negating the need for their own investment in high-bandwidth connectivity.
PHYSICAL NETWORKS
Enron augments its initial 1,700 miles of fiber optic cable by building, swapping and leasing additional capacity in the U.S. By early 2000, Enron has access to 14,300 route miles. To upload and download content from the Internet, the company establishes points of presence, pooling points and data centers in 30 strate- gic markets. Leasing fiber keeps capital investment to a minimum. At the same time, the unit benefits from strong sales of dark fiber and data transmission.
ENRON BROADBAND SERVICES
THE DREAM TEAM
In late 1998, Enron forms Enron Broadband Services to develop a fiber optic business. Joe Hirko, former Portland General Electric CFO, and Ken Rice, former chairman of Enron North America, are called in to capture every possible opportunity in the high-bandwidth market. They attract the industry’s leading technological minds to assemble a high-bandwidth network of superior hardware, intelligent software and innovative products and applications. They draw on talent throughout Enron to explore all possible bandwidth business opportunities.
STRATEGIC PARTNERS
Best-in-breed technology is obtained through strategic partnerships with the industry’s leaders: Cisco Systems®
routers, Sun® Microsystems servers and Ciena® dense wave division multiplexors — equipment that is unsur- passed in moving data and content. As partners, these Internet luminaries give Enron instant credibility with customers and assist in forming new relationships.
ePOWERED APPLICATIONS
The EIN moves data up to 50 times faster than current Internet speed and reduces average data latency from approximately 29 seconds to 3 seconds. Media streams on the EIN like nowhere else, and Enron capitalizes on the EIN’s speed and responsive- ness to launch unique and lucrative ePowered applications, including: • ePowered Media CastTM delivers broadcast-quality video to
the desktop. That allows the Country Music Association to simulcast additional video from its annual Country Music Awards broadcast using ePowered Media Cast.
• ePowered Media Transport speeds video content wherever it needs to go, bypassing satellite and land-based networks.
RESULT: THE ENRON INTELLIGENT NETWORK ALLOWS CONTENT AND INTERNET PROVIDERS TO TRANSPORT rich media and streaming video right to the desktop with no delay or quality reductions. Bandwidth trading permits customers to buy bandwidth capacity as needed and avoid the cost of full-time, underused capacity. Enron is accepted as an Internet innovator and strikes an alliance with Sun Microsystems to advance Enron’s Broadband Operating System as the industry standard protocol.
17
BANDWIDTH TRADING AND CONTENT SERVICES
Veteran Enron North America market-maker Tom Gros recognizes that bandwidth capacity should be bought and sold via standardized contracts, similar to the way natural gas and electricity are marketed. He brings in Jean Mrha and other experienced Enron traders and in December 1999 initiates the first-ever forward trade of bandwidth between New York and Los Angeles. By serving as a market inter- mediary, Enron reduces the cost and increases the flexibility of purchasing bandwidth capacity and helps bandwidth producers and consumers manage price and supply risks. David Cox sells services directly to content providers, such as entertainment and media companies.
• We can provide labor outsourcing for energy and facilities
management.
• We offer both our own capital and our financing capabilities
to structure and syndicate financial transactions.
Enron’s success in retail energy is not dependent on retail
energy deregulation. At the close of 1999 only 23 states were in
the process of opening electricity and natural gas markets to
competition. Enron focuses on non-regulatory opportunities,
such as improving operations and energy infrastructure, nego-
tiating utility rates, gathering and analyzing energy usage
information and managing complete facilities such as manufac-
turing plants and retail outlets. And energy consumption is not our
sole focus: Enron’s analysis of a retail customer’s energy use includes
examination of less obvious factors in the customer’s energy cost,
such as operating processes and the use of labor resources.
CUSTOMER FOCUS
Enron’s retail initiative relies heavily on the ability of our
sales teams to bring in customers, both large and small, who
never realized the potential benefit of energy outsourcing. In
1999 Sales & Marketing Management magazine named Enron
the No. 1 sales team in the United States, citing our ability to
develop customized solutions and target Fortune 500 companies.
Enron has also developed the capability to deliver energy services
that take the best from Enron’s experience in the wholesale
energy business and combine it with responsive
customer service. The result is a remarkable ability
to create value through outsourcing contracts.
Enron is augmenting the retail market with
new products and services. We compiled the first
indexes for retail electricity — the Enron Energy
Indexes — published weekly in Megawatt Daily.
These indexes, used as benchmarks for the pricing
of retail power, foster end-user energy price
transparency and are fast becoming the de facto
standard for retail pricing.
We are commited to deliver continuously
superior service to customers over the long term.
To ensure that we are serving our customers well,
we have established an interactive web-based
system to measure customer satisfaction. The
system is founded on key performance measures
set by the customer and Enron. This information
system helps us determine if other sales oppor-
tunities exist with the customer, and whether
both the customer and Enron are deriving value
from the relationship.
The engineering and technical expertise
required by Enron’s retail energy business is applic-
able across all customer segments, including food
processors, retailers, real estate investment trusts,
manufacturers and sports facilities.
RETAIL ENERGY SERVICES
Enron’s retail business surpassed our goals in 1999 when we
signed contracts representing $8.5 billion of customers’ future
energy expenditures. The unit turned profitable in the fourth
quarter, marking the end of our start-up phase. With systems and
people in place, we are set for exponential growth and sharply
increased profitability. In 2000 we expect to again double our
total contract volume to more than $16 billion.
Enron has taken the lead in a rapidly expanding $243 billion
U.S. retail energy market. With our experience, international
presence and breadth of service, Enron alone has the scale and
capability necessary to provide major customers with the quality
of service they expect. In addition to Houston headquarters staff,
Enron maintains eight U.S. district offices with 250 professionals
and manages services at 16,500 sites with 4,500 contracted
employees. This structure helps make Enron the only energy
outsourcing provider with nationwide reach.
In 1999 the retail group signed contracts with scores of
customers, including 10-year contracts with Owens Corning,
Polaroid, Simon Property Group and the U.S. Department of
Defense. Furthermore, existing contracts provide significant
upsell opportunity, as the majority of Enron’s large retail cus-
tomers recognize opportunities and request services beyond
the scope of their initial contracts.
The proposition at the heart of Enron’s retail
energy business is a simple one: energy management
is not a core business strength for most companies.
Few companies have the expertise to approach
energy strategically, and often energy infrastructure
and equipment are not adequately maintained and
updated. In addition, companies that use large
amounts of energy can realize substantial benefit
when they are able to optimize electricity and
natural gas purchases, benefiting from lower prices
and gaining protection from unpredictable price
spikes.
When energy management is outsourced to
Enron, we look at the entire energy supply chain,
identifying which equipment must be updated
or replaced, financing the cost of more efficient
equipment and using our extensive experience in
energy markets to manage the cost of the com-
modity. As a result, companies can reduce energy
expenditures and gain significant competitive
advantage in the marketplace.
Enron draws on existing businesses, resources
and experience to structure comprehensive cus-
tomer solutions and capture value throughout the
retail transaction:
• We manage the commodity supply or supply it
ourselves and manage the commodity price risk.
18
19
ENRON ENERGY SERVICES
Most companies operate undercapitalized and inefficient energy infrastructure and bear unnecessary cost and waste.
ENRON ASKS WHY?
INTERNATIONAL POTENTIAL
Enron extended its retail network to Europe in late 1999.
By building on Enron’s European wholesale network, our retail
operation is expected to achieve first-year positive earnings.
Our retail competitiveness on the Continent is enhanced by our
reputation in pan-European wholesale operations and by our
knowledge of working in individual countries. As in the United
States, it is not necessary to wait for full energy liberalization
before moving into the European retail energy market.
Enron alone has the critical mass to roll out a pan-European
network. And for our North American customers with European
facilities, we are the vendor of choice for their operations abroad.
Enron’s wholesale operations also are laying the ground-
work for the retail energy business in other regions. Mature
energy markets, such as Japan and South Korea, where Enron has
opened wholesale energy operations, have great potential for
retail business as these countries continue the trend toward
liberalization.
PROBLEM: ENERGY IS A LARGE EXPENSE AT OWENS CORNING, ONE OF THE WORLD’S LARGEST MELTERS OF glass to make fibers for insulating and reinforcement products. Owens Corning already was capitalizing on various energy management programs, including interruptible power, but was looking to further reduce its energy expenses while decreasing or eliminating the risk of losing power during peak usage.
LEAD TEAM
Harold Buchanan, managing director, and Michael Mann, vice president, lead a team of experts during the analysis, structuring and negotiations to find out all they can about Owens Corning’s operations and needs. Extensive discussion and examination of data are necessary to design the best customized solution.
CUSTOMER
Owens Corning seeks an energy partner that can reliably serve the company on a national and international basis. Enron is the only company with worldwide reach and the ability to provide a packaged solution that includes com- modity purchasing and energy equipment financing, as well as engineering and risk management. As talks progress, Owens Corning is impressed by Enron’s ability to quickly present and execute new energy solutions. Enron’s focus on environmentally beneficial energy solutions also is important to ecology-minded Owens Corning.
FINANCING
Financial engineering specialists Larry Derrett, vice presi- dent, and Clint Freeland, director, create and discard dozens of financial structures until they hit upon the right one: the formation of a jointly owned limited liability company (LLC) empowered to execute the agreement. The LLC serves as a platform for joint decision-making, shared savings and energy equipment leasing. Energy savings will offset the customer’s leasing costs. Enron arranged the financing for the transaction.
20 OWENS CORNING PARTNERS
RESULT: WITH DOZENS OF ENRON EXPERTS TACKLING THE PROBLEM, OWENS CORNING CAN EXPECT meaningful energy savings as well as improved efficiency and better power quality. Through a 10-year partner- ship valued at $1.3 billion, covering 22 U.S. Owens Corning facilities, Enron will finance and refurbish specific energy infrastructure projects and allow Owens Corning to buy energy at advantageous rates.
COMMODITY PRICE RISK MANAGEMENT
Enron will use its experience as the world’s largest marketer of electricity to effectively predict the market cost of elec- tricity using its retail electricity indexes published in Megawatt Daily. The risk management team designs a unique structure based on the indexes to protect Owens Corning from substantial price spikes that historically occur. Owens Corning is immune to day-to-day electricity price fluctuations. Enron manages the risk systematically through its large portfolio of commodity contracts.
DEAL STRUCTURING & ACCOUNT MANAGEMENT
Enron assigns point persons to oversee deal development and account management. Michael Moore, vice president of deal structuring, creates the scope, transaction compo- nents and pricing solutions covering every aspect of the deal—commodity transactions, construction management, project management, legal, tax, regulatory, accounting and more. By looking at the total picture rather than each individual piece, Owens Corning and Enron significantly increase the potential savings. After the LLC is formed, Barbara Kortes is named global account manager to provide continuing service and coordinate Enron resources for the account. She looks out for the customer’s interests and works with Owens Corning to expand the relationship to overseas facilities. Already, Enron has engineered a backup generation system for a plant in Brazil.
ENGINEERING
A team of electrical and mechanical engineers led by Cynthia Wishert evaluates Owens Corning’s energy infra- structure and proposes updating air-compression systems and steam boilers. Owens Corning is not driven to refurbish equipment because the investment does not meet its internal rate of return criteria. However, Enron’s buying power and ability to squeeze efficiencies throughout the energy supply chain enables Enron to install state-of-the-art assets and recover their cost.
21
INDEX REGION
MEGAWATT DAILY
NPCC-NEPOOL NPCC-NPP MAAC1 SERC FRCC
Primary Index
Secondary Index
Wholesale Index
0.0911 0.0808 0.0544 0.0437 0.0517
0.1062 0.0973 0.0761 0.0535 0.0569
0.0283 na 0.0237 0.0227 0.0239
ENRON RETAIL ELECTRICITY INDEXES
WITH ENRON
22
TRANSPORTATION AND DISTRIBUTION
THE GAS PIPELINE GROUP
Enron’s Gas Pipeline Group owns interests in four interstate
pipelines, operates 32,000 miles of pipelines in 21 states and
transports 15 percent of U.S. natural gas. Returns are strong and
stable from the group, which produces consistent earnings and
cash flow. In 1999 the group had income before interest and
taxes (IBIT) of $380 million, or 19 percent of Enron’s overall IBIT.
Natural gas pipelines and their storage facilities are a key
component of Enron’s energy strategy.
The Gas Pipeline Group is benefiting from the nation’s
growing demand for natural gas. Domestic gas consumption is
expected to increase to almost 30 trillion cubic feet (Tcf) per year
by 2010 from almost 23 Tcf at present. Much of that consump-
tion is driven by the use of natural gas to fuel new electricity
generation. Unlike industrial users, generators require more
flexibility and choices in gas delivery. To meet the new demands
of the market, we are expanding all systems to transport
more gas to more users, and providing those users with more
flexible choices.
Perhaps more than any other pipeline operator, Enron’s Gas
Pipeline Group helps customers respond to shifting gas markets.
Value-added products and services beyond transportation allow
us to leverage our assets, build a knowledge-based business and
keep our pipelines fully subscribed and running at capacity in the
face of increased competition. We also operate with one of the
lowest cost structures in the industry, which gives us a distinct
advantage over competitors.
The expansion of our systems has been facilitated by
Enron’s regulatory, engineering and construction skills, which
allow us to speed implementation.
The Gas Pipeline Group continues to be recognized for its
superior environmental record. For the third year running, we
won the Environmental Protection Agency’s Star Program
Transmission Partner of the Year award, the only gas transmis-
sion company to receive the award since its inception in 1997.
The Gas Pipeline Group operates four interstate pipelines
that move approximately 9.2 billion cubic feet (Bcf) of gas daily:
Northern Natural Gas
Northern Natural Gas is the largest system, with 16,463
miles of pipeline running from Texas to the Great Lakes, serving
the upper Midwest. Deliveries averaged 3.8 Bcf per day in 1999.
Since 1995, the system has increased market capacity by 10 percent.
With the proliferation of power plant development in its
market, Northern Natural Gas is responding to the distinct needs
of this new customer. Northern also continues to work with its
Midwest-based customers to actively pursue and connect increased
load requirements in this growing market by offering competitive
transportation and storage products that connect these markets
to a variety of alternative suppliers.
Transwestern Pipeline
Transwestern’s 2,487 miles of pipe have bi-directional capa-
bility, allowing customers to direct gas to the best markets.
Originating in the San Juan Basin, Transwestern can move gas
east to Texas or west to the California border. Daily delivery
averaged 1.5 Bcf in 1999.
In January 2000 Transwestern’s Gallup expansion project
was approved by the Federal Energy Regulatory Commission
(FERC). The addition of one compressor station near Gallup, New
Mexico, and two coolers at the La Plata and Blanco
Hub will increase capacity to the California border
by 140 million cubic feet per day (MMcf/d).
Florida Gas Transmission
Florida Gas Transmission, the sole interstate
natural gas pipeline serving peninsular Florida, is
the fastest growing system in North America. With
a surge in state population and demand for gas-
fired electric generation, Florida Gas Transmission
is working on two major expansions. Phase IV will
consist of pipe and compression to extend its network
to southwest Florida and add capacity of nearly 200 MMcf/d. This
project is scheduled to be in service by mid-2001. The proposed
Phase V expansion, once completed, will add approximately 400
MMcf/d of capacity and has an in-service date of 2002. The
proposal was filed in December with FERC.
The 4,795-mile pipeline had average daily capacity of 1.5 Bcf
in 1999.
Northern Border Pipeline
Northern Border Pipeline runs from the U.S./Canadian
border in Montana to Illinois, transporting approximately 23
percent of all Canadian gas imports to the U.S. The pipeline
measures 1,214 miles and averaged daily deliveries of 2.4 Bcf in
1999. The Chicago Project expansion was put in service at the
end of 1998. By interconnecting with multiple pipeline systems,
this link fundamentally changed North American markets by
establishing a new relationship between Canadian and NYMEX
gas prices. Northern Border has proposed a second expansion,
Project 2000, to connect to Northern Indiana Public Service
Company and its industrial customer base in the Midwest.
PORTLAND GENERAL ELECTRIC
In November, Sierra Pacific Resources agreed to purchase
Portland General Electric for $2.1 billion, including $2.02 billion
23
Traditional gas transportation offers little flexibility to customers.
TRANSWESTERN PIPELINE
ENRON ASKS WHY?
in cash and the assumption of Enron’s approximately $80 million
merger payment obligation. Sierra Pacific also will assume $1 billion
in PGE debt and preferred stock. The proposed transaction is
expected to conclude in late 2000.
Enron purchased the utility in 1997 to enter the Pacific
Northwest market. Through our association, we successfully
launched a merchant services operation in that region and
acquired Portland General Electric’s communications business,
which became the basis for Enron Broadband Services. The
electricity market has advanced rapidly since that time, and we
can now offer merchant energy services to customers without
owning a regulated electric utility.
24
STRATEGY: TRANSWESTERN USES ITS EXPERTISE AND ENRON’S TO FAST-TRACK CAPACITY EXPANSION to California, where natural gas demand is growing rapidly. In response to customers’ reluctance to subscribe to the new capacity under old scenarios, Transwestern Pipeline develops innovative, flexible products for the natural gas transportation market.
TRANSWESTERN OPTIMIZATION TEAM
Created to increase pipeline capacity through incremental improvements, the Optimization Team searches for ways to flow more gas without laying new pipe. To increase capacity 15 percent, Ben Asante, Ron Matthews, Terry Galassini and Dave Foti conceive an innovative two-step approach. First, the team will site a new $12 million compressor at Gallup, New Mexico, to increase pressure at the San Juan junction to 950 psig. Second, it advocates the use of two coolers, at La Plata and the Blanco Hub, to reduce the gas temperature, allowing more gas to be compressed through the pipe.
ENRON COMPRESSION SERVICESENRON COMPRESSION SERVICES
Enron provides compression services at several pipeline sites throughout North America. Enron will provide 10,000 shaft horsepower to run the Gallup compressor. By providing the service at a lower cost than Transwestern could otherwise obtain, Enron helps lower the cost of the Gallup expansion.
TRANSWESTERN GAS FLOWS TASK FORCE
Through its forecast of overall demand and supply of gas production in the U.S. and Canada, the task force anticipates that California gas demand will increase by 3.2 percent annually, mostly due to electric power generation. Customers want to ship low-cost gas from the San Juan basin in New Mexico to the California border. They sign commitments to use the proposed increase in Transwestern’s capacity because of Transwestern’s ability to offer innovative deal structures and its bi-directional flexibility to serve both California and Texas intrastate markets.
TRANSWESTERN PIPELINE’S GALLUP EXPANSION PROJECT
Planned power plants
Power plants under development
POOLING POINTS
DATA CENTERS
CONNECTIVITY
London
Toronto
Vancouver
New New OrleansNew Orleans
Stamford
Minneapolis
St. Louis Louisville
Charlotte
Cincinnati
Tampa
Miami
San Diego
Philadelphia
New York
Washington DC
Boston
Baltimore
Los Angeles
San Francisco
Waco
San AntonioSan Antonio
Austin
Lubbock
Denver
Cheyenne
Detroit
OrlandoOrlando Houston
College Station College Station
Salt Lake City
San Jose
Las Vegas
Boise
Seattle
Portland
Tacoma
Dallas
Chicago
Atlanta
Orlando
Jacksonville
ENRON OFFICES
HVAC SERVICE
FACILITY MANAGEMENT
ENERGY SYSTEM DESIGN & INSTALLATION
CUSTOMER SITES
The Enron Broadband Services Network
The Retail Network’s Portfolio of Nationwide Outsourcing Contracts
29 30
CONTENTS
31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
37 FINANCIAL RISK MANAGEMENT
39 INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
39 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
40 REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
41 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT
41 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
42 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
44 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
45 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
46 ENRON CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
62 SELECTED FINANCIAL AND CREDIT INFORMATION (UNAUDITED)
FINANCIAL REVIEW
25
RESULT: TRANSWESTERN INCREASES PIPELINE CAPACITY TO THE CALIFORNIA BORDER WITHOUT LAYING new pipe — avoiding delay, expense and rights-of-way negotiations. Capacity will increase 15 percent beginning second quarter 2000, just months after the plan is approved by federal regulators.
ENRON ENGINEERING & CONSTRUCTION COMPANYENRON ENGINEERING & CONSTRUCTION COMPANY
Enron Engineering & Construction Company (EE&CC) is the traditional provider of construction services to Transwestern. EE&CC’s familiarity with the project and Transwestern’s system allows it to set an ambitious schedule of completing construction in just four months. When completed, the Gallup expansion will add 50 MMcf/d from the San Juan basin. Overall, Transwestern’s capacity to the California border is anticipated to increase by 140 MMcf/d.
TRANSWESTERN GOVERNMENT/REGULATORY AFFAIRS
Transwestern files its expansion proposal with the Federal Energy Regulatory Commission (FERC) in May 1999. FERC approves the proposal in January 2000.
TRANSWESTERN COMMERCIAL GROUP
Transwestern creates customized products to meet the specific needs of its customers. They can purchase capacity at set prices or index the price of transportation to basin spreads. For the first time, customers can use a variety of Transwestern services to mitigate price risk.
Henry Hub
Entergy Hub
Palo Verde Hub
COB Hub
Cinergy Hub
Cuiabá Pipeline 385 miles
Santo Domingo
IGL (LPG)
Caracas
Rio de Janeiro
Gaspart Northeast 5 LDCs
CEG/CEG Rio LDCs
Gaspart South 2 LDCs
Elektro Eletricidade e Serviços
ARGENTINA Buenos Aires
Transportadora de Gas del Sur 4,104 miles
Bolivia to Brazil Pipeline 1,864 miles
Transredes 3,093 miles
Santa Cruz
Centragas 357 miles
Promigas 1,062 miles
COLOMBIA Bogotá
Pantanal Energía 150 MW 330 MW
San Juan
JAMAICA Kingston
Panamá City
Managua Corinto 70.5 MW
Puerto Quetzal 110 MW 124 MW
Guatemala City
Stockholm
Arcos de
S
London
Oslo
Portland
San Francisco
Calgary
Denver
Houston
Monterrey
Mexico City
Charleston, WV
New York City Pittsburgh
Chicago
Puerto Plata 185 MW Haina 347 MW EcoEléctrica 507 MW
San Juan Gas LDC
Progasco
ProCaribe
PUERTO RICO
São Paulo
Salvador
BRAZIL
VENEZUELA Accroven LPG
Bachaquero III
Ventane LPG Calife LDC
LNG Facility
DOMINICAN REPUBLIC
Toronto
BOLIVIA
GUATEMALA
PANAMÁ
MEXICO
Bahía Las Minas 355 MW
NICARAGUA
José LNG
INDIA
THAILAND
0˚
15˚N
30˚N
45˚N
60˚N
15˚S
30˚S
45˚S
PROJECTS OR GENERATION ASSETS IN OPERATION
POWER PLANT
ENRON-OWNED PIPELINE
LEASED PIPELINE CAPACITY
OTHER
LPG FACILITY
E&P
GAS DISTRIBUTION
ELECTRICITY DISTRIBUTION
PROJECTS OR GENERATION ASSETS IN CONSTRUCTION OR COMMISSION
POWER PLANT
PIPELINE
OTHER
LPG FACILITY
LNG FACILITY
PROJECTS OR GENERATION ASSETS IN DEVELOPMENT
POWER PLANT
PIPELINE
GAS DISTRIBUTION
LPG FACILITY
LNG FACILITY
LNG VESSEL
OTHER
ENRON WHOLESALE OFFICES
TRADING EXCHANGE
ELECTRIC GRID
GAS PROCESSING PLANTS
STORAGE FACILITIES
ENERGY PARTNERS
DAILY ENERGY MARKETING ACTIVITY (BBTUE/D)
3000 +
2000 – 3000
1000 – 2000
0 – 1000
APX
EEX
Nord Pool
h
Hainan Island 160 MW
Hanoi
SK-Enron Gas Distribution LPG Import
Beijing
Subic Bay 116 MW
GUAM Anigua Piti 80 MW
Bangkok
Dabhol-Talasari Pipeline
826 MW 1,624 MW
New Delhi
Mumbai
LNG Import
India E&P
Dubai
Muscat Gas Distribution
Project Dolphin 3 Bcf/d
Chengdu Cogen 284 MW
Sydney
MOZAMBIQUE
Johannesburg Maputo Iron & Steel Project Integrated Steel Slab Manufacturing Facility 2x2 MTPY
Benin Integrated Gas & Power Project 80 MW 20 miles
Lagos State Power Project 548 MW 90MW
RUSSIA
TURKEY
AUSTRIA
ITALY SPAIN
NIGERIA
GERMANY
NETHERLANDS
FRANCE HUNGARY
DENMARK
BELGIUM
POLAND
NORWAY FINLAND
SWEDEN
CZECH
CROATIA
U. K. IRELAND
SARDINIA
Nowa Sarzyna 116 MW
Budapest
Bucharest
Helsinki
StockholmStockholm
Warsaw
Sarlux 551 MW
Marmara 478 MW
Jertovec 240 MW
Gaza Power 136 MW
Arcos de Arcos de la Frontera 1,200 MW
Teesside Power & Gas Processing Plant
1,875 MW Wilton 154 MW
Sutton Bridge Power 790 MW
Moscow
Madrid
Frankfurt
Zurich
Milan
Amsterdam
Brussels
SWITZERLAND
LondonLondon
Zagreb
OsloOsloOslo
SLOVENIA
Pande Gas Project 378 miles
Oxford
U.A.E.
OMAN
QATAR
First Gas Power Co. Fuel Supply 30-35,000 Bbls/d
SOUTH AFRICA
SINGAPORE
INDONESIA
Jakarta
Seoul
Tokyo
SOUTH KOREA
Maputo
Oman 1.6 MM tons LNG Export
Abu Dhabi 480,000 tons LNG Export
Dabhol
PHILIPPINES Manila
Batangas110 MW
VIETNAM
CHINA
AUSTRALIA
Malaysia 2.6 MM tons LNG Export
Qinghai-Lanzhou Natural Gas Pipeline
Sichuan-Wuhan Natural Gas Pipeline
Wuhan Loop
26
A GLOBAL LOOK AT ENRON
Henry Hub
Entergy Hub
Palo Verde Hub
COB Hub
Cinergy Hub
Cuiabá Pipeline 385 miles
Santo Domingo
IGL (LPG)
Caracas
Rio de Janeiro
Gaspart Northeast 5 LDCs
CEG/CEG Rio LDCs
Gaspart South 2 LDCs
Elektro Eletricidade e Serviços
ARGENTINA Buenos Aires
Transportadora de Gas del Sur 4,104 miles
Bolivia to Brazil Pipeline 1,864 miles
Transredes 3,093 miles
Santa Cruz
Centragas 357 miles
Promigas 1,062 miles
COLOMBIA Bogotá
Pantanal Energía 150 MW 330 MW
San Juan
JAMAICA Kingston
Panamá City
Managua Corinto 70.5 MW
Puerto Quetzal 110 MW 124 MW
Guatemala City
Stockholm
Arcos de
S
London
Oslo
Portland
San Francisco
Calgary
Denver
Houston
Monterrey
Mexico City
Charleston, WV
New York City Pittsburgh
Chicago
Puerto Plata 185 MW Haina 347 MW EcoEléctrica 507 MW
San Juan Gas LDC
Progasco
ProCaribe
PUERTO RICO
São Paulo
Salvador
BRAZIL
VENEZUELA Accroven LPG
Bachaquero III
Ventane LPG Calife LDC
LNG Facility
DOMINICAN REPUBLIC
Toronto
BOLIVIA
GUATEMALA
PANAMÁ
MEXICO
Bahía Las Minas 355 MW
NICARAGUA
José LNG
INDIA
THAILAND
0˚
15˚N
30˚N
45˚N
60˚N
15˚S
30˚S
45˚S
PROJECTS OR GENERATION ASSETS IN OPERATION
POWER PLANT
ENRON-OWNED PIPELINE
LEASED PIPELINE CAPACITY
OTHER
LPG FACILITY
E&P
GAS DISTRIBUTION
ELECTRICITY DISTRIBUTION
PROJECTS OR GENERATION ASSETS IN CONSTRUCTION OR COMMISSION
POWER PLANT
PIPELINE
OTHER
LPG FACILITY
LNG FACILITY
PROJECTS OR GENERATION ASSETS IN DEVELOPMENT
POWER PLANT
PIPELINE
GAS DISTRIBUTION
LPG FACILITY
LNG FACILITY
LNG VESSEL
OTHER
ENRON WHOLESALE OFFICES
TRADING EXCHANGE
ELECTRIC GRID
GAS PROCESSING PLANTS
STORAGE FACILITIES
ENERGY PARTNERS
DAILY ENERGY MARKETING ACTIVITY (BBTUE/D)
3000 +
2000 – 3000
1000 – 2000
0 – 1000
APX
EEX
Nord Pool
h
Hainan Island 160 MW
Hanoi
SK-Enron Gas Distribution LPG Import
Beijing
Subic Bay 116 MW
GUAM Anigua Piti 80 MW
Bangkok
Dabhol-Talasari Pipeline
826 MW 1,624 MW
New Delhi
Mumbai
LNG Import
India E&P
Dubai
Muscat Gas Distribution
Project Dolphin 3 Bcf/d
Chengdu Cogen 284 MW
Sydney
MOZAMBIQUE
Johannesburg Maputo Iron & Steel Project Integrated Steel Slab Manufacturing Facility 2x2 MTPY
Benin Integrated Gas & Power Project 80 MW 20 miles
Lagos State Power Project 548 MW 90MW
RUSSIA
TURKEY
AUSTRIA
ITALY SPAIN
NIGERIA
GERMANY
NETHERLANDS
FRANCE HUNGARY
DENMARK
BELGIUM
POLAND
NORWAY FINLAND
SWEDEN
CZECH
CROATIA
U. K. IRELAND
SARDINIA
Nowa Sarzyna 116 MW
Budapest
Bucharest
Helsinki
StockholmStockholm
Warsaw
Sarlux 551 MW
Marmara 478 MW
Jertovec 240 MW
Gaza Power 136 MW
Arcos de Arcos de la Frontera 1,200 MW
Teesside Power & Gas Processing Plant
1,875 MW Wilton 154 MW
Sutton Bridge Power 790 MW
Moscow
Madrid
Frankfurt
Zurich
Milan
Amsterdam
Brussels
SWITZERLAND
LondonLondon
Zagreb
OsloOsloOslo
SLOVENIA
Pande Gas Project 378 miles
Oxford
U.A.E.
OMAN
QATAR
First Gas Power Co. Fuel Supply 30-35,000 Bbls/d
SOUTH AFRICA
SINGAPORE
INDONESIA
Jakarta
Seoul
Tokyo
SOUTH KOREA
Maputo
Oman 1.6 MM tons LNG Export
Abu Dhabi 480,000 tons LNG Export
Dabhol
PHILIPPINES Manila
Batangas110 MW
VIETNAM
CHINA
AUSTRALIA
Malaysia 2.6 MM tons LNG Export
Qinghai-Lanzhou Natural Gas Pipeline
Sichuan-Wuhan Natural Gas Pipeline
Wuhan Loop
26
A GLOBAL LOOK AT ENRON
Henry Hub
Entergy Hub
Palo Verde Hub
COB Hub
Cinergy Hub
Cuiabá Pipeline 385 miles
Santo Domingo
IGL (LPG)
Caracas
Rio de Janeiro
Gaspart Northeast 5 LDCs
CEG/CEG Rio LDCs
Gaspart South 2 LDCs
Elektro Eletricidade e Serviços
ARGENTINA Buenos Aires
Transportadora de Gas del Sur 4,104 miles
Bolivia to Brazil Pipeline 1,864 miles
Transredes 3,093 miles
Santa Cruz
Centragas 357 miles
Promigas 1,062 miles
COLOMBIA Bogotá
Pantanal Energía 150 MW 330 MW
San Juan
JAMAICA Kingston
Panamá City
Managua Corinto 70.5 MW
Puerto Quetzal 110 MW 124 MW
Guatemala City
Stockholm
Arcos de
S
London
Oslo
Portland
San Francisco
Calgary
Denver
Houston
Monterrey
Mexico City
Charleston, WV
New York City Pittsburgh
Chicago
Puerto Plata 185 MW Haina 347 MW EcoEléctrica 507 MW
San Juan Gas LDC
Progasco
ProCaribe
PUERTO RICO
São Paulo
Salvador
BRAZIL
VENEZUELA Accroven LPG
Bachaquero III
Ventane LPG Calife LDC
LNG Facility
DOMINICAN REPUBLIC
Toronto
BOLIVIA
GUATEMALA
PANAMÁ
MEXICO
Bahía Las Minas 355 MW
NICARAGUA
José LNG
INDIA
THAILAND
0˚
15˚N
30˚N
45˚N
60˚N
15˚S
30˚S
45˚S
PROJECTS OR GENERATION ASSETS IN OPERATION
POWER PLANT
ENRON-OWNED PIPELINE
LEASED PIPELINE CAPACITY
OTHER
LPG FACILITY
E&P
GAS DISTRIBUTION
ELECTRICITY DISTRIBUTION
PROJECTS OR GENERATION ASSETS IN CONSTRUCTION OR COMMISSION
POWER PLANT
PIPELINE
OTHER
LPG FACILITY
LNG FACILITY
PROJECTS OR GENERATION ASSETS IN DEVELOPMENT
POWER PLANT
PIPELINE
GAS DISTRIBUTION
LPG FACILITY
LNG FACILITY
LNG VESSEL
OTHER
ENRON WHOLESALE OFFICES
TRADING EXCHANGE
ELECTRIC GRID
GAS PROCESSING PLANTS
STORAGE FACILITIES
ENERGY PARTNERS
DAILY ENERGY MARKETING ACTIVITY (BBTUE/D)
3000 +
2000 – 3000
1000 – 2000
0 – 1000
APX
EEX
Nord Pool
h
Hainan Island 160 MW
Hanoi
SK-Enron Gas Distribution LPG Import
Beijing
Subic Bay 116 MW
GUAM Anigua Piti 80 MW
Bangkok
Dabhol-Talasari Pipeline
826 MW 1,624 MW
New Delhi
Mumbai
LNG Import
India E&P
Dubai
Muscat Gas Distribution
Project Dolphin 3 Bcf/d
Chengdu Cogen 284 MW
Sydney
MOZAMBIQUE
Johannesburg Maputo Iron & Steel Project Integrated Steel Slab Manufacturing Facility 2x2 MTPY
Benin Integrated Gas & Power Project 80 MW 20 miles
Lagos State Power Project 548 MW 90MW
RUSSIA
TURKEY
AUSTRIA
ITALY SPAIN
NIGERIA
GERMANY
NETHERLANDS
FRANCE HUNGARY
DENMARK
BELGIUM
POLAND
NORWAY FINLAND
SWEDEN
CZECH
CROATIA
U. K. IRELAND
SARDINIA
Nowa Sarzyna 116 MW
Budapest
Bucharest
Helsinki
StockholmStockholm
Warsaw
Sarlux 551 MW
Marmara 478 MW
Jertovec 240 MW
Gaza Power 136 MW
Arcos de Arcos de la Frontera 1,200 MW
Teesside Power & Gas Processing Plant
1,875 MW Wilton 154 MW
Sutton Bridge Power 790 MW
Moscow
Madrid
Frankfurt
Zurich
Milan
Amsterdam
Brussels
SWITZERLAND
LondonLondon
Zagreb
OsloOsloOslo
SLOVENIA
Pande Gas Project 378 miles
Oxford
U.A.E.
OMAN
QATAR
First Gas Power Co. Fuel Supply 30-35,000 Bbls/d
SOUTH AFRICA
SINGAPORE
INDONESIA
Jakarta
Seoul
Tokyo
SOUTH KOREA
Maputo
Oman 1.6 MM tons LNG Export
Abu Dhabi 480,000 tons LNG Export
Dabhol
PHILIPPINES Manila
Batangas110 MW
VIETNAM
CHINA
AUSTRALIA
Malaysia 2.6 MM tons LNG Export
Qinghai-Lanzhou Natural Gas Pipeline
Sichuan-Wuhan Natural Gas Pipeline
Wuhan Loop
26
A GLOBAL LOOK AT ENRON
POOLING POINTS
DATA CENTERS
CONNECTIVITY
London
Toronto
Vancouver
New New OrleansNew Orleans
Stamford
Minneapolis
St. Louis Louisville
Charlotte
Cincinnati
Tampa
Miami
San Diego
Philadelphia
New York
Washington DC
Boston
Baltimore
Los Angeles
San Francisco
Waco
San AntonioSan Antonio
Austin
Lubbock
Denver
Cheyenne
Detroit
OrlandoOrlando Houston
College Station College Station
Salt Lake City
San Jose
Las Vegas
Boise
Seattle
Portland
Tacoma
Dallas
Chicago
Atlanta
Orlando
Jacksonville
ENRON OFFICES
HVAC SERVICE
FACILITY MANAGEMENT
ENERGY SYSTEM DESIGN & INSTALLATION
CUSTOMER SITES
The Enron Broadband Services Network
The Retail Network’s Portfolio of Nationwide Outsourcing Contracts
29 30
CONTENTS
31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
37 FINANCIAL RISK MANAGEMENT
39 INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
39 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
40 REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
41 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT
41 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
42 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
44 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
45 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
46 ENRON CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
62 SELECTED FINANCIAL AND CREDIT INFORMATION (UNAUDITED)
FINANCIAL REVIEW
25
RESULT: TRANSWESTERN INCREASES PIPELINE CAPACITY TO THE CALIFORNIA BORDER WITHOUT LAYING new pipe — avoiding delay, expense and rights-of-way negotiations. Capacity will increase 15 percent beginning second quarter 2000, just months after the plan is approved by federal regulators.
ENRON ENGINEERING & CONSTRUCTION COMPANYENRON ENGINEERING & CONSTRUCTION COMPANY
Enron Engineering & Construction Company (EE&CC) is the traditional provider of construction services to Transwestern. EE&CC’s familiarity with the project and Transwestern’s system allows it to set an ambitious schedule of completing construction in just four months. When completed, the Gallup expansion will add 50 MMcf/d from the San Juan basin. Overall, Transwestern’s capacity to the California border is anticipated to increase by 140 MMcf/d.
TRANSWESTERN GOVERNMENT/REGULATORY AFFAIRS
Transwestern files its expansion proposal with the Federal Energy Regulatory Commission (FERC) in May 1999. FERC approves the proposal in January 2000.
TRANSWESTERN COMMERCIAL GROUP
Transwestern creates customized products to meet the specific needs of its customers. They can purchase capacity at set prices or index the price of transportation to basin spreads. For the first time, customers can use a variety of Transwestern services to mitigate price risk.
POOLING POINTS
DATA CENTERS
CONNECTIVITY
London
Toronto
Vancouver
New New OrleansNew Orleans
Stamford
Minneapolis
St. Louis Louisville
Charlotte
Cincinnati
Tampa
Miami
San Diego
Philadelphia
New York
Washington DC
Boston
Baltimore
Los Angeles
San Francisco
Waco
San AntonioSan Antonio
Austin
Lubbock
Denver
Cheyenne
Detroit
OrlandoOrlando Houston
College Station College Station
Salt Lake City
San Jose
Las Vegas
Boise
Seattle
Portland
Tacoma
Dallas
Chicago
Atlanta
Orlando
Jacksonville
ENRON OFFICES
HVAC SERVICE
FACILITY MANAGEMENT
ENERGY SYSTEM DESIGN & INSTALLATION
CUSTOMER SITES
The Enron Broadband Services Network
The Retail Network’s Portfolio of Nationwide Outsourcing Contracts
29 30
CONTENTS
31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
37 FINANCIAL RISK MANAGEMENT
39 INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
39 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
40 REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
41 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT
41 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
42 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
44 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
45 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
46 ENRON CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
62 SELECTED FINANCIAL AND CREDIT INFORMATION (UNAUDITED)
FINANCIAL REVIEW
25
RESULT: TRANSWESTERN INCREASES PIPELINE CAPACITY TO THE CALIFORNIA BORDER WITHOUT LAYING new pipe — avoiding delay, expense and rights-of-way negotiations. Capacity will increase 15 percent beginning second quarter 2000, just months after the plan is approved by federal regulators.
ENRON ENGINEERING & CONSTRUCTION COMPANYENRON ENGINEERING & CONSTRUCTION COMPANY
Enron Engineering & Construction Company (EE&CC) is the traditional provider of construction services to Transwestern. EE&CC’s familiarity with the project and Transwestern’s system allows it to set an ambitious schedule of completing construction in just four months. When completed, the Gallup expansion will add 50 MMcf/d from the San Juan basin. Overall, Transwestern’s capacity to the California border is anticipated to increase by 140 MMcf/d.
TRANSWESTERN GOVERNMENT/REGULATORY AFFAIRS
Transwestern files its expansion proposal with the Federal Energy Regulatory Commission (FERC) in May 1999. FERC approves the proposal in January 2000.
TRANSWESTERN COMMERCIAL GROUP
Transwestern creates customized products to meet the specific needs of its customers. They can purchase capacity at set prices or index the price of transportation to basin spreads. For the first time, customers can use a variety of Transwestern services to mitigate price risk.
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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
(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
(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 dilut-
ed 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
(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 primar- ily a result of higher earnings from Northern Border Pipeline and EOTT reflecting Northern Border Pipeline’s expansion project and greater vol- umes 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
(a) Represents the period from July 1, 1997 through December 31, 1997.
Revenues and purchased power and fuel costs increased $183 mil- lion 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 whole- sale 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
(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 oppor- tunities enable the Gas Pipeline Group to continue to be a strong, effi- cient 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 nat- ural 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 pro- posed 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 whole- sale energy businesses around the world, as well as its emerging broad- band 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 net- works 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
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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 over- all liquidity. In doing so, Enron Wholesale uses portfolio and risk man- agement disciplines, including offsetting or hedging transactions, to man- age 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 for- ward contracts. This market-making activity includes the purchase, sale, marketing and delivery of natural gas, electricity, liquids and other com- modities, as well as the management of Enron Wholesale’s own portfo- lio 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 commodi- ties 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
(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 success- fully 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 sys- tem, EnronOnline, which allows wholesale customers to view Enron’s real time pricing and to complete commodity transactions with Enron as prin- cipal, 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 transac- tion levels during the period. Sales in North America increased signifi- cantly 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 invest- ments 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 uti- lize 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 Serviços S.A. (Elektro), a Brazilian electric utility (see Note 2 to the Consolidated Financial Statements) and assets in various other develop- ing 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 net- work, 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 inter- ests in certain energy assets including power projects in Puerto Rico, Turkey, Italy and the United Kingdom, from which Enron Wholesale real- ized 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 imple- ment deregulation or privatization plans. The market for broadband ser- vices 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 combi- nation 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 trans- action 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 opportu- nities related to its assets and investments, including sales or restructur- ings 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 construc- tion 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 signifi- cant and which are impacted by market conditions, the regulatory envi- ronment 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 expect- ed 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 associat- ed 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 mate- rial 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 organiza- tions in South America, Mexico and Canada.
Energy Services provides natural gas, electricity, liquids and other commodities to industrial and commercial customers located through- out 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 regu- lated 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 cus- tomer 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 conduct- ed by Enron Oil & Gas Company (EOG). The operating results of this seg- ment 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.
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Corporate and Other
Corporate and Other includes results of Azurix Corp., which pro- vides 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 off- set 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 own- ership 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 pre- ferred 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 Jacaré 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 Jacaré beginning January 1, 1999, major- ity-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 rec- ognize 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 mate- rial 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 earn- ings 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 inter- ests 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 expen- ditures 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 total- ing $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 major- ity-owned limited partnerships, partially offset by payments of $467 mil- lion 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 pay- ments 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 compa- nies 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 mil- lion 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 invest- ments 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 disposi- tions 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.
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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 primar- ily 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 provi- sions 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 invest- ment 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.
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 com- mitments. 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 parame- ters 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 commo- dity 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 com- modity 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 own- ing 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 provid- ing 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 pri- mary 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 invest- ments operations of Enron Wholesale, which provides capital to cus- tomers 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 methodolo- gies. The quantification of market risk using value at risk provides a con- sistent 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 peri- od for liquidation and the treatment of risks outside the value at risk methodologies, including liquidity risk and event risk. Value at risk rep- resents an estimate of reasonably possible net losses in earnings that would be recognized on its investments assuming hypothetical move- ments 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 virtual- ly all of Enron’s financial assets and liabilities. Value at risk incorporates numerous variables that could impact the fair value of Enron’s invest- ments, including commodity prices, interest rates, foreign exchange rates, equity prices and associated volatilities, as well as correlation with- in 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 sig- nificant portion of the exposure related to option positions. The value at risk for equity exposure discussed above is based on J.P. Morgan’s RiskMetrics™ 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, sub- jectivity in the choice of liquidation period and reliance on historical data to calibrate the models, Enron relies on value at risk as only one compo- nent 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 -
(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 pri- marily 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.
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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 state- ments 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 band- width applications, transaction volumes in the U.S. power market, com- mencement of commercial operations of new power plants and pipeline projects and growth in the demand for retail energy outsourcing solu- tions. When used in this document, the words "anticipate," "believe," "estimate," "expect," "intend," "may," "project," "plan," "should" and similar expressions are intended to be among the statements that iden- tify forward-looking statements. Although Enron believes that its expec- tations reflected in these forward-looking statements are based on rea- sonable assumptions, such statements involve risk 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 tim- ing 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 interna- tional 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 dur- ing 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 obli- gations.
Management’s Responsibility for Financial Reporting
The following financial statements of Enron Corp. and subsidiaries (collectively, Enron) were prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and necessari- ly include some amounts that are based on the best estimates and judg- ments of management.
The system of internal controls of Enron is designed to provide rea- sonable assurance as to the reliability of financial statements and the protection of assets from unauthorized acquisition, use or disposition. This system is augmented by written policies and guidelines and the careful selection and training of qualified personnel. It should be recog- nized, however, that there are inherent limitations in the effectiveness of any system of internal control. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to the preparation of reliable financial statements and safeguarding of assets. Further, because of changes in conditions, internal control system effec- tiveness may vary over time.
Enron assessed its internal control system as of December 31, 1999, 1998 and 1997, relative to current standards of control criteria. Based upon this assessment, management believes that its system of internal controls was adequate during the periods to provide reasonable assur- ance as to the reliability of financial statements and the protection of assets against unauthorized acquisition, use or disposition.
Arthur Andersen LLP was engaged to audit the financial statements of Enron and issue reports thereon. Their audits included developing an overall understanding of Enron’s accounting systems, procedures and internal controls and conducting tests and other auditing procedures sufficient to support their opinion on the financial statements. Arthur Andersen LLP was also engaged to examine and report on manage- ment’s assertion about the effectiveness of Enron’s system of internal controls. The Reports of Independent Public Accountants appear in this Annual Report.
The adequacy of Enron’s financial controls and the accounting prin- ciples employed in financial reporting are under the general oversight of the Audit Committee of Enron Corp.’s Board of Directors. No member of this committee is an officer or employee of Enron. The independent public accountants have direct access to the Audit Committee, and they meet with the committee from time to time, with and without financial management present, to discuss accounting, auditing and financial reporting matters.
Reports of Independent Public Accountants
To the Shareholders and Board of Directors of Enron Corp.:
We have examined management’s assertion that the system of internal control of Enron Corp. (an Oregon corporation) and subsidiaries as of December 31, 1999, 1998 and 1997 was adequate to provide rea- sonable assurance as to the reliability of financial statements and the protection of assets from unauthorized acquisition, use or disposition, included in the accompanying report on Management’s Responsibility for Financial Reporting. Management is responsible for maintaining effective internal control over the reliability of financial statements and the protection of assets against unauthorized acquisition, use or dispo- sition. Our responsibility is to express an opinion on management’s assertion based on our examination.
Our examinations were made in accordance with attestation stan- dards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the system of internal control, testing and evaluating the design and operating effectiveness of the system of internal control and such other procedures as we considered necessary in the circumstances. We believe that our examinations provide a reasonable basis for our opinion.
Because of inherent limitations in any system of internal control, errors or fraud may occur and not be detected. Also, projections of any evaluation of the system of internal control to future periods are subject to the risk that the system of internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assertion that the system of internal control of Enron Corp. and its subsidiaries as of December 31, 1999, 1998 and 1997 was adequate to provide reasonable assurance as to the relia- bility of financial statements and the protection of assets from unau- thorized acquisition, use or disposition is fairly stated, in all material respects, based upon current standards of control criteria.
Arthur Andersen LLP
Houston, Texas March 13, 2000
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 man- agement. 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 esti- mates 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
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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
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 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
The accompanying notes are an integral part of these consolidated financial statements.
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December 31, 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
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)
The accompanying notes are an integral part of these consolidated financial statements.
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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
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 gener- ally accepted accounting principles requires management to make esti- mates 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 opera- tions are managed by their respective officers.
Cash Equivalents
Enron records as cash equivalents all highly liquid short-term invest- ments 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 differ- ences between financial statement carrying amounts of assets and lia- bilities 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 trad- ing 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 out- sourcing 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 clos- ing 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 man- ner 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 manage- ment 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 explo- ration 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.
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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 pro- ject development costs are otherwise expensed in the period that man- agement 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 genera- tion, 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 environmen- tal assessments and/or clean-ups are probable and the costs can be rea- sonably 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 associ- ated 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 trans- lated at year-end rates of exchange and revenue and expenses are trans- lated at average exchange rates prevailing during the year. For sub- sidiaries 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 trans- action gains and losses are recorded in income.
Reclassifications
Certain reclassifications have been made to the consolidated finan- cial 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) com- mon 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 consoli- dated financial statements within the Wholesale Energy Operations and Services segment following the exchange and sale.
In August 1998, Enron, through a wholly-owned subsidiary, com- pleted the acquisition of a controlling interest in Elektro Eletricidade e Serviços S.A. (Elektro), an electricity distributor in Brazil, for approxi- mately $1.3 billion. Enron’s interest in Elektro is held by Jacaré Electrical Distribution Trust (Jacaré) and was initially accounted for using the equi- ty method based on temporary control. In December 1998, Enron finan- cially closed the Elektro financial restructuring, reducing its interest in Jacaré to 51%. Following the decision by Enron to acquire additional interests in Elektro, Enron consolidated Jacaré effective January 1, 1999. Jacaré’s balance sheet at that date consisted of net assets of approxi- mately $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 approxi- mately $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 approx- imately 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 genera- tion, 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
(a) Excludes amounts related to the 1998 acquisition of Elektro prior to the consolidation of Jacaré.
If the PGC and EPP acquisitions had occurred at the beginning of 1997, Enron’s 1997 consolidated revenues would have been $20,950 mil- lion, 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 cus- tomary 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 contrac- tual arrangements. Interest rate risks and foreign currency risks associat- ed 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
(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 instru- ments. 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
(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 instru- ments, 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 sig- nificantly minimize overall credit risk. These policies include an evalua- tion of potential counterparties’ financial condition (including credit rat- ing), 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
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minimizes this credit exposure using monetization of its contract port- folio 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
(a) “Investment Grade” is primarily determined using publicly available credit ratings along with consideration of collateral, which encompass standby letters of credit, parent com- pany 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 coun- terparties 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, respec- tively, 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 bil- lion 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 con- tracts will expire in 2000.
Credit Risk. While notional amounts are used to express the volume of various financial instruments, the amounts potentially subject to cred- it risk, in the event of nonperformance by the third parties, are substan- tially 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 utili- ty and oil and gas exploration and production industries. These concen- trations 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 vari- able-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 – esti- mated fair values have been determined using available market data and valuation methodologies. Judgment is necessarily required in inter- preting 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 invest- ments 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
(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 pri- marily 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 pay- ments, 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 mer- chant 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 manage- ment’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 mil- lion, $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 statu- tory 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
(a) Includes $118 million and $(26) million in other current liabilities for 1999 and 1998, respectively.
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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 oper- ating loss carryforward 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 approxi- mately $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 contribut- ed 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, L JM 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 com- mon 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 Jacaré 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 uncom- mitted lines of credit totaling $225 million at December 31, 1999. The uncommitted lines have no stated expiration dates. Neither compensat- ing 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 outstand- ing 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 Jacaré 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 con- solidated 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 part- nership 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 Jacaré 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
(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 unconsoli- dated 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
(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.
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(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
(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 wastewa- ter 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 approximate- ly $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 restruc- turing 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 div- idends 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 deter- mined 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 December 31, Value share 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
(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
(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 approxi- mately 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 con- tracts 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 accor- dance with APB Opinion 25, no compensation expense has been recog- nized 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 offi- cers, 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 grant- ed 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.
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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 non- contributory defined benefit plan covering substantially all employees in the United States and certain employees in foreign countries. The bene- fit 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 employ- ees. 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 individu- al 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 com- prised primarily of equity securities, fixed income securities and tempo- rary 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 obli- gations 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 fund- ed status of the plans and components of the expense recognized relat- ed to Enron’s pension and other postretirement plans:
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
(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 Outstanding Contractual Exercise Exercisable Exercise
Range of 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
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
(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 combi- nation 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 determi- nation 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 opera- tions 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 mil- lion 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 commit- ment 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 implement- ed a rate escalation of settled transportation rates in accordance with its May 1995 global settlement, as amended in May 1996.
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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 consid- ering 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 appropri- ate 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 numer- ous gas purchase contracts with Intratex, many of which have terminat- ed. 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 neg- ligent 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 vio- lated 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 con- sider Enron’s appeal of the class certification. The Enron Defendants deny the Plaintiffs’ claims and have asserted various affirmative defens- es, including the statute of limitations. The Enron Defendants believe that they have strong legal and factual defenses, and intend to vigor- ously 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 result- ed in fatalities, bodily injuries and damage to the building and sur- rounding property. San Juan Gas Company, Inc. (San Juan), an Enron sub- sidiary, 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 migra- tion 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 dis- trict of Puerto Rico and the Superior Court of Puerto Rico. These suits, which seek damages for wrongful death, personal injury, business inter- ruption 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 assur- ances 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 unde- preciated 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 undepre- ciated 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 allow- ing 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 ref- erendum 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, pur- suant 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 prede- cessor owned the site, and that Enron’s predecessor assumed the liabili- ties of the company that operated the plant. Enron contests these alle- gations. 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 sub- mitted 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, accord- ing 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 responsi- ble 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 ground water 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 ven- ture 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, includ- ing commodity charges on actual quantities shipped, totaled $55 mil- lion, $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 lease- back 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 mil- lion at December 31, 1999, including $427 million related to EOTT trade obligations. The EOTT letters of credit and guarantees of trade obliga- tions 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.
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16 RELATED PARTY TRANSACTIONS
In June 1999, Enron entered into a series of transactions involving a third party and L JM Cayman, L.P. (L JM). L JM 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 L JM’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) L JM received 6.8 million shares of Enron common stock subject to certain restrictions and (iii) Enron received a note receivable and certain finan- cial instruments hedging an investment held by Enron. Enron recorded the assets received and equity issued at estimated fair value. In connec- tion with the transactions, L JM 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. L JM repaid the note receivable in December 1999.
L JM2 Co-Investment, L.P. (L JM2) 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, L JM2, which has the same general partner as L JM, acquired, directly or indirectly, approximately $360 million of mer- chant assets and investments from Enron, on which Enron recognized pre-tax gains of approximately $16 million. In December 1999, L JM2 entered into an agreement to acquire Enron’s interests in an unconsoli- dated equity affiliate for approximately $34 million. Additionally, L JM 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 lim- ited 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 mer- chant assets from Enron. Enron recognized no gains or losses in connec- tion with these transactions.
Management believes that the terms of the transactions with relat- ed 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 pre- viously-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 consid- ering 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 requir- ing 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 rec- ognized 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 docu- ment, 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 quanti- fied the effect on its hedging activities or physical based contracts.
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 avail- able and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources to an indi- vidual 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 perfor- mance and allocates resources based on income before interest, minori- ty 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 seg- ments, 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, natu- ral 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 sec- tors, 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
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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
(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.
61
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
(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.
Selected Financial and Credit Information (Unaudited)
The following review of the credit characteristics of Enron Corp. and its subsidiaries and affiliates should be read in conjunction with the Consolidated Financial Statements. The credit information that follows represents management’s calculation of certain key credit ratios of Enron.
(In millions) 1999 1998 Source Total Obligations Balance sheet debt (short- and long-term) $ 8,152 $ 7,357 Balance Sheet
Items added to liability profile: Accounts receivable sales(a) - 202 Guarantees(b) 180 96 Note 15 Residual value guarantees of synthetic leases 715 1,039 Note 15 Net liability from price risk management activities(c) - 87 Balance Sheet Debt exchangeable for EOG Resources, Inc. shares(d) (239) - Note 7 Debt of unconsolidated equity affiliates(e) - - Note 9 Firm transportation obligations(f) - - Note 15
Total Obligations $ 8,808 $ 8,781
Shareholders’ Equity and Certain Other Items Shareholders’ Equity $ 9,570 $ 7,048 Balance sheet
Items added to shareholders’ equity: Minority interests 2,430 2,143 Balance Sheet, Note 8 Company-obligated preferred securities of subsidiaries 1,000 1,001 Balance Sheet, Note 10
Total Shareholders’ Equity and Certain Other Items $13,000 $10,192
Funds Flow from Operations Net cash provided by operating activities $ 1,228 $ 1,640 Cash Flow Statement
Add back: Changes in working capital (1,000) (233) Cash Flow Statement Funds Flow from Operations $ 2,228 $ 1,873
Interest and Estimated Lease Interest Expense Interest incurred $ 710 $ 616 Capitalized interest (54) (66) Management’s Discussion and Analysis Interest and Related Charges, net $ 656 $ 550 Income Statement
Estimated Lease Interest Expense(g) $ 124 $ 125
Adjusted Earnings for Credit Analysis Income before interest, minority interests and income taxes $ 1,995 $ 1,582 Income Statement
Adjustments to IBIT: Gain on sales of assets and investments (541) (82) Cash Flow Statement Impairment of long-lived assets 441 - Cash Flow Statement Distributions in excess of (less than) earnings of unconsolidated equity affiliates 173 (10) Note 9 Estimated lease interest expense(g) 124 125
Total Adjusted Earnings for Credit Analysis $ 2,192 $ 1,615
Key Credit Ratios Funds flow interest coverage(h) 3.67 3.53 Pretax interest coverage(i) 2.63 2.18 Funds flow from operations/Total obligations 25.3% 21.3% Total obligations/Total obligations plus Total
shareholders’ equity and certain other items 40.4% 46.3% Debt/Total capital(j) 38.5% 41.9%
(a) Accounts receivable sold under agreements to provide financing to meet seasonal working capital needs. (b) Management estimates Enron’s risk adjusted exposure on uncollateralized guarantees is approximately 10% of the total nominal value of the guarantees issued. (c) Excess of price risk management liabilities over price risk management assets. (d) Enron expects to extinguish this obligation by delivering shares of EOG Resources, Inc. stock. (e) Debt of unconsolidated equity affiliates is non-recourse and therefore is excluded from Enron’s obligations. ( f ) Firm transportation obligations are excluded, as contracted capacity has market value. (g) Management estimates Enron’s lease interest expense for the year based on the average minimum lease payment or commitment (excluding principal repayments and other items). (h) Calculated as funds flow from operations plus interest incurred and estimated lease interest expense, divided by interest incurred and estimated lease interest expense. ( i ) Calculated as total adjusted earnings divided by interest incurred and estimated lease interest expense. ( j ) Total capital includes debt, minority interests, company-obligated preferred securities of subsidiaries and shareholders’ equity.
62
CORPORATE HEADQUARTERS
Enron Corp. 1400 Smith Street Houston, TX 77002 Tel: (713) 853-6161 www.enron.com
WHOLESALE ENERGY BUSINESSES
North America
Enron North America Corp. Calgary, Canada Charleston, West Virginia Chicago, Illinois Denver, Colorado Houston, Texas Mexico City, Mexico Monterrey, Mexico New York, New York Pittsburgh, Pennsylvania Portland, Oregon San Francisco, California Toronto, Canada
Europe
Enron Europe, Ltd. Amsterdam, The Netherlands Brussels, Belgium Bucharest, Romania Budapest, Hungary Frankfurt, Germany Helsinki, Finland London, United Kingdom* Madrid, Spain Milan, Italy Moscow, Russia Oslo, Norway Stockholm, Sweden Warsaw, Poland Zurich, Switzerland *Corporate headquarters in Europe
South America, Latin America and Caribbean Basin
Bogotá, Colombia Buenos Aires, Argentina Caracas, Venezuela Kingston, Jamaica Managua, Nicaragua Nivel, Guatemala Panamá City, Panamá Rio de Janeiro, Brazil San Juan, Puerto Rico Santa Cruz, Bolivia Santo Domingo, Dominican Republic São Paulo, Brazil
Africa, Middle East and Asia
Anigua, Guam Bangkok, Thailand Beijing, China Dubai, United Arab Emirates Hanoi, Vietnam Jakarta, Indonesia Manila, Philippines Maputo, Mozambique Mumbai, India
New Delhi, India Sandton, South Africa Seoul, Korea Singapore Sydney, Australia Tokyo, Japan
ENRON BROADBAND SERVICES
Houston, Texas Portland, Oregon
RETAIL ENERGY SERVICES
Enron Energy Services, LLC Burlington, Massachusetts Costa Mesa, California Hinsdale, Illinois Houston, Texas Norcross, Georgia Philadelphia, Pennsylvania San Ramon, California
TRANSPORTATION AND DISTRIBUTION
Enron Transportation & Storage Minneapolis, Minnesota Omaha, Nebraska
Portland General Electric Company Portland, Oregon
ENRON WIND CORP.
North America
Tehachapi, California
Europe
Alborg, Denmark Athens, Greece London, United Kingdom Madrid, Spain Salzbergen, Germany Stockholm, Sweden
ENRON OFFICES
63
ROBERT A. BELFER (1, 3)
New York, New York Chairman, Belco Oil & Gas Corp.
NORMAN P. BLAKE, JR. (3, 4)
Memphis, Tennessee CEO and Secretary General, United States Olympic Committee, and Former Chairman, President and CEO, Promus Hotel Corporation
RONNIE C. CHAN (2, 3)
Hong Kong Chairman, Hang Lung Development Company Limited
JOHN H. DUNCAN (1*, 4)
Houston, Texas Former Chairman of the Executive Committee of Gulf & Western Industries, Inc.
JOE H. FOY (1, 2)
Houston, Texas Retired Senior Partner, Bracewell & Patterson, and Former President and COO, Houston Natural Gas Corp.
64
WENDY L. GRAMM (2, 5)
Washington, D.C. Former Chairman, U.S. Commodity Futures Trading Commission
KEN L. HARRISON Portland, Oregon Former Chairman and CEO, Portland General Electric Company
ROBERT K. JAEDICKE (2*, 4)
Stanford, California Professor of Accounting (Emeritus) and Former Dean, Graduate School of Business, Stanford University
KENNETH L. LAY (1)
Houston, Texas Chairman and CEO, Enron Corp.
CHARLES A. LEMAISTRE (1, 4*)
San Antonio, Texas President Emeritus, University of Texas M.D. Anderson Cancer Center
BOARD OF DIRECTORS
65
REBECCA MARK-JUSBASCHE Houston, Texas Chairman and CEO, Azurix Corp.
JOHN MENDELSOHN (2, 5)
Houston, Texas President, University of Texas M.D. Anderson Cancer Center
JEROME J. MEYER (3, 5)
Wilsonville, Oregon Chairman, Tektronix, Inc.
PAULO V. FERRAZ PEREIRA(2, 3)
Rio de Janeiro, Brazil President and CEO, Meriodinal Financial Group, and Former President and CEO, State Bank of Rio de Janerio, Brazil
FRANK SAVAGE (3, 4)
Stamford, Connecticut Chairman, Alliance Capital Management International (a division of Alliance Capital Management L.P.)
JEFFREY K. SKILLING (1)
Houston, Texas President and COO, Enron Corp.
JOHN A. URQUHART (3)
Fairfield, Connecticut Senior Advisor to the Chairman, Enron Corp., President, John A. Urquhart Associates, and Former Senior Vice President of Industrial and Power Systems, General Electric Company
JOHN WAKEHAM (2, 5*)
London, England Former U.K. Secretary of State for Energy and Leader of the Houses of Lords and Commons
HERBERT S. WINOKUR, JR. (1, 3*)
Greenwich, Connecticut Chairman and CEO, Capricorn Holdings, Inc., and Former Senior Executive Vice President, Penn Central Corporation
(1) Executive Committee (2) Audit Committee (3) Finance Committee (4) Compensation Committee (5) Nominating Committee * Denotes Chairman
FROM LEFT TO RIGHT: Charles A. LeMaistre, Ronnie C. Chan, Herbert S. Winokur, Jr., Paulo V. Ferraz Pereira, Kenneth L. Lay, Jeffrey K. Skilling, Norman P. Blake, Jr., Wendy L. Gramm, John Mendelsohn, Robert A. Belfer, John Wakeham, Robert K. Jaedicke, John H. Duncan, Joe H. Foy, Ken L. Harrison, Jerome J. Meyer, Rebecca Mark- Jusbasche, Frank Savage and John A. Urquhart.
JIM BANNANTINE Co-Chairman & Chief Executive Officer, Enron South America
CLIFF BAXTER Chairman & Chief Executive Officer, Enron North America
SANJAY BHATNAGAR Chief Executive Officer, Enron India
RICK BUY Executive Vice President & Chief Risk Officer, Enron Corp.
RICK CAUSEY Executive Vice President & Chief Accounting Officer, Enron Corp.
DIOMEDES CHRISTODOULOU Co-Chairman & Chief Executive Officer, Enron South America
JIM DERRICK Executive Vice President & General Counsel, Enron Corp.
ANDY FASTOW Executive Vice President & Chief Financial Officer, Enron Corp.
PEGGY FOWLER President, Portland General Electric Company
MARK FREVERT Chairman & Chief Executive Officer, Enron Europe, Ltd.
KEVIN HANNON Chief Operating Officer, Enron Broadband Services
KEN HARRISON Chief Executive Officer, Portland General Electric Company
DAVID HAUG Chairman & Chief Executive Officer, Enron Caribbean, Enron Middle East, Enron Global LNG
JOE HIRKO Chief Executive Officer, Enron Broadband Services
STAN HORTON Chairman & Chief Executive Officer, Enron Gas Pipeline Group
KURT HUNEKE Chief Executive Officer, Global Asset Operations, Enron Corp.
LARRY IZZO President & Chief Executive Officer, Enron Engineering & Construction Company
STEVE KEAN Executive Vice President & Chief of Staff, Enron Corp.
MARK KOENIG Executive Vice President, Investor Relations, Enron Corp.
KEN LAY Chief Executive Officer & Chairman of the Board, Enron Corp.
REBECCA MARK–JUSBASCHE Chairman & Chief Executive Officer, Azurix Corp.
MIKE MCCONNELL Chief Executive Officer, Global Technology, Enron Corp.
REBECCA MCDONALD Chairman & Chief Executive Officer, Enron Asia Pacific, Africa & China
JEFF MCMAHON Executive Vice President, Finance and Treasurer, Enron Corp.
MARK METTS Executive Vice President, Corporate Development, Enron Corp.
CINDY OLSON Executive Vice President, Human Resources & Community Relations, Enron Corp.
LOU PAI Chairman & Chief Executive Officer, Enron Energy Services, LLC
KEN RICE Chief Commercial Officer, Enron Broadband Services
JEFF SHERRICK President & Chief Executive Officer, Enron Global Exploration & Production
JOHN SHERRIFF President, Enron Europe, Ltd.
JEFF SKILLING President & Chief Operating Officer, Enron Corp.
JOE SUTTON Vice Chairman, Enron Corp.
GREG WHALLEY President & Chief Operating Officer, Enron North America
TOM WHITE Vice Chairman, Enron Energy Services, LLC
TRANSFER AGENT, REGISTRAR, DIVIDEND PAYING AND REINVESTMENT PLAN AGENT (DIRECTSERVICE PROGRAM) First Chicago Trust Company, a division of EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 (800) 519-3111 (201) 324-1225 TDD: (201) 222-4955 For direct deposit of dividends only, call: (800) 870-2340 Internet address: http://www.equiserve.com
1999 ANNUAL REPORT This Annual Report and the statements con- tained herein are submitted for the general information of the shareholders of Enron Corp. and are not intended for use in connection with or to induce the sale or purchase of securities.
ADDITIONAL INFORMATION Enron Corp.’s Annual Report to shareholders and Form 10-K report to the Securities and Exchange Commission are available upon request on Enron’s Internet address http://www.enron.com For information regarding specific shareholder questions, write or call the Transfer Agent.
Financial analysts and investors who need additional information should contact: Enron Corp. Investor Relations Dept. P.O. Box 1188, Suite 4926B Houston, TX 77251-1188 (713) 853-3956 Enron’s Internet address: http://www.enron.com
ANNUAL MEETING OF SHAREHOLDERS The Annual Meeting of Shareholders will be held in Houston, Texas, in the LaSalle Ballroom of the Doubletree Hotel at Allen Center, 400 Dallas Street, on Tuesday, May 2, 2000, at 10 a.m. Information with respect to this meeting is contained in the Proxy Statement sent with this Annual Report to holders of record of Enron Corp.’s Common Stock and the Cumulative Second Preferred Convertible Stock on March 3, 2000. The 1999 Annual Report is not to be con- sidered a part of the proxy soliciting material.
DIVIDEND REINVESTMENT The Transfer Agent offers holders of Enron Corp. Common Stock the opportunity to reinvest part or all of their dividends in the purchase of addi- tional shares of Common Stock by participating in the DirectSERVICE Program for Shareholders of Enron Corp. This program gives almost every- one the opportunity to purchase additional shares of Common Stock without paying a bro- kerage commission. Anyone wishing to partici- pate in the program may, upon timely applica- tion, reinvest some, all, or none of the cash divi- dends paid on their Common Stock, or make optional cash payments of as little as $25, after an initial investment of $250 for new sharehold- ers, with a limit of $120,000 per calendar year. Direct requests for further information to: DirectSERVICE Program for Shareholders of Enron Corp. c/o First Chicago Trust Company, a division of EquiServe P.O. Box 2598 Jersey City, NJ 07303-2598 Shareholders may call: (800) 519-3111 Non-shareholders requests for program materials: (800) 662-7662 Internet address: http://www.equiserve.com TDD: (201) 222-4955
SHAREHOLDER INFORMATION
ENRON EXECUTIVE COMMITTEE
66
OUR VALUES COMMUNICATION We have an obligation to communicate. Here, we
take the time to talk with one another… and to
listen. We believe that information is meant to
move and that information moves people.
RESPECT We treat others as we would like to be treated
ourselves. We do not tolerate abusive or disrespectful
treatment. Ruthlessness, callousness and arrogance
don’t belong here.
INTEGRITY We work with customers and prospects openly,
honestly and sincerely. When we say we will do
something, we will do it; when we say we cannot
or will not do something, then we won’t do it.
EXCELLENCE We are satisfied with nothing less than the very best
in everything we do. We will continue to raise the
bar for everyone. The great fun here will be for all
of us to discover just how good we can really be.
CONTENTS
1 FINANCIAL HIGHLIGHTS
2 LETTER TO SHAREHOLDERS
6 WHOLESALE ENERGY BUSINESS
14 ENRON BROADBAND SERVICES
18 RETAIL ENERGY SERVICES
22 TRANSPORTATION AND DISTRIBUTION
26 A GLOBAL LOOK AT ENRON (MAPS)
30 FINANCIAL REVIEW
63 ENRON OFFICES
64 BOARD OF DIRECTORS
66 EXECUTIVE COMMITTEE
66 SHAREHOLDER INFORMATION
67 OUR VALUES
ENRON operates networks throughout the world to develop and enhance energy and broadband communication services. Networks, unlike vertically integrated business structures, facilitate the flow of information and expertise. We can spot market signals faster and respond more quickly. Networks empower individuals, freeing them to craft innovative and substantive solutions to customer problems. Networks are the foundation of our knowledge-based businesses, and they provide exceptional returns and value for our shareholders.
On the front and back covers: Five of the 13 Chairman’s Roundtable members of 1999 and the winner of the 1999 Chairman’s Award, Bobbye Brown (far left on front cover).The Chairman’s Award, which includes the selection of Chairman’s Roundtable members, is an annual, employee-driven program that recognizes Enron’s everyday heroes — people who make a difference by living our values of communication, integrity, respect and excellence in everything they do.
1400 Smith Street
Houston, Texas 77002-7361
www.enron.com
ENRON ANNUAL REPORT 1999
E N
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©2000 Enron Corp. Enron and the Enron logo are registered trademarks and Endless possibilities, ePowered, ePowered Media Cast, ePowered Media Transport and EnronOnline are trademarks of Enron Corp. or one of its subsidiaries. Other company, product and service names may be trademarks of others.
®
- Financial Highlights
- Letter to the Shareholders
- Wholesale Energy Business
- Enron Broadband Services
- Retail Energy Energy Services
- Transportation and Distribution
- A Global Look at Enron (Maps)
- Financial Review
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Financial Risk Management
- Information Regarding Forward-Looking Statements
- Management's Responsibility for Financial Reporting
- Reports of Independent Public Accountants
- Enron Corp. and Subsidiaries Consolidated Income Statement
- Enron Corp. and Subsidiaries Consolidated Statement of Comprehensive Income
- Enron Corp. and Subsidiaries Consolidated Balance Sheet
- Enron Corp. and Subsidiaries Consolidated Statement of Cash Flows
- Enron Corp. and Subsidiaries Consolidated Statement of Changes in Shareholders' Equity
- Enron Corp. and Subsidiaries Notes to the Consolidated Financial Statements
- Selected Financial and Credit Information (Unaudited)
- Enron Offices
- Board of Directors
- Executive Committee
- Our Values
1
EE-446 MEMS (Microelectromechanical Systems), Spring 2020, Homework #3. 1.(12’) Thermal oxide growth of Si in high temperature (>1000°C) is shown in Figure 1. The chemical reaction is: 22 SiOOSi The atomic weights of Si and O are 28 and 16 separately. That is, every 28 grams Si reacts with 32 grams of O2 to generate 60 grams of SiO2. The density of Si and SiO2 are given as: Density of silicon: 33 /1033.2 mkgSi , Density of SiO2: 33 /102.22 mkgSiO . The surface area of silicon wafer is 1XY cm2, where “XY” are the last two digits of your student ID. For example, if your student ID is 1234567, then the silicon wafer surface area is 167 cm2. Assume tSi µm thickness of silicon is consumed during the oxidation process. 1). What is the total mass of Si consumed during oxidation? Using above chemical reaction and atomic weights data, find out the mass of the generated SiO2. 2). Using the density of SiO2, find out the thickness tox of the generated SiO2 layer. 3). Find out the ratio of tSi/tox. (Note: Your results in 1) and 2) may contain constants A and tSi.)
Figure 1. Thermal oxidation of silicon wafer
2. (25’) The anisotropic etching profile of (100) silicon wafer in KOH solution is shown in Figure 2.
Figure 2. Anisotropic etching profile of (100) silicon wafer in KOH solution
Assume you are going to fabrication a MEMS silicon membrane for pressure sensor using KOH etching, as shown in Figure 3. The thickness of the (100) wafer is 4XYμm, where “XY” are the last two digits of your student ID. For example, if your student ID is 1234567, then the silicon wafer thickness is 467μm. You are going to use SiO2 as etching mask. The width of the membrane is W1=80μm. The thickness of the membrane is t=10μm. (1) What is the etching depth you need to etch down the bare Si wafer to get the Si membrane (t=10μm)? (2) What is the width (W2) of the window in SiO2 you need to open in the bottom side? (3) Assume you are going to use 40% KOH solution in temperature of 60°C. For this condition, the KOH etching rate for (100) silicon is 19.9μm/hr, the KOH etching rate for SiO2 is 76nm/hr. What is the etching time you need to etch the wafer to get the membrane? What is the minimum thickness of SiO2 you need as etching mask to protect the wafer during the whole etching process?
2
(4). Assume (100) silicon wafer has initial native oxide layer of 0.06µm (thickness). For (100) Si wafer at T=1100 oC, wet oxidation: A=0.1827µm, B=0.5289µm2/hr. If we use this Si wafer to perform wet oxidation at T=1100 oC to get the minimum SiO2 thickness we need in step (3), how long should we perform the wet oxidation for the silicon wafer?
(a). SEM photo of Si membrane (b). cross-sectional view (upside-down)
Figure 3. Silicon membrane by KOH wet etching 3. (14’) 1). What are the ten basic steps of photolithography? (Names only, no need for explanation). 2). What is PVD and what is CVD for thin film deposition? List the names of four methods used to evaporate the source material in evaporation process for thin film deposition. (Names only, no need for explanation.) List ONE example chemical reaction you can use for CVD of polysilicon thin film deposition and its temperature needed. List TWO example chemical reactions you can use for CVD of SiO2 thin film deposition and its temperature needed. 3). What are the requirements for a successful silicon-glass anodic bonding? What is the difference between bulk-micromachining and surface-micromachining? 4. (12’) 1). Both surface-micromachining and Silicon-on-Glass (SoG) bulk-micromachining can make free-standing movable microstructures on substrate, but they use different ways to ensure the movable microstructure to be free-standing. How would they achieve this differently? 2). The term “mask” is used with different context in microfabrication literature. Explain briefly the following concepts (2~3 sentences for each concept): i). photolithography mask. ii). etching mask. iii). oxidation mask. iv). implantation mask. 3). What are lag effect and loading effect of DRIE process? Please explain the reasons for them. 5. (16’) A bulk-micromachined silicon-on-glass MEMS accelerometer is shown in Figure 4. The device can sense the acceleration perpendicular to the device plane. The central silicon mass is supported by four beams connected to the frame. If there is acceleration (a) along perpendicular direction, the central mass experiences an inertial force and the beams bend. Hence the gap between the central movable mass and bottom Al electrode on glass substrate will change, which in turn leads to the capacitance change. By measuring the capacitance change, the acceleration can be derived. The cross sectional view of the accelerometer is shown in Figure 4(b). 1). Use the cross sectional view, draw the fabrication flow chart of the device to show how the device is fabricated step by step using individual microfabrication processes. You can use the example in our slides for reference.
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2). For the fabrication of this device, totally four times of photolithography steps are required: 3 times for silicon structure, and one time for aluminum bottom electrode. Assume positive photoresist is used, can you roughly sketch the patterns of four photolithography masks to be used?
(a). Top view of the accelerometer (b). cross sectional view of the accelerometer
Figure 4. A silicon-on-glass bulk-micromachined MEMS accelerometer 6.(16’) A surface-micromachined poly-Si MEMS bridge structure is shown in Figure 5. The accelerometer is fabricated with poly-silicon surface-micromachining technology. Poly-Si microbridge is connected to both poly-Si anchors which are anchored to the Si wafer substrate covered with a thin layer of 0.25µm Si3N4 film. The thickness of Si wafer is 400µm. The thickness of poly-Si layer is 2µm. The gap between free standing microbridge and the substrate is 3µm. The cross-sectional view of the structure is shown in Figure 6. (1). Draw the cross sectional view of the surface-micromachining fabrication flow chart for the MEME microbridge step by step, as shown in the class. Also show the thickness of each thin film layer in the flow chart clearly. (2). The top view of the microbridge is shown in Figure 5(b). You need two photolithography steps in the fabrication of the microbridge: one for patterning the anchors and one for patterning the poly-Si microbridge structure. Each photolithography process needs a photolithography mask to define the pattern you want. Assume positive photoresist is used, try to design the photolithography masks for each photolithography step. (Note: You need to sketch the shapes of your mask design, shade the dark region and leave the transparent region as blank).
(a). 3D view (b). Top view
Figure 5. Structure diagram of a poly-Si
anchor anchor bridge
Si
Si3N4
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Figure 6. Cross section view of Si MEMS microbridge
7.(15’) A surface-micromachined MEMS comb gyroscope developed by UC Berkeley in 1996 is shown in Figure 7.
Figure 7. A surface-micromachined MEMS comb vibratory gyroscope
1). Sketch the simplified spring-mass model of the gyroscope, and briefly explain its working principle. Please clearly mark the direction of driving vibration and sensing vibration of the gyroscope. What are the actuation technique and sensing technique used (names only, no need for explanation)? What force (name only, no need for explanation) is used to sense the angular velocity? Why do we need to match the resonant frequencies of the driving vibration and sensing vibration modes of the gyroscope? 2). Assume the mass of the sensing mass as M. The system experience an angular velocity Ω (in unit of rad/sec) along Z direction. In the driving vibration mode, the sensing mass is activated into vibration along X direction with displacement
)sin()( tAtx d , where amplitude Ad=40μm, ω=2π×600 rad/sec, t is time.
i). Find out the velocity of the mass dt
tdxtv )()( =?
ii). Assume sensing mass M=0.2μg, input angular velocity Ω=1X°/sec=1X∙ (π/180) rad/sec, where X is the last digit of your student ID. For example, if your student ID is 1234567, then Ω=17°/sec=17∙ (π/180) rad/sec. What is the Coriolis force Fc(t) experienced by the sensing mass? Which direction is the Coriolis force along? Will the sensing mass be activated to vibrate along the direction of the Coriolis force? iii). If the total spring constant of the sensing beams is Ksens=0.2N/m, find out the resulted displacement ys(t) of the sensing vibration along Y direction. (Hint: ys(t)=Fc(t)/Ksens)
8. (15’) A 2×2 binary reflective MEMS optical switch fabricated with SOI (Silicon-on-Insulator) wafers and RIE (Reactive Ion Etching) technique is shown in Figure 8. Assume capacitance gap between movable and left/right fixed finger as d=2µm, device thickness t=80µm, number of
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comb finger groups N=80, overlap length between movable and fixed fingers: Lov=80µm, the width Wb, length Lb and thickness tb of each beam are 1µm, 2XYµm and 80µm respectively, where “XY” are the last two digits of your student ID. For example, if your student ID is 1234567, then your beam length is Lb=267µm. The Young’s modulus of Si material is E=1.7×1011Pa. Dielectric constant of air is ε=8.85×10-12F/m. (Hint: Please refer to single-side comb driving in our MEMS structure slides). 1). Find the spring constant of each beam section Kb1=? 2). Are two beams connected in parallel or in series? Find the total spring constant of the whole device Ktot=? 3). In order to turn the optical switch from “OFF” to “ON”, the mirror needs to move away from cross-over point by 30µm. To achieve this, what is the required DC driving voltage applied between the movable and fixed comb fingers Vd=? 4). If we want to build a 128×128 (128 input fibers, 128 output fibers) switch network, how many such optical switches do we need? Large number of switches may reduce the yield and increase the cost for complex switch network. Can you suggest a better solution which can reduce the required number of optical switches? How many optical switches would you need then?
Figure 8. A 2×2 binary reflective MEMS optical switch element
Due on 04/20/2020, Monday in class.
Enron Annual Report 2000 En
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Enron manages efficient, flexible networks to reliably deliver physical products at predictable prices. In 2000 Enron used its networks to deliver a record amount of physical natural gas, electricity, bandwidth capacity and other products. With our networks, we can significantly expand our
existing businesses while extending our services to new markets with enormous potential for growth.
CONTENTS
1 FINANCIAL HIGHLIGHTS
2 LETTER TO SHAREHOLDERS
9 ENRON WHOLESALE SERVICES
14 ENRON ENERGY SERVICES
16 ENRON BROADBAND SERVICES
18 ENRON TRANSPORTATION SERVICES
20 FINANCIAL REVIEW
53 OUR VALUES
54 BOARD OF DIRECTORS
56 ENRON CORPORATE POLICY COMMITTEE
56 SHAREHOLDER INFORMATION
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(Unaudited: in millions, except per share data) 2000 1999 1998 1997 1996
Revenues $100,789 $ 40,112 $ 31,260 $ 20,273 $ 13,289
Net income: Operating results $ 1,266 957 698 515 493 Items impacting comparability (287) (64) 5 (410) 91
Total $ 979 893 703 105 584
Earnings per diluted common share: Operating results $ 1.47 1.18 1.00 0.87 0.91 Items impacting comparability (0.35) (0.08) 0.01 (0.71) 0.17
Total $ 1.12 1.10 1.01 0.16 1.08
Dividends paid per common share $ 0.50 0.50 0.48 0.46 0.43
Total assets $ 65,503 33,381 29,350 22,552 16,137
Cash from operating activities (excluding working capital) $ 3,010 2,228 1,873 276 742
Capital expenditures and equity investments $ 3,314 3,085 3,564 2,092 1,483
NYSE price range High $ 90 9⁄16 44 7⁄8 29 3⁄8 22 9⁄16 23 3⁄4 Low 41 3⁄8 28 3⁄4 19 1⁄16 17 1⁄2 17 5⁄16 Close December 31 83 1⁄8 44 3⁄8 28 17⁄32 20 25⁄32 21 9⁄16
FINANCIAL HIGHLIGHTS
S&P 500
Enron
Ten Years
S&P 500
Enron
Five Years
CUMULATIVE TOTAL RETURN (through December 31, 2000)
383%
1,415%
350%
129%
S&P 500
Enron
One Year
(9%) 89%
REVENUES
20.3 31.3
40.1
100.8
99 0099 00
OPERATING RESULTS
Income ($ in millions)
($ in billions) Earnings Per Diluted Share
(in dollars)
957 1.18
1.471,266
00999897
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Enron has built unique and strong businesses
that have tremendous opportunities for growth.
These businesses — wholesale services, retail energy
services, broadband services and transportation
services — can be significantly expanded within
their very large existing markets and extended
to new markets with enormous growth potential.
At a minimum, we see our market opportunities
company-wide tripling over the next five years.
Enron is laser-focused on earnings per share,
and we expect to continue strong earnings per-
formance. We will leverage our extensive business
networks, market knowledge and logistical exper-
tise to produce high-value bundled products for an
increasing number of global customers.
Competitive Advantages
Our targeted markets are very large and are
undergoing fundamental changes. Energy deregu-
lation and liberalization continue, and customers
are driving demand for reliable delivery of energy
at predictable prices. Many markets are experienc-
ing tighter supply, higher prices and increased
volatility, and there is increasing interdependence
within regions and across commodities. Similarly,
the broadband industry faces issues of overcapacity
and capital constraint even as demand increases for
faster, flexible and more reliable connectivity. Enron
is in a unique position to provide the products and
services needed in these environments. Our size,
experience and skills give us enormous competitive
advantages. We have:
• Robust networks of strategic assets that we own
or have contractual access to, which give us
greater flexibility and speed to reliably deliver
widespread logistical solutions.
• Unparalleled liquidity and market-making abilities
that result in price and service advantages.
• Risk management skills that enable us to offer
reliable prices as well as reliable delivery.
• Innovative technology such as EnronOnline to
deliver products and services easily at the lowest
possible cost.
These capabilities enable us to provide high-
value products and services other wholesale service
providers cannot. We can take the physical compo-
nents and repackage them to suit the specific needs
of customers. We treat term, price and delivery as
variables that are blended into a single, compre-
hensive solution. Our technology and fulfillment
systems ensure execution. In current market envi-
ronments, these abilities make Enron the right
company with the right model at the right time.
TO OUR SHAREHOLDERS Enron’s performance in 2000 was a success by any measure, as we continued to
outdistance the competition and solidify our leadership in each of our major businesses. In our largest business, wholesale services, we experienced an enormous increase of 59 percent in physical energy deliveries. Our retail energy business achieved its highest level ever of total contract value. Our newest business, broadband services, significantly accelerated transaction activity, and our oldest business, the interstate pipelines, registered increased earnings. The company’s net income reached a record $1.3 billion in 2000.
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wholesale services income before interest, minority
interests and taxes (IBIT) increased 72 percent to $2.3
billion. Over the past five years, as physical volumes
have increased, wholesale IBIT has grown at a com-
pounded average annual rate of 48 percent, and we
have had 20 consecutive quarters of year-over-year
growth. We have established core wholesale busi-
nesses in both natural gas and power in North
America and Europe, where we are market leaders.
In North America, we deliver almost double
the amount of natural gas and electricity than the
second tier of competitors. Our network of 2,500
delivery points provides price advantages, flexibility
and speed-to-market in both natural gas and power.
Natural gas, our most developed business, has seen
substantial volume growth throughout the United
States and Canada. In 2000 our physical natural gas
volumes were up 77 percent to 24.7 billion cubic feet
per day (Bcf/d). Physical power volumes were up 52
percent to 579 million megawatt-hours (MWh).
We are building a similar, large network in
Europe. In 2000 we marketed 3.6 Bcf/d of natural gas
and 53 million MWh in this market, a vast increase
over 1999. As markets open, we tenaciously pursue
the difficult, early deals that break ground for
subsequent business. We are the only pan-European
player, and we are optimizing our advantage to
conduct cross-border transactions.
We are extending Enron’s proven business
approach to other markets, and integrating
EnronOnline into all our businesses as an accelera-
tor. Our growth rates are rising in areas such as
metals, forest products, weather derivatives and coal.
We expect these businesses to contribute to earnings
even more significantly in 2001.
Enron Energy Services
Our retail unit is a tremendous business that
experienced a break-out year in 2000. We signed
contracts with a total value of $16.1 billion of cus-
tomers’ future energy expenditures, almost double
the $8.5 billion signed in 1999. We recorded increas-
ing positive earnings in all four quarters in 2000, and
the business generated $103 million of recurring IBIT.
Energy and facilities management outsourcing is
The Astonishing Success of EnronOnline
In late 1999 we extended our successful busi-
ness model to a web-based system, EnronOnline.
EnronOnline has broadened our market reach,
accelerated our business activity and enabled us
to scale our business beyond our own expectations.
By the end of 2000, EnronOnline had executed
548,000 transactions with a notional value of $336
billion, and it is now the world’s largest web-based
eCommerce system.
With EnronOnline, we are reaching a greater
number of customers more quickly and at a lower
cost than ever. It’s a great new business generator,
attracting users who are drawn by the site’s ease of
use, transparent, firm prices and the fact that they
are transacting directly with Enron. In 2000 our
total physical volumes increased significantly as a
direct result of EnronOnline.
EnronOnline has enabled us to scale quickly,
soundly and economically. Since its introduction,
EnronOnline has expanded to include more than
1,200 of our products. It also has streamlined our
back-office processes, making our entire operation
more efficient. It has reduced our overall transaction
costs by 75 percent and increased the productivity
of our commercial team by five-fold on average.
We are not sitting still with this important new
business tool — in September 2000 we released
EnronOnline 2.0, which added even more customer
functionality and customization features and
attracted more customers.
Enron Wholesale Services
The wholesale services business delivered
record physical volumes of 51.7 trillion British
thermal units equivalent per day (TBtue/d) in 2000,
compared to 32.4 TBtue/d in 1999. As a result,
left page: Jeffrey K. Skilling President and CEO
right page: Kenneth L. Lay Chairman
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businesses and offer viewers at home an additional
convenient way to choose and receive entertain-
ment. Enron provides the wholesale logistical services
that bridge the gap between content providers and
last-mile distributors. Full-length movies-on-demand
service has been successfully tested in four U.S.
metropolitan markets.
Enron Transportation Services
The new name for our gas pipeline group accu-
rately reflects a cultural shift to add more innovative
customer services to our efficient pipeline operation.
To serve our customers more effectively, we are
increasingly incorporating the web into those rela-
tionships. Customers can go online to schedule nomi-
nations and handle inquiries, and they can transact
for available capacity on EnronOnline. The pipelines
continued to provide strong earnings and cash flow
in 2000. Demand for natural gas is at a high in the
United States, and we’re adding capacity to take
advantage of expansion opportunities in all markets.
New capacity is supported by long-term contracts.
Strong Returns
Enron is increasing earnings per share and
continuing our strong returns to shareholders.
Recurring earnings per share have increased
steadily since 1997 and were up 25 percent in
2000. The company’s total return to shareholders
was 89 percent in 2000, compared with a negative
9 percent returned by the S&P 500. The 10-year
return to Enron shareholders was 1,415 percent
compared with 383 percent for the S&P 500.
Enron hardly resembles the company we were
in the early days. During our 15-year history, we have
stretched ourselves beyond our own expectations.
now a proven concept, and we’ve established a
profitable deal flow, which includes extensions of
contracts by many existing customers. Price volatility
in energy markets has drawn fresh attention to our
capabilities, increasing demand for our services. No
other provider has the skill, experience, depth and
versatility to offer both energy commodity and
price risk management services, as well as energy
asset management and capital solutions. In 2001
we expect to close approximately $30 billion in
new total contract value, including business from
our newest market, Europe.
Enron Broadband Services
We have created a new market for bandwidth
intermediation with Enron Broadband Services. In
2000 we completed 321 transactions with 45 coun-
terparties. We are expanding our broadband inter-
mediation capabilities to include a broad range of
network services, such as dark fiber, circuits, Internet
Protocol service and data storage. Our opportunities
are increasing commensurately.
Part of the value we bring to the broadband
field is network connectivity — providing the
switches, the network intelligence and the inter-
mediation skills to enable the efficient exchange
of capacity between independent networks. We
operate 25 pooling points to connect independent
third-parties — 18 in the United States, six in
Europe and one in Japan. At least 10 more are
scheduled to be completed in 2001.
Enron also has developed a compelling
commerical model to deliver premium content-on-
demand services via the Enron Intelligent Network.
Content providers want to extend their established
WHOLESALE SERVICES – PHYSICAL VOLUMES (trillion British thermal units equivalent per day)
51.7
32.4
27.3
Other Electricity Natural Gas
98 99 00
16.1
8.5
3.8
ENRON ENERGY SERVICES – VALUE OF CONTRACTS ORIGINATED ($ in billions)
98 99 00
We have metamorphosed from an asset-based
pipeline and power generating company to a
marketing and logistics company whose biggest
assets are its well-established business approach
and its innovative people.
Our performance and capabilities cannot be
compared to a traditional energy peer group. Our
results put us in the top tier of the world’s corpora-
tions. We have a proven business concept that is
eminently scalable in our existing businesses and
adaptable enough to extend to new markets.
As energy markets continue their transforma-
tion, and non-energy markets develop, we are
poised to capture a good share of the enormous
opportunities they represent. We believe wholesale
gas and power in North America, Europe and Japan
will grow from a $660 billion market today to a
$1.7 trillion market over the next several years.
Retail energy services in the United States and
Europe have the potential to grow from $180 billion
today to $765 billion in the not-so-distant future.
Broadband’s prospective global growth is huge —
it should increase from just $17 billion today to
$1.4 trillion within five years.
Taken together, these markets present a $3.9
trillion opportunity for Enron, and we have just
scratched the surface. Add to that the other big
markets we are pursuing — forest products, metals,
steel, coal and air-emissions credits — and the
opportunity rises by $830 billion to reach nearly
$4.7 trillion.
Our talented people, global presence, finan-
cial strength and massive market knowledge have
created our sustainable and unique businesses.
EnronOnline will accelerate their growth. We plan
to leverage all of these competitive advantages to
create significant value for our shareholders.
Kenneth L. Lay
Chairman
Jeffrey K. Skilling
President and
Chief Executive Officer
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ENRON BROADBAND SERVICES – 2000 BANDWIDTH TRANSACTIONS
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59
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391380
351
ENRON TRANSPORTATION SERVICES REPORTED INCOME BEFORE INTEREST AND TAXES ($ in millions)
98 99 00 4Q3Q2Q1Q
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When customers do business with Enron, they get our commitment to reli- ably deliver their product at a predictable price, regardless of the market condition.
This commitment is possible because of Enron’s unrivaled access to markets and liquidity. We manage flexible net- works with thousands of delivery points, giving us multiple options and a distinct service advantage.
Our extensive daily market activity keeps us on top of price movements, so we can manage our customers’ price risk. We offer a multitude of predictable pric- ing options.
Market access and information allow Enron to deliver comprehensive logistical solutions that work in volatile markets or markets undergoing fundamental changes, such as energy and broadband.
This core logistical capability led to our best year ever in 2000 because physi- cal volumes drive our wholesale profits. We see ample opportunities for further volume growth in existing and new mar- kets. Enron’s ability to deliver is the one constant in an increasingly complex and competitive world.
Enron blends these four elements together to deliver premium logistical solutions.
>>
In Volatile Markets, EVERYTHING CHANGES BUT US
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Knowledgeable Pricing • Enron’s market activity captures massive
amounts of pricing information. • Pricing information helps Enron effectively
manage its customers’ price risk and its own.
• Enron allows customers to choose the optimal way to set a predictable price.
Technology Advantages • Information systems quickly distribute
real-time information. • EnronOnline extends Enron’s reach to
increase volumes and market share. • Enron’s sophisticated systems track
prices, register exposures and monitor customer credit.
Scalable Fulfillment • EnronOnline integrates seamlessly into
delivery fulfillment systems, reducing transaction costs.
• Existing systems scale readily as volumes increase.
• Standardized legal and tax compliance speed business.
• Systematic risk assessment and control protect Enron.
Extensive Market Networks • Enron manages large, flexible networks
of assets, contracts and services that provide unrivaled liquidity.
• Liquidity allows Enron to move products in and out of markets so it can maximize opportunity and margins.
• Because it has broad physical access, Enron reliably executes contracts.
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created liquidity on a scale never seen before. It is a
dynamic business accelerator: It took nearly a
decade for Enron’s daily gas transactions to reach
13.9 Bcf in 1999. Just 12 months later, EnronOnline
had helped to practically double daily transactions
to 24.7 Bcf.
EnronOnline magnifies the success of our
existing business, which springs from the scale and
scope of our established networks. We touch more
parts of North America’s energy system than any
other merchant, with access to upwards of 2,500
distinct delivery points each day. The widespread
delivery options and possibilities of our network
give us a price and service advantage. Our networks
and presence in nationwide energy markets also
enable us to capture and distribute massive amounts
of information about real-time market supply and
demand, grid constraints and bottlenecks. When
the market moves, we are able to conduct business
while competitors are still fact-finding.
Our people also make a difference. We are
able to attract the best and the brightest and place
them in an entrepreneurial atmosphere in which
they can thrive. With our intellectual capital, we
develop premium high-margin structured products
that draw on our liquidity and market knowledge.
A good example is the gas-marketing-services hub
in Chicago we launched with People’s Energy in
March 2000. Known as Enovate, this venture opti-
mizes People’s 30 Bcf a year of Chicago-area storage
capacity and related transportation. It played a role
in increasing our gas volumes in the central United
States by 156 percent, the largest increase in our
2000 North American physical volumes.
We continually assess the necessity of adding
or owning assets in a region. Sometimes it is less
expensive to own an asset than to replicate the
asset in the market through contracting and mar-
ket-making. We are developing generation plants
to sell merchant power to high-demand markets,
including proposed facilities in California, Florida,
Texas, Louisiana and Georgia. But as liquidity
increases, asset ownership may no longer be neces-
sary. We plan to sell Houston Pipe Line Company,
and Louisiana Resources Company is now held by
Bridgeline Holdings, L.P., a joint venture in which
Enron retains an interest. Additionally, in the second
quarter of 2001 we expect to close the sale of five
of the six electricity peaking generation units in
operation. The result is the same earnings power
with less invested capital.
Mexico’s move toward liberalizing its energy
markets should gain intensity and speed with its
new government. Increased cross-border electricity
transactions between Mexico and the United States
seem inevitable. Our activities in Mexico seek to
ENRON WHOLESALE SERVICES
Wholesale services is Enron’s largest and fastest
growing business, with sustainable growth oppor-
tunities in each of its markets. In 2000 income before
interest, minority interests and taxes (IBIT) rose 72
percent to $2.3 billion, with record physical energy
volumes of 51.7 trillion British thermal units equiv-
alent per day (TBtue/d) — a 59 percent increase
over 1999.
For the past five years, wholesale services
earnings have grown at an average compounded
growth rate of 48 percent annually, and our com-
petitive position is growing stronger. Customers
transact with Enron because we offer products and
services few others can match. With our flexible
networks and unique capabilities in risk manage-
ment and finance, we deliver the widest range of
reliable logistical solutions at predictable prices.
Enron delivers more than two times the natural
gas and power volumes as does its nearest energy
marketing competitor. Our formidable lead comes
from our willingness to enter markets early and
serve as a market-maker to build liquidity and price
transparency. Breakthrough technology applications,
such as EnronOnline, accelerate our market penetra-
tion. These competitive advantages have made us
the most successful energy marketer in the two
largest deregulating energy markets, North America
and Europe. We expect to achieve a similar leader-
ship position as we extend our business approach
to new regions, products and industries.
Our business has flourished with EnronOnline.
Launched in November 1999, EnronOnline handled
548,000 transactions in 2000 with a gross notional
value of $336 billion. EnronOnline is unquestionably
the largest web-based eCommerce site in the world
and dwarfs all other energy marketing web sites
combined. By the fourth quarter of 2000, it account-
ed for almost half of Enron’s transactions over all
business units. EnronOnline has pushed productivity
through the roof: Transactions per commercial person
rose to 3,084 in 2000 from 672 in 1999. EnronOnline
Version 2.0, launched in September 2000, has attract-
ed more users with its additional functionality (see
“EnronOnline” next page).
Enron North America
In North America, Enron’s physical natural gas
volumes increased 77 percent to 24.7 billion cubic
feet per day (Bcf/d) in 2000 from 13.9 Bcf/d in 1999.
Power deliveries increased 52 percent to 579 million
megawatt-hours (MWh) from 381 million MWh the
year before.
EnronOnline has been a runaway success in
North America. It accounted for 74 percent of
North American volume transacted in 2000, and
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optimize both the Mexican electricity market and
cross-border activity between the two countries.
Enron also is active in South America, where
we own and develop assets to help create an
energy network.
Enron Europe
We are rapidly extending Enron’s market-
making approach into the deregulating European
markets, focusing on the U.K., the Continent and
the Nordic region. The Continent is still in the early
stages of liberalization. Although the European
Union has mandated liberalization of the power and
natural gas markets, each country is responding at
its own pace. The velocity of transactions is rising on
the Continent, however, and Enron expects to raise
the level of liquidity to make the markets work.
Our business throughout Europe is growing
rapidly. Natural gas and power volumes more than
doubled to 10.3 trillion British thermal units equiv-
alent per day (TBtue/d) in 2000 from 4.1 TBtue/d in
1999. We enjoy several competitive advantages in
Europe: We are the only pan-European player; we
have a proven business strategy; we entered the
market early to build a presence; and we have
attracted a talented and skilled local workforce.
Our cross-border capabilities are becoming
increasingly important as markets interconnect.
U.K. gas can now be transported to Belgium, and
subsequently to the rest of the Continent, giving us
the opportunity to develop innovative transactions
on both sides of the border. The resulting increase
in price volatility has nearly doubled U.K. gas prices,
which, along with more volatile electricity prices
ahead, has significantly improved demand for the
U.K. risk management products we offer, both now
and over the long term.
Just as in North America, EnronOnline is
increasing Enron’s reach and volumes in Europe
and is a prime driver of liquidity. Its simple con-
tracts, multi-currency capabilities, transparent and
competitive prices and easy accessibility have won
EnronOnline rapid acceptance.
In the U.K., power and gas volumes more than
doubled, with power rising to 113 million MWh in
2000, and gas volumes climbing 119 percent to reach
3.2 Bcf/d. Several market factors are likely to create
more business for us. The U.K.’s New Electricity
Trading Agreements, which replace the existing
U.K. power pool, are scheduled to be implemented
by the second quarter of 2001. The agreements
will result in increased price volatility, and Enron
is well-positioned to help customers manage this
risk. Additionally, lower power prices are shrinking
profit margins for U.K. merchant power plants,
which increasingly need to turn to market inter-
mediaries such as Enron to hedge their fuel and
power prices.
On the Continent, our power volumes
increased to 50 million MWh in 2000 from 7 million
MWh in 1999. We are transacting at all major
country interconnections, benefiting from cross-
border opportunities. We closed our first-ever
transaction in France and are an active player in
Germany and Switzerland. We are beginning to
partner with utilities to offer comprehensive port-
folio management services, such as our agreement
to purchase and distribute power jointly with Swiss
Citypower AG, which controls 19 percent of the
Swiss electricity market.
In Spain, electricity demand is growing faster
than anywhere else in Europe, and there are limit-
ed import and export capabilities. Enron is respond-
ing to this opportunity by developing a 1,200-
megawatt plant in Arcos, south of Seville, that
should close financing in 2001.
Continental gas liquidity is just starting to
increase. Our volumes grew to 472 million cubic
feet per day (MMcf/d) in 2000 from 53 MMcf/d in
1999. While the market is in its early stages, Enron
has managed to increase weekly transactions from
about 5 to 100 over the course of a year. In
October we initiated the first gas supply deal in
Germany to the local utilities of Heidelberg,
Tuebingen and Bensheim. We also are delivering
natural gas to some large users in the Netherlands
and France.
EnronOnline successfully leverages Enron’s core
market-making capabilities, benefiting both our
customers and Enron. The web-based system
makes it easier to do business with Enron. It
also accelerates the growth of Enron’s existing
businesses and facilitates quick and efficient
entry into new markets.
EnronOnline
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We continue to set records in the Nordic
region, where we are the largest power marketer.
Electricity volumes increased nearly 150 percent
to reach 77 million MWh in 2000 from 31 million
MWh in 1999. Enron’s Oslo office also is now
the base of our European weather risk manage-
ment business.
As more Nordic companies outsource energy
supply and management, Enron’s products and serv-
ices — including advanced technology applications
— are eagerly sought. In December Enron entered
into a two-year portfolio management agreement
with UPM-Kymmene Corp., one of the world’s
largest forest products companies. Enron will assist
UPM-Kymmene in optimizing its Nordic power port-
folio of approximately 14 terawatt hours.
Enron Japan
Enron Japan formally opened its Tokyo office
in October 2000. Japan represents an enormous
opportunity: Its electricity rates are the highest in
the world, and electricity consumption is second
only to the United States. We have attracted top
talent to develop wholesale and joint venture possi-
bilities, and have introduced our first product for
large electricity users — three- to five-year contracts
that will reduce electricity bills immediately by up
to 10 percent the first year, with the possibility of
further reductions in subsequent years. Our first
contracts were signed in early 2001.
Through joint ventures with several Japanese
companies, Enron is exploring merchant plant
opportunities to support our market-making activi-
ties, including inside-the-fence power generation.
Under consideration are a number of sites, which
may be fueled by gas, liquefied natural gas or coal.
Enron Australia
Enron’s market-making ability has been suc-
cessfully extended to Australia, where Enron is a
leading provider of logistical solutions in the coun-
try’s power market. During 2000 we introduced
weather risk management products in the region,
offering temperature-based products for Sydney,
Melbourne, Hong Kong, Tokyo and Osaka. The
Sydney office also provides a strategic platform for
the extension of Enron’s coal, metals and broad-
band businesses, as well as providing support for
Enron’s operations in the Asia-Pacific region.
Extending to New Markets
Enron’s durable business approach, which has
driven our success in the natural gas and electricity
markets, is eminently applicable to other markets
and geographical regions. While we are remaining
focused on increasing earnings and opportunities
in gas and power, we also are extending Enron’s
method to large, fragmented industries and prod-
ucts, where intermediation can make markets
more efficient and responsive to customer needs.
We expect these new businesses to contribute to
earnings in 2001.
Enron Metals was launched in July 2000 when
Enron acquired the world’s leading merchant of non-
ferrous metals, MG plc. Together, MG and Enron are
MAKING MARKETS Enron’s networks of assets and contractual relationships allow us to make markets and offer real- time pricing for more than 1,200 products on EnronOnline. This tremendous market liquidity attracts customers and further increases Enron’s volumes and market share.
CUSTOMER RELATIONSHIPS EnronOnline provides customers with a more convenient way to dis- cover prices and do business with Enron, which increases transaction volumes and attracts new cus- tomers. The system automatically taps into Enron’s sophisticated cus- tomer-credit profiles to protect Enron from credit risk.
INFORMATION SYSTEMS EnronOnline is fully integrated with Enron’s proprietary informa- tion systems, which provide critical market information, process thou- sands of deals and help assess and manage market and other risks. As a result, Enron manages risks instantaneously even in the most volatile markets.
SCALABILITY Enron’s well-tuned back-office sys- tem, integrated with EnronOnline, has proven its ability to scale as Enron’s total transactions have grown from an average of 650 a day at EnronOnline’s November 1999 launch to an average of 7,900 a day by year-end 2000. As EnronOnline expands products and volumes, Enron’s scalable back-office will continue to be a competitive advantage.
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a powerful team. Enron’s financial resources and
eCommerce abilities add a new dimension to MG’s
widespread physical merchant skills and excellent
customer relationships. The early results are right on
target, with physical volumes up 31 percent in 2000.
Enron Metals opens an additional door to
large energy customers. Cominco Ltd., a zinc pro-
ducer and an Enron Metals customer in Vancouver,
British Columbia, worked with Enron to halt zinc
production for six weeks and sell its power into the
Northwestern power market, where it was needed.
Enron North America protected Cominco by struc-
turing a fixed-price swap to guarantee the sale
price of the power, and Enron Metals arranged to
supply a portion of the zinc required to fulfill
Cominco’s obligations. Cominco’s profit from the
deal exceeded the annual profit it makes from
producing zinc.
Enron Credit is a new business with strong mar-
ket potential. Enron has leveraged its internal risk
management processes and systems to create a real-
time, market-based online credit evaluation system.
The idea is simple: Existing credit ratings and scoring
mechanisms are not market-based and cannot
respond in real time to credit events. This means
creditors must figure out their credit risk exposure
on their own. Enron Credit posts the cost of credit
as a simple interest rate for more than 10,000 com-
panies on its web site, www.enroncredit.com. Enron
Credit also gives corporations the ability to hedge
their credit risk via a bankruptcy product.
Coal intermediation moved to a new level in
2000. The industry has been radically affected by the
worldwide deregulation of the electricity industry.
Like natural-gas-fueled generation, coal-burning
generators require flexible terms and risk-manage-
ment protection. Enron is able to provide unrivaled
logistical support. Our coal business has led us to
participate in sea and land logistics as well.
Weather has never been better for us. Our
weather risk management business is up about
five-fold to 1,629 transactions in 2000 from 321
transactions the year before. As in all of our mar-
kets, we bring cross-commodity capabilities to our
weather products. For instance, we closed a three-
year precipitation transaction that provides finan-
cial compensation linked to natural gas prices if
precipitation falls below a pre-determined mini-
mum. The weather unit worked with several other
Enron groups to transfer Enron’s risk, ultimately
transacting with 10 external companies in three
markets (natural gas, weather products and insur-
ance). The bundled end-product resulted in an
effective hedge for the customer.
Crude oil. We now average crude deliveries of
7.5 TBtue/d to 240 customers in 46 countries. We
have introduced the first-ever 24x7 commodity
market of a West Texas Intermediate crude product
on EnronOnline, allowing our customers to respond
to market-changing events at any time, day or
night. We also concluded our biggest physical jet
fuel contract, providing 100,000 barrels for one
The process of sourcing and delivering
coal to an electricity generator is a com-
plicated process. Enron provides a single,
comprehensive solution to manage all
logistics and risk, whether the coal is
sourced domestically or abroad. In some
cases, we have reduced the customer’s
cost of coal by as much as 10 percent.
One Coal Contract Covers All Logistics
COAL PRICE AND SUPPLY RISKS Enron allows generators to purchase coal at flexible terms, such as long-term fixed rates or a maximum price. Supply and price are assured because Enron has access to multiple sources all over the globe. Enron is on its way to becoming the world’s largest wholesale coal merchant.
TRANSPORTATION RISKS Imported coal travels by sea and land, and the consumer usually makes each arrange- ment separately and bears the risk if prices or capacity change. Enron delivers a com- plete logistical solution for its customers, managing both the process and risk as part of just a single contract for the coal. Enron also provides complete domestic logistics.
CURRENCY RISKS Like oil, imported coal is denominated in U.S. dollars. A British generator, however, collects electricity payments in pounds sterling. When appropriate, Enron includes currency hedges in its con- tracts to protect customers if the value of the pound drops against the dollar.
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year at the flexible and market-based prices that
the customer needed.
LNG. Enron is establishing a liquefied natural
gas (LNG) network to create merchant LNG opportu-
nities and to bring more gas to areas of the world
that need it. Our LNG-related assets in operation
and development in the Caribbean and the Middle
East form part of this network. We source surplus
LNG from the Middle East and Asia and currently
market it in the United States.
Forest Products. Enron has offered pulp, paper
and lumber financial products for several years, and
now we are marketing physical volumes. In 2000 we
acquired Garden State Paper Co., which gives us
access to 210,000 tons of newsprint a year and
four recycling centers in key markets. In January
2001 we agreed to purchase a newsprint mill and
related assets in Canada. With this acquisition,
Enron will become the seventh-largest producer of
newsprint in North America, giving us the physical
liquidity necessary to quickly grow this business.
Enron’s Clickpaper.com™ is powered by the
EnronOnline platform but is totally customized for
the forest products industry. It offers more than 100
financial and physical products and features news
and information tailored specifically to forest prod-
ucts industry customers.
Steel. In some markets, such as steel, we believe
we can run our network with minimal assets. The
industry currently suffers from overcapacity, but
lacks a market mechanism to efficiently market the
surplus. We will offer a core commodity baseline
product that can be indexed against almost all
other products in this $330 billion industry. The
outlook is promising — we have transacted our
first steel swap. This year we will build liquidity,
improve pricing efficiency and gain contractual
access to the physical product to provide compre-
hensive logistical support.
Enron Global Assets
Enron Global Assets manages and optimizes
Enron’s assets outside North America and Europe.
Enron has a solid portfolio of asset-based busi-
nesses. However, with the higher returns available
in the company’s other businesses, we expect to
divest some interests in a number of these assets.
The remaining asset businesses will continue to
focus on performance and complementing our mar-
ket-making and services businesses.
Enron Wind Corp.
The economics of wind power are more
promising than ever, creating significant growth
for Enron Wind. Technological advancements and
lower costs associated with today’s larger, more
efficient wind turbines have made wind power
costs competitive with fossil fuel-generation for
the first time. This cost competitiveness, together
with government policies supporting renewable
energy in most key markets and growing consumer
demand for green energy, have fueled 30 percent
annual growth over the past five years.
With focused efforts in the world’s three key
wind power markets — Germany, Spain and the
United States — Enron Wind completed 2000 with
revenues of approximately $460 million. Strong
growth in both the United States and Europe will
account for a projected sales increase of approxi-
mately 100 percent in 2001.
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versatility to provide a comprehensive solution to
address uncertain, rapidly changing markets.
Customer Relationships
The core of Enron’s retail business is developing
long-term, multi-year relationships with our cus-
tomers. The value at contract signing is only a part
of the potential value that can be realized when
satisfied customers seek to add additional Enron
services to their contracts.
Of the $16.1 billion in total contract value
signed in 2000, approximately $3 billion came from
expansions of existing contract relationships. For
example, in 1998, we signed a five-year, $250 million
contract with World Color Press, which later merged
with Quebecor Printing. In 2000, based on Quebecor
World’s satisfaction, the relationship was extended
and expanded to a 10-year, $1 billion agreement
including not only commodity supply, but also over-
all energy management, including the design and
implementation of improvements in energy asset
infrastructure in more than 60 facilities operated
by Quebecor World.
We value our long-term customer relation-
ships, and the health of these relationships can’t
be left to luck, instinct or vague impressions. Our
Customer Satisfaction Program continually cap-
tures our performance against expectations and
benchmarks those results. Further, it is designed
to ensure identification and resolution — including
prompt escalation to the executive level if needed
— of any issue that might arise.
ENRON ENERGY SERVICES
Enron Energy Services is the retail arm of Enron,
serving business users of energy in commercial and
industrial sectors. Our comprehensive energy out-
sourcing product has proven an exceptionally
effective way for companies to reduce their costs,
manage risks of energy price volatility, improve
their energy infrastructure and focus resources
on their core businesses.
Enron Energy Services recorded its first prof-
itable quarter as expected at the end of 1999, and
continued to grow rapidly through 2000, with
increasing profits in all four quarters of 2000 and
aggregate recurring income before interest and
taxes (IBIT) of $103 million for the year. The value of
our contracts in 2000 totaled more than $16 billion,
increasing Enron Energy Services’ cumulative con-
tract value to more than $30 billion since late 1997.
This success reflects growing acceptance of
Enron’s energy outsourcing product — acceptance
that has meant an increasing rate of new contract-
ing. Our retail energy success in 2000 also reflects
our strong emphasis on contract execution and
implementation and on excellence in customer
service. Additionally, 2000 was marked by increased
activity in Europe — an untapped market for
energy outsourcing.
We are positioned to dramatically increase our
profitability in 2001. Retail energy earnings will be
fueled by the rapid growth of our U.S. and European
businesses and the strong execution and extension
of existing contracts.
Market Volatility
The U.S. energy sector experienced unprece-
dented challenge and opportunity in 2000. In
national terms, steady movement toward a func-
tioning deregulated energy marketplace continues.
More than half the country’s population is scheduled
to be able to choose their electricity supplier by
2004. The ongoing energy crisis in California has
focused everyone’s attention on the complexities
of incomplete deregulation, the risks of unreliable
supply and the costs of unmanaged energy demand.
Enron provides commercial and industrial energy
customers with the solutions they need, bringing
reliability and price-risk management to a market
otherwise fraught with uncertainty.
The volatility of energy prices across the coun-
try has heightened the value of energy management
and increased the demand for retail services. With
our series of capabilities — energy commodity and
price risk management capabilities, energy asset
management and capital solutions — we remain
the only firm with the skill, experience, depth and
Companies can’t improve what they can’t measure.
That’s why Enron has developed a state-of-the-art
Performance Measurement Center (PMC) that moni-
tors, predicts and changes customer energy consump-
tion. Powered by a flexible Internet-based link that
connects customers’ building controls to the PMC,
and operated by a team of energy management pro-
fessionals, the PMC is a unique resource, enabling
genuinely proactive energy management.
Measuring Performance
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Medium-size Business Market
In the first three years of U.S. operation, Enron
Energy Services has been squarely focused on Fortune
1000 customers. But U.K.-based Enron Direct has
successfully penetrated the immense medium-size
business market, proving that we can sell energy to
smaller enterprises in a truly open retail market.
Since gaining regulatory approval in February
1999 through the end of 2000, Enron Direct has
acquired more than 130,000 gas and power cus-
tomers, and continues to grow at a substantial rate.
The profitability of these smaller accounts comes
from Enron’s long-term price risk management capa-
bility and Enron Direct’s low-cost sales channels. Our
high expectations for medium-size businesses are
reflected by the rapid expansion of the European
operation. Enron Directo already is active in Madrid,
Spain, and similar businesses will be launched in
other countries as well.
It is our strong belief that Enron is uniquely
positioned to benefit both in the United States and
Europe from the world’s steady shift toward dereg-
ulated energy markets. We will continue to provide
sensible market solutions for the effective manage-
ment of energy costs, and will continue to build a
dynamic global retail business to drive company
profits and sustain our reputation for innovation.
SENSIBLE INVESTMENTS PMC data identify opportunities to improve efficiency through equipment upgrades or through changes in processes, without adversely affecting a client’s oper- ations. The PMC’s sophisticated modeling systems calculate a cost-benefit analysis for every potential investment in energy assets. This analysis includes a real-time correlation with the price of commodities — to help companies not only make deci- sions but also to show them that there are decisions to be made.
REDUCING PEAK DEMAND The cost of energy varies widely over the course of the day. The PMC uses real-time pricing infor- mation, and the stream of data coming from the customer site, to automatically and remotely reduce customers’ low-priority energy use when the price of energy is highest —ensuring that the customer gets maximum benefit for every dollar spent on energy.
DIAGNOSTIC MEASUREMENTS Most energy users don’t realize something is wrong until the ener- gy bill comes, and then it is much too late. But with the Enron PMC, real-time monitoring means that unusual changes in energy demand are tracked instantaneously, enabling Enron and the customer to identify and address problems before energy costs get out of hand.
MINIMIZING DOWNTIME When repairs are needed, PMC personnel can help control the costs of vendor calls and on-site repairs through diagnostic data, and through best-practice manage- ment of a network of thousands of service providers. We work with service providers to categorize and analyze the actual cost of repairs. With Enron’s expertise and scale, we can improve response times, reduce downtime and cut the cost of repairs and maintenance.
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ENRON BROADBAND SERVICES
Enron Broadband Services made excellent
progress executing its business plan in 2000. The
build-out of Enron’s 18,000-mile global fiber
network is near completion, bandwidth interme-
diation transaction volume is growing exponen-
tially, and we are testing the first commercially
sound premium content-on-demand service.
Clearly, the Enron business model is working in
the broadband market.
Enron Broadband Services’ goals are to:
• Deploy the most open, efficient global broadband
network, the Enron Intelligent Network.
• Be the world’s largest marketer of bandwidth and
network services.
• Be the world’s largest provider of premium con-
tent delivery services.
The Enron Intelligent Network
We expect to be the first to provide broad-
band connectivity on a global basis through the
Enron Intelligent Network (EIN). The EIN operates
as a “network of networks,” providing switching
capacity between independent networks for low-
cost scalability. We will continue to add pooling
points, which physically interconnect third parties’
networks and serve as reference points for band-
width contracts. We currently operate 25 pooling
points: 18 in the United States, and one each
in Tokyo, London, Brussels, Amsterdam, Paris,
Dusseldorf and Frankfurt. We expect to add at
least 10 more in 2001.
EIN’s embedded intelligence, provided by
Enron’s proprietary Broadband Operating System
(BOS), gives Enron unique, powerful multi-layer
network control. The Enron BOS enables the EIN to:
• Dynamically provision bandwidth in real time.
• Control quality and access to the network for
Internet Service Providers.
• Control and monitor applications as they stream
over the network to ensure quality and avoid
congested routes.
The BOS automates the transaction process
all the way from the initial request for capacity to
provisioning, electronic billing and funds transfer.
With the BOS, Enron has created the first scalable,
fully integrated transaction processing platform
for delivering bandwidth capacity.
Bandwidth Intermediation
We exceeded our expectations by delivering
more than 72,000 terabytes of network services
in 2000, demonstrating rapidly growing industry
acceptance of our flexible services. We are creating
the risk management building blocks to manage
almost every element of the network in addition to
bandwidth: dark fiber, circuits, Internet Protocol (IP)
services (transporting data packets according to IP
standards) and storage capacity.
To date we have transacted with 45 counter-
parties, including U.S. and international telecom-
munications carriers, marketers and resellers and
network service providers. In 2001 we expect to
deliver 570,000 terabytes as we grow both the
breadth and the depth of our network and prod-
ucts. We offer 32 bandwidth-related products on
EnronOnline.
Enron’s ability to provide bandwidth-on-
demand at specified service levels and guaranteed
delivery enables customers to access capacity with-
out necessarily building, buying or expanding their
own networks. Our bundled intermediation package
includes IP transport over land, under the sea, and
via satellite, at both fixed and peak-usage terms.
For example, we are working with i2 Technologies,
a global provider of intelligent eBusiness solutions,
to connect with customers in six cities, including
four overseas. i2 has provisioned local-loop and
long-haul capacity through Enron, and has low-
cost access to our network’s equipment as if it
were its own, but it now has the flexibility to
quickly add or discard capacity as day-to-day
needs change.
Data storage is a $30 billion-per-year business,
and we know customers would like to purchase it
on an as-needed basis. In January 2001 we com-
pleted our first data storage transactions with a
Enron’s bandwidth intermediation business gives the
broadband industry new tools — standard contracts,
liquidity, price transparency, connectivity, quick provi-
sioning and flexibility — to help industry participants
optimize assets and opportunities.
The Value of Bandwidth Intermediation
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leading provider of managed storage services,
StorageNetworks, and a large retailer, Best Buy.
Best Buy is buying off-site storage capacity to save
money and gain flexibility to accommodate chang-
ing storage needs.
Content Services
In April 2000 Enron signed an agreement with
a U.S. video rental retailer to deliver movies over
the Enron Intelligent Network. The trial service is
up and running in Seattle; Portland, Ore.; Salt Lake
City and New York City. Additionally, we have
established relationships with other high-visibility
content providers. Over the next two or three years,
we plan to deliver on-demand not only movies
but sports, educational content, games, music and
applications not yet imagined.
Market Innovator
Enron’s innovative approach is as valuable in
broadband as it is in energy. Our proven intermedi-
ation skills are creating new value for the industry
and giving it a flexibility it has never enjoyed. We
have combined our business model with readily
available technologies to deliver premium content
over the Enron Intelligent Network in a very com-
pelling commercial model. We are not tied to any
particular technology. We use the best solution at
the best time for our customers, delivering the
most reliable product at the lowest available cost
in the marketplace.
CONNECTIVITY Enron is facilitating network con- nectivity by establishing pooling points in major metropolitan areas to switch bandwidth from one independent network to another. The pooling points help optimize network capacity by creating com- mon physical delivery points and access to multiple locations.
DYNAMIC PROVISIONING Enron’s pooling point infrastruc- ture allows companies to provision bandwidth quickly, eliminating the long lead times associated with circuit provisioning in the past. Enhanced connectivity and dynam- ic provisioning allow bandwidth users to take advantage of band- width market opportunities on short notice.
NETWORK CONTROL Within Enron’s Broadband Operating System (BOS) lie several unique capabilities that monitor switching activity between networks and control the provisioning of circuits. The Enron BOS can measure per- formance in real time at every layer of the network and ensure quality of service and delivery.
SCALABILITY The Enron Intelligent Network (EIN) has extensive reach through- out the continental United States and connects to Europe and Asia. With its broad connectivity, the EIN is designed to scale without the cost of building additional infrastructure. Leveraging the EnronOnline platform provides additional reach and gives cus- tomers a new, easy option for their bandwidth needs.
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needs. Northern Natural Gas, for example, has used
interruptible storage products that extend its capa-
bility to meet the growing demand for services to
manage physical positions. Transwestern Pipeline
Company is offering shippers increased service
flexibility by accessing third-party storage. Across
all pipelines, web-based applications have been
introduced to allow customers to better manage
transactions and allow the pipelines to maximize
their capacity offerings. Northern Natural Gas,
Transwestern Pipeline and Florida Gas Transmission
began to sell available capacity on EnronOnline
in 2000 to give customers the convenience of
eCommerce transacting (see “Purchasing Capacity
Through EnronOnline” on this page).
Northern Natural Gas
Northern Natural Gas, Enron’s largest pipeline,
has approximately 16,500 miles of pipeline extend-
ing from the Permian Basin in Texas to the Great
Lakes, providing extensive access to major utilities
and industrials in the upper Midwest. The pipeline
has market area peak capacity of 4.3 Bcf/d. It inter-
connects with major pipelines, including Great
Lakes, Transwestern, El Paso, Northern Border and
Trailblazer, to offer excellent northern, southern
and western flow capabilities. Ninety-five percent
of market area capacity is contracted through 2003.
Market area demand is expected to increase
considerably with the development of approximately
2,000 megawatts of gas-fired generation over the
next three years. The pipeline has developed innova-
ENRON TRANSPORTATION SERVICES
The Gas Pipeline Group formally changed its
name in September 2000 to Enron Transportation
Services to emphasize its ability to deliver innovative
solutions to its customers. These emerging services
augment our core competency: operating interstate
pipelines safely and efficiently. In 2000 we continued
our record of strong returns with consistent earnings
and cash flow. Income before interest and taxes
reached $391 million, up from $380 million in 1999.
Cash flow from operations rose to $415 million
in 2000 from $370 million in 1999. Throughput
remained relatively unchanged in 2000 at 9.13
billion cubic feet per day (Bcf/d), compared to 9.18
Bcf/d the previous year.
Together, our interstate pipelines span approxi-
mately 25,000 miles with a peak capacity of 9.8
Bcf/d. We transport 15 percent of U.S. natural gas
demand. We connect to the major supply basins in
the United States and Canada, and we continue to
increase capacity from those basins to our major
markets. We have added 840 million cubic feet per
day (MMcf/d) over the past two years, and nearly 1
Bcf/d is scheduled to enter service in the next three
years. At the same time, our expense per MMcf/d
has declined by 26 percent from 1992 to today.
Enron Transportation Services pipelines have
brought to market a variety of new products and
services specifically tailored to address customer
Enron Transportation Services has intro-
duced several innovative customer services,
including the use of EnronOnline. Northern
Natural Gas, Transwestern Pipeline and
Florida Gas Transmission are selling avail-
able firm and interruptible capacity on
EnronOnline in addition to selling capacity
through traditional methods. Customers
already using EnronOnline to transact gas
can now arrange transportation at the
same time.
Purchasing Capacity Through EnronOnline
PRICE DISCOVERY Knowledge helps customers make better decisions. Prices are fully transparent and instantly accessible, which allows buyers to know what their transportation costs will be when they are buying their gas.
OPTIMIZING THE ASSETS When a pipeline is not totally subscribed, EnronOnline lets the market know it is avail- able. Pipelines also can auction off highly desirable capacity by accepting sealed bids. EnronOnline gives Enron Transportation Services the ability to put more product in front of more of its customers than ever before.
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under long-term agreements with an average term
of six years. Its Project 2000 extension — 34 miles of
pipe from Manhattan, Illinois, to a point near North
Hayden, Indiana — will provide 544 MMcf/d to
industrial markets in Indiana with a targeted in-
service date of late 2001.
Late in 2000, Northern Border Pipeline settled
its rate case, allowing it to switch from a cost-of-
service tariff to a stated-rate tariff, which will provide
rate certainty to customers, increase competitiveness
and allow flexibility in services provided.
Northern Border Partners also owns interests
in gathering systems in the Powder River and Wind
River Basins in Wyoming, and recently signed a letter
of intent to purchase Bear Paw LLC, which has
extensive gathering and processing operations in
the Powder River Basin and the Williston Basin.
The partnership also owns Black Mesa Pipeline, a
273-mile coal-water slurry pipeline running from
Kayenta, Arizona, to Mohave Power Station in
Laughlin, Nevada.
Portland General Electric
The sale of Portland General Electric (PGE) to
Sierra Pacific Resources has been delayed by the
effect of recent events in California and Nevada on
the buyer. In 2000 the Portland, Oregon-based elec-
tricity utility performed well in the face of regional
wholesale price volatility. IBIT rose approximately 12
percent to $341 million. Total electricity sales reached
38.4 million megawatt-hours (MWh) compared to
31.9 million MWh in 1999. We will continue to drive
performance while we pursue the utility’s sale.
tive and flexible services to meet the transportation,
storage and balancing needs of power producers. It
completed construction in October 2000 of a link to
445 megawatts of peaking power operated by Great
River Energy in Minnesota. The link will transport up
to 120 MMcf/d of gas.
Transwestern Pipeline
Transwestern operates approximately 2,500
miles of pipe with 1.7 Bcf/d of peak capacity. With
pipeline originating in the San Juan, Permian and
Anadarko Basins, Transwestern can move gas east
to Texas or west to the California border. To respond
to increased gas demand in California, Transwestern
Pipeline added compressor facilities near Gallup,
New Mexico, in May 2000 to increase mainline
capacity by 140 MMcf/d to the California border.
The new capacity is completely subscribed under
long-term contracts. In 2000 the pipeline also added
several major interconnects to tap into growing
markets east of California.
The Transwestern system is fully subscribed for
western deliveries through December 2005 and for
eastern deliveries through December 2002. The sys-
tem has the potential to quickly increase throughput
capacity. An expansion project is expected to be filed
this year and completed in 2002.
Florida Gas Transmission
Florida Gas Transmission serves the rapidly
growing Florida peninsula and connects with 10
major pipelines. It has maintained a competitive
position by staging expansions to keep pace with
demand as it grows. With current peak capacity
of 1.5 Bcf/d, Florida Gas Transmission will add 600
MMcf/d of capacity when its Phase IV and Phase V
expansions are completed. The Fort Myers extension,
part of a 200 MMcf/d Phase IV expansion, went into
service on October 1, 2000, and the remainder is
scheduled to go into service in May 2001. The 400-
MMcf/d Phase V expansion has received preliminary
approval from the Federal Energy Regulatory
Commission and is expected to be completed in
April 2002.
The 4,795-mile pipeline currently is evaluating
supply connections to two proposed liquefied natu-
ral gas facilities.
Northern Border Partners, L.P.
Northern Border Partners, L.P. is a publicly
traded partnership (NYSE: NBP), of which Enron
is the largest general partner. Northern Border
Partners owns a 70 percent general partner interest
in Northern Border Pipeline, which extends 1,214
miles from the Canadian border in Montana to
Illinois. The pipeline, a low-cost link between
Canadian reserves and the Midwest market, has a
peak capacity of 2.4 Bcf/d and is fully contracted
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CONTENTS
21 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
27 FINANCIAL RISK MANAGEMENT
29 INFORMATION REGARDING FORWARD- LOOKING STATEMENTS
29 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
30 REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
31 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT
31 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
32 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
34 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
35 ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
36 ENRON CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
52 SELECTED FINANCIAL AND CREDIT INFORMATION (UNAUDITED)
FINANCIAL REVIEW
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following review of the results of operations and financial condition of Enron Corp. and its subsidiaries and affiliates (Enron) should be read in conjunction with the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Consolidated Net Income
Enron’s net income for 2000 was $979 million compared to $893 million in 1999 and $703 million in 1998. Items impacting comparability are discussed in the respective segment results. Net income before items impacting comparability was $1,266 million, $957 million and $698 million, respectively, in 2000, 1999 and 1998. Enron’s business is divided into five segments and Exploration and Production (Enron Oil & Gas Company) through August 16, 1999 (see Note 2 to the Consolidated Financial Statements). Enron’s operating segments include:
Transportation and Distribution. Transportation and Distribution consists of Enron Transportation Services and Portland General. Transportation Services includes Enron’s interstate natural gas pipelines, primarily Northern Natural Gas Company (Northern), Transwestern Pipeline Company (Transwestern), Enron’s 50% interest in Florida Gas Transmission Company (Florida Gas) and Enron’s interests in Northern Border Partners, L.P. and EOTT Energy Partners, L.P. (EOTT).
Wholesale Services. Wholesale Services includes Enron’s wholesale businesses around the world. Wholesale Services oper- ates in developed markets such as North America and Europe, as well as developing or newly deregulating markets including South America, India and Japan.
Retail Energy Services. Enron, through its subsidiary Enron Energy Services, LLC (Energy Services), is extending its energy expertise and capabilities to end-use retail customers in the indus- trial and commercial business sectors to manage their energy requirements and reduce their total energy costs.
Broadband Services. Enron’s broadband services business (Broadband Services) provides customers with a single source for broadband services, including bandwidth intermediation and the delivery of premium content.
Corporate and Other. Corporate and Other includes Enron’s investment in Azurix Corp. (Azurix), which provides water and wastewater services, results of Enron Renewable Energy Corp. (EREC), which develops and constructs wind-generated power projects, and the operations of Enron’s methanol and MTBE plants as well as overall corporate activities of Enron.
Net income includes the following:
(In millions) 2000 1999 1998 After-tax results before items
impacting comparability $1,266 $ 957 $ 698
Items impacting comparability: (a)
Charge to reflect impairment by Azurix (326) - - Gain on TNPC, Inc. (The New
Power Company), net 39 - - Gains on sales of subsidiary stock - 345 45 MTBE-related charges - (278) (40) Cumulative effect of
accounting changes - (131) - Net income $ 979 $ 893 $ 703
(a) Tax affected at 35%, except where a specific tax rate applied.
Diluted earnings per share of common stock were as follows:
2000 1999 1998 Diluted earnings per share (a):
After-tax results before items impacting comparability $ 1.47 $ 1.18 $ 1.00
Items impacting comparability: Charge to reflect impairment by Azurix (0.40) - - Gain on The New Power Company, net 0.05 - - Gains on sales of subsidiary stock - 0.45 0.07 MTBE-related charges - (0.36) (0.06) Cumulative effect of
accounting changes - (0.17) - Diluted earnings per share $ 1.12 $ 1.10 $ 1.01
(a) Restated to reflect the two-for-one stock split effective August 13, 1999.
Income Before Interest, Minority Interests and Income Taxes
The following table presents income before interest, minor- ity interests and income taxes (IBIT) for each of Enron’s operating segments (see Note 20 to the Consolidated Financial Statements):
(In millions) 2000 1999 1998 Transportation and Distribution:
Transportation Services $ 391 $ 380 $ 351 Portland General 341 305 286
Wholesale Services 2,260 1,317 968 Retail Energy Services 165 (68) (119) Broadband Services (60) - - Exploration and Production - 65 128 Corporate and Other (615) (4) (32)
Income before interest, minority interests and taxes $2,482 $1,995 $1,582
Transportation and Distribution
Transportation Services. The following table summarizes total volumes transported by each of Enron’s interstate natural gas pipelines.
2000 1999 1998 Total volumes transported (BBtu/d) (a)
Northern Natural Gas 3,529 3,820 4,098 Transwestern Pipeline 1,657 1,462 1,608 Florida Gas Transmission 1,501 1,495 1,324 Northern Border Pipeline 2,443 2,405 1,770
(a) Billion British thermal units per day. Amounts reflect 100% of each entity’s throughput volumes. Florida Gas and Northern Border Pipeline are unconsoli- dated equity affiliates.
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Significant components of IBIT are as follows:
(In millions) 2000 1999 1998 Net revenues $650 $626 $640 Operating expenses 280 264 276 Depreciation and amortization 67 66 70 Equity earnings 63 38 32 Other, net 25 46 25
Income before interest and taxes $391 $380 $351
Net Revenues
Revenues, net of cost of sales, of Transportation Services increased $24 million (4%) during 2000 and declined $14 million (2%) during 1999 as compared to 1998. In 2000, Transportation Services’ interstate pipelines produced strong financial results. The volumes transported by Transwestern increased 13 percent in 2000 as compared to 1999. Northern’s 2000 gross margin was comparable to 1999 despite an 8 percent decline in volumes transported. Net revenues in 2000 were favorably impacted by transportation revenues from Transwestern’s Gallup, New Mexico expansion and by sales from Northern’s gas storage inventory. The decrease in net revenue in 1999 compared to 1998 was primarily due to the expiration, in October 1998, of certain tran- sition cost recovery surcharges, partially offset by a Northern sale of gas storage inventory in 1999.
Operating Expenses
Operating expenses, including depreciation and amortiza- tion, of Transportation Services increased $17 million (5%) during 2000 primarily as a result of higher overhead costs related to information technology and employee benefits. Operating expenses decreased $16 million (5%) during 1999 primarily as a result of the expiration of certain transition cost recovery sur- charges which had been recovered through revenues.
Equity Earnings
Equity in earnings of unconsolidated equity affiliates increased $25 million and $6 million in 2000 and 1999, respectively. The increase in equity earnings in 2000 as compared to 1999 primarily relates to Enron’s investment in Florida Gas. The increase in earnings in 1999 as compared to 1998 was primarily a result of higher earnings from Northern Border Pipeline and EOTT.
Other, Net
Other, net decreased $21 million in 2000 as compared to 1999 after increasing $21 million in 1999 as compared to 1998. Included in 2000 were gains related to an energy commodity contract and the sale of compressor-related equipment, while the 1999 amount included interest income earned in connection with the financing of an acquisition by EOTT. The 1998 amount included gains from the sale of an interest in an equity invest- ment, substantially offset by charges related to litigation.
Portland General. Portland General realized IBIT as follows:
(In millions) 2000 1999 1998 Revenues $2,256 $1,379 $1,196 Purchased power and fuel 1,461 639 451 Operating expenses 321 304 295 Depreciation and amortization 211 181 183 Other, net 78 50 19
Income before interest and taxes $ 341 $ 305 $ 286
Revenues, net of purchased power and fuel costs, increased $55 million in 2000 as compared to 1999. The increase is primarily the result of a significant increase in the price of power sold and
an increase in wholesale sales, partially offset by higher purchased power and fuel costs. Operating expenses increased primarily due to increased plant maintenance costs related to periodic overhauls. Depreciation and amortization increased in 2000 primarily as a result of increased regulatory amortization. Other, net in 2000 included the impact of an Oregon Public Utility Commission (OPUC) order allowing certain deregulation costs to be deferred and recovered through rate cases, the settlement of litigation related to the Trojan nuclear power generating facility and gains on the sale of certain generation-related assets.
Revenues, net of purchased power and fuel costs, decreased $5 million in 1999 as compared to 1998. Revenues increased pri- marily as a result of an increase in the number of customers served by Portland General. Higher purchased power and fuel costs, which increased 42 percent in 1999, offset the increase in revenues. Other income, net increased $31 million in 1999 as compared to 1998 primarily as a result of a gain recognized on the sale of certain assets.
In 1999, Enron entered into an agreement to sell Portland General Electric Company to Sierra Pacific Resources. See Note 2 to the Consolidated Financial Statements.
Statistics for Portland General are as follows:
2000 1999 1998 Electricity sales (thousand MWh)(a)
Residential 7,433 7,404 7,101 Commercial 7,527 7,392 6,781 Industrial 4,912 4,463 3,562
Total retail 19,872 19,259 17,444 Wholesale 18,548 12,612 10,869
Total electricity sales 38,420 31,871 28,313
Resource mix Coal 11% 15% 16% Combustion turbine 12 8 12 Hydro 6 9 9
Total generation 29 32 37 Firm purchases 63 57 56 Secondary purchases 8 11 7
Total resources 100% 100% 100%
Average variable power cost (Mills/KWh)(b)
Generation 14.5 11.3 8.6 Firm purchases 34.9 23.2 17.3 Secondary purchases 123.6 19.7 23.6
Total average variable power cost 37.2 20.0 15.6
Retail customers (end of period, thousands) 725 719 704
(a) Thousand megawatt-hours. (b) Mills (1/10 cent) per kilowatt-hour.
Outlook
Enron Transportation Services is expected to provide stable earnings and cash flows during 2001. The four major natural gas pipelines have strong competitive positions in their respective markets as a result of efficient operating practices, competitive rates and favorable market conditions. Enron Transportation Services expects to continue to pursue demand-driven expansion opportunities. Florida Gas expects to complete an expansion that will increase throughput by 198 million cubic feet per day (MMcf/d) by mid-2001. Florida Gas has received preliminary approval from the Federal Energy Regulatory Commission for an expansion of 428 MMcf/d, expected to be completed by early 2003, and is also pursuing an expansion of 150 MMcf/d that is expected to be completed in mid-2003. Transwestern completed an expansion of 140 MMcf/d in May 2000 and is pursuing an expansion of 50 MMcf/d that is expected to be completed in 2001
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and an additional expansion of up to 150 MMcf/d that is expected to be completed in 2002. Northern Border Partners is evaluating the development of a 325 mile pipeline with a range of capacity from 375 MMcf/d to 500 MMcf/d to connect natural gas produc- tion in Wyoming to the Northern Border Pipeline in Montana.
In 2001, Portland General anticipates purchased power and fuel costs to remain at historically high levels. Portland General has submitted a request with the OPUC to recover the anticipated cost increase through a rate adjustment.
Wholesale Services
Enron builds its wholesale businesses through the creation of networks involving selective asset ownership, contractual access to third-party assets and market-making activities. Each market in which Wholesale Services operates utilizes these components in a slightly different manner and is at a different stage of development. This network strategy has enabled Wholesale Services to establish a leading position in its markets. Wholesale Services’ activities are categorized into two business lines: (a) Commodity Sales and Services and (b) Assets and Investments. Activities may be integrated into a bundled product offering for Enron’s customers.
Wholesale Services manages its portfolio of contracts and assets in order to maximize value, minimize the associated risks and provide overall liquidity. In doing so, Wholesale Services uses portfolio and risk management disciplines, including offsetting or hedging transactions, to manage exposures to market price movements (commodities, interest rates, foreign currencies and equities). Additionally, Wholesale Services manages its liquidity and exposure to third-party credit risk through monetization of its contract portfolio or third-party insurance contracts. Wholesale Services also sells interests in certain investments and other assets to improve liquidity and overall return, the timing of which is dependent on market conditions and management’s expectations of the investment’s value.
The following table reflects IBIT for each business line:
(In millions) 2000 1999 1998 Commodity sales and services $1,630 $ 628 $411 Assets and investments 889 850 709 Unallocated expenses (259) (161) (152)
Income before interest, minority interests and taxes $2,260 $1,317 $968
The following discussion analyzes the contributions to IBIT for each business line.
Commodity Sales and Services. Wholesale Services provides reliable commodity delivery and predictable pricing to its customers through forwards and other contracts. This market- making activity includes the purchase, sale, marketing and delivery of natural gas, electricity, liquids and other commodi- ties, as well as the management of Wholesale Services’ own portfolio of contracts. Contracts associated with this activity are accounted for using the mark-to-market method of accounting. See Note 1 to the Consolidated Financial Statements. Wholesale Services’ market-making activity is facilitated through a network of capabilities including selective asset ownership. Accordingly, certain assets involved in the delivery of these services are included in this business (such as intrastate natural gas pipelines, gas storage facilities and certain electric generation assets).
Wholesale Services markets, transports and provides energy commodities as reflected in the following table (including inter- company amounts):
2000 1999 1998 Physical volumes (BBtue/d)(a)(b)
Gas: United States 17,674 8,982 7,418 Canada 6,359 4,398 3,486 Europe and Other 3,637 1,572 1,251
27,670 14,952 12,155 Transportation volumes 649 575 559
Total gas volumes 28,319 15,527 12,714 Crude oil and Liquids 6,088 6,160 3,570 Electricity(c) 17,308 10,742 11,024
Total physical volumes (BBtue/d) 51,715 32,429 27,308 Electricity volumes (thousand MWh)
United States 578,787 380,518 401,843 Europe and Other 54,670 11,576 529
Total 633,457 392,094 402,372 Financial settlements
(notional, BBtue/d) 196,148 99,337 75,266
(a) Billion British thermal units equivalent per day. (b) Includes third-party transactions by Enron Energy Services. (c) Represents electricity volumes, converted to BBtue/d.
Earnings from commodity sales and services increased $1.0 billion (160%) in 2000 as compared to 1999. Increased profits from North American gas and power marketing operations, European power marketing operations as well as the value of new businesses, such as pulp and paper, contributed to the earnings growth of Enron’s commodity sales and services busi- ness. Continued market leadership in terms of volumes trans- acted, significant increases in natural gas prices and price volatility in both the gas and power markets were the key contributors to increased profits in the gas and power interme- diation businesses. In late 1999, Wholesale Services launched an Internet-based eCommerce system, EnronOnline, which allows wholesale customers to view Enron’s real time pricing and to complete commodity transactions with Enron as principal, with no direct interaction. In its first full year of operation, EnronOnline positively impacted wholesale volumes, which increased 59 percent over 1999 levels.
Earnings from commodity sales and services increased $217 million (53%) in 1999 as compared to 1998, reflecting strong results from the intermediation businesses in both North America and Europe, which include delivery of energy com- modities and associated risk management products. Wholesale Services also successfully managed its overall portfolio of con- tracts, particularly in minimizing credit exposures utilizing third-party contracts. New product offerings in coal and pulp and paper markets also added favorably to the results.
Assets and Investments. Enron’s Wholesale businesses make investments in various energy and certain related assets as a part of its network strategy. Wholesale Services either purchases the asset from a third party or develops and constructs the asset. In most cases, Wholesale Services operates and manages such assets. Earnings from these investments principally result from operations of the assets or sales of ownership interests.
Additionally, Wholesale Services invests in debt and equity securities of energy and technology-related businesses, which may also utilize Wholesale Services’ products and services. With these merchant investments, Enron’s influence is much more limited relative to assets Enron develops or constructs. Earnings from these activities, which are accounted for on a fair value basis and are included in revenues, result from changes in the market value of the securities. Wholesale Services uses risk
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management disciplines, including hedging transactions, to manage the impact of market price movements on its merchant investments. See Note 4 to the Consolidated Financial Statements for a summary of these investments.
Earnings from assets and investments increased $39 million (5%) in 2000 as compared to 1999 as a result of an increase in the value of Wholesale Services’ merchant investments, partially off- set by lower gains from sales of energy assets. Earnings from asset operations were comparable to 1999 levels. Earnings from merchant investments were positively impacted by power-related and energy investments, partially offset by the decline in value of technology-related and certain energy-intensive industry investments. Gains on sales of energy assets in 2000 included the monetization of certain European energy operations.
Earnings from assets and investments increased $141 million (20%) in 1999 as compared to 1998. During 1999, earnings from Wholesale Services’ energy-related assets increased, reflecting the operation of the Dabhol Power Plant in India, ownership in Elektro Eletricidade e Serviços S.A. (Elektro), a Brazilian electric utility, and assets in various other developing markets. Wholesale Services’ merchant investments increased in value during the year due to the expansion into certain technology-related invest- ments, partially offset by a decline in the value of certain energy investments. In addition, Wholesale Services’ 1999 earnings increased due to development and construction activities, while gains on sales of energy assets declined.
Unallocated Expenses. Net unallocated expenses such as systems expenses and performance-related costs increased in 2000 due to growth of Wholesale Services’ existing businesses and continued expansion into new markets.
Outlook
In 2000, Wholesale Services reinforced its leading positions in the natural gas and power markets in both North America and Europe. In the coming year, Wholesale Services plans to continue to expand and refine its existing energy networks and to extend its proven business model to new markets and industries.
In 2001, Wholesale Services plans to continue to fine-tune its already successful existing energy networks. In North America, Enron expects to complete the sale of five of its peaking power plants located in the Midwest and its intrastate natural gas pipeline. In each case, market conditions, such as increased liquidity, have diminished the need to own physical assets. For energy networks in other geographical areas where liquidity may be an issue, Enron will evaluate whether its existing network will benefit from additional physical assets. The existing networks in North America and Europe should continue to provide opportu- nities for sustained volume growth and increased profits.
The combination of knowledge gained in building networks in key energy markets and the application of new technology, such as EnronOnline, is expected to provide the basis to extend Wholesale Services’ business model to new markets and industries. In key international markets, where deregulation is underway, Enron plans to build energy networks by using the optimum combination of acquiring or constructing physical assets and securing contractual access to third-party assets. Enron also plans to replicate its business model to new industrial markets such as metals, pulp, paper and lumber, coal and steel. Enron expects to use its eCommerce platform, EnronOnline, to accelerate the pene- tration into these industries.
Earnings from Wholesale Services are dependent on the origination and completion of transactions, some of which are individually significant and which are impacted by market condi- tions, the regulatory environment and customer relationships. Wholesale Services’ transactions have historically been based on
a diverse product portfolio, providing a solid base of earnings. Enron’s strengths, including its ability to identify and respond to customer needs, access to extensive physical assets and its inte- grated product offerings, are important drivers of the expected continued earnings growth. In addition, significant earnings are expected from Wholesale Services’ commodity portfolio and investments, which are subject to market fluctuations. External factors, such as the amount of volatility in market prices, impact the earnings opportunity associated with Wholesale Services’ business. Risk related to these activities is managed using natu- rally offsetting transactions and hedge transactions. The effec- tiveness of Enron’s risk management activities can have a materi- al impact on future earnings. See “Financial Risk Management” for a discussion of market risk related to Wholesale Services.
Retail Energy Services
Energy Services sells or manages the delivery of natural gas, electricity, liquids and other commodities to industrial and commercial customers located in North America and Europe. Energy Services also provides outsourcing solutions to customers for full energy management. This integrated product includes the management of commodity delivery, energy information and energy assets, and price risk management activities. The com- modity portion of the contracts associated with this business are accounted for under the mark-to-market method of accounting. See Note 1 to the Consolidated Financial Statements.
(In millions) 2000 1999 1998 Revenues $4,615 $1,807 $1,072 Cost of sales 4,028 1,551 955 Operating expenses 449 308 210 Depreciation and amortization 38 29 31 Equity losses (60) - (2) Other, net 63 13 7
IBIT before items impacting comparability 103 (68) (119)
Items impacting comparability: Gain on The New Power Company
stock issuance 121 - - Retail Energy Services charges (59) - -
Income (loss) before interest, minority interests and taxes $ 165 $ (68) $ (119)
Operating Results
Revenues and gross margin increased $2,808 million and $331 million, respectively, in 2000 compared to 1999, primarily resulting from execution of commitments on its existing cus- tomer base, long-term energy contracts originated in 2000 and the increase in the value of Energy Services’ contract portfolio. Operating expenses increased as a result of costs incurred in building the capabilities to deliver services on existing customer contracts and in building Energy Services’ outsourcing business in Europe. Other, net in 2000 consisted primarily of gains associat- ed with the securitization of non-merchant equity instruments. Equity losses reflect Energy Services’ portion of losses of The New Power Company.
Items impacting comparability in 2000 included a pre-tax gain of $121 million related to the issuance of common stock by The New Power Company and a charge of $59 million related to the write-off of certain information technology and other costs. The New Power Company, which is approximately 45 percent owned by Enron, was formed to provide electricity and natural gas to residential and small commercial customers in deregulated energy markets in the United States.
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Outlook
During 2001, Energy Services anticipates continued growth in the demand for retail energy outsourcing solutions. Energy Services will deliver these services to its existing customers, while continuing to expand its commercial and industrial customer base for total energy outsourcing. Energy Services also plans to contin- ue integrating its service delivery capabilities, extend its business model to related markets and offer new products.
Broadband Services
In implementing Enron’s network strategy, Broadband Services is constructing the Enron Intelligent Network, a nation- wide fiber-optic network that consists of both fiber deployed by Enron and acquired capacity on non-Enron networks and is man- aged by Enron’s Broadband Operating System software. Enron is extending its market-making and risk management skills from its energy business to develop the bandwidth intermediation busi- ness to help customers manage unexpected fluctuation in the price, supply and demand of bandwidth. Enron’s bandwidth-on- demand platform allows delivery of high-bandwidth media-rich content such as video streaming, high capacity data transport and video conferencing. Broadband Services also makes invest- ments in companies with related technologies and with the potential for capital appreciation. Earnings from these merchant investments, which are accounted for on a fair value basis and are included in revenues, result from changes in the market value of the securities. Broadband Services uses risk management disci- plines, including hedging transactions, to manage the impact of market price movements on its merchant investments. Broadband Services also sells interests in certain investments and other assets to improve liquidity and overall return, the timing of which is dependent on market conditions and management’s expectations of the investment’s value.
The components of Broadband Services’ businesses include the development and construction of the Enron Intelligent Network, sales of excess fiber and software, bandwidth interme- diation and the delivery of content. Significant components of Broadband Services’ results are as follows:
(In millions) 2000 Gross margin $318 Operating expenses 305 Depreciation and amortization 77 Other, net 4
Loss before interest, minority interests and taxes $ (60)
Broadband Services recognized a loss before interest, minority interests and taxes of $60 million in 2000. Gross margin included earnings from sales of excess fiber capacity, a significant increase in the market value of Broadband Services’ merchant investments and the monetization of a portion of Enron’s broadband content deliv- ery platform. Expenses incurred during the period include expenses related to building the business and depreciation and amortization.
Outlook
Broadband Services is extending Enron’s proven business model to the communications industry. In 2001, Enron expects to further develop the Enron Intelligent Network, a global broad- band network with broad connectivity potential to both buyers and sellers of bandwidth through Enron’s pooling points. In addi- tion, Enron expects to further deploy its proprietary Broadband Operating System across the Enron Intelligent Network, enabling Enron to manage bandwidth capacity independent of owning the underlying fiber. Broadband Services expects its intermediation transaction level to increase significantly in 2001 as more market participants connect to the pooling points and transact with Enron
to manage their bandwidth needs. The availability of Enron’s bandwidth intermediation products and prices on EnronOnline are expected to favorably impact the volume of transactions. In 2001, Broadband Services expects to continue to expand the commercial roll-out of its content service offerings including video-on- demand. Enron expects the volume of content delivered over its network to increase as more content delivery contracts are signed and as more distribution partner locations are connected.
Corporate and Other
Significant components of Corporate and Other’s IBIT are as follows:
(In millions) 2000 1999 1998 IBIT before items impacting
comparability $(289) $ (17) $ 7
Items impacting comparability: Charge to reflect impairment
by Azurix (326) - - Gains on exchange and sales of
Enron Oil & Gas Company (EOG) stock - 454 22 Charge to reflect impairment of
MTBE assets and losses on contracted MTBE production - (441) (61)
Loss before interest, minority interests and taxes $(615) $ (4) $(32)
Results for Corporate and Other in 2000 reflect operating losses from Enron’s investment in Azurix (excluding the impair- ments discussed below) and increased information technology, employee compensation and corporate-wide expenses.
Results for Corporate and Other in 1999 were impacted by higher corporate expenses, partially offset by increased earnings from EREC resulting from increased sales volumes from its German manufacturing subsidiary and from the completion and sale of certain domestic wind projects. Enron also recognized higher earnings related to Azurix. Results in 1998 were favor- ably impacted by increases in the market value of certain corpo- rate-managed financial instruments, partially offset by higher corporate expenses.
Items impacting comparability in 2000 included a $326 mil- lion charge reflecting Enron’s portion of impairments recorded by Azurix related to assets in Argentina. Items impacting compa- rability in 1999 included a pre-tax gain of $454 million on the exchange and sale of Enron’s interest in EOG (see Note 2 to the Consolidated Financial Statements) and a $441 million pre-tax charge for the impairment of its MTBE assets (see Note 17 to the Consolidated Financial Statements).
During 1998, Enron recognized a pre-tax gain of $22 million on the delivery of 10.5 million shares of EOG stock held by Enron as repayment of mandatorily exchangeable debt. Enron also recorded a $61 million charge to reflect losses on contracted MTBE production.
Interest and Related Charges, Net
Interest and related charges, net of interest capitalized which totaled $38 million, $54 million and $66 million for 2000, 1999 and 1998, respectively, increased to $838 million in 2000 from $656 million in 1999 and $550 million in 1998. The increase in 2000 as compared to 1999 was primarily a result of increased long-term debt levels, increased average short-term borrowings, short-term debt assumed as a result of the acquisition of MG plc and higher interest rates in the U.S. The increase was partially offset by the replacement of debt related to a Brazilian sub- sidiary with lower interest rate debt.
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The increase in 1999 as compared to 1998 was primarily due to debt issuances and debt related to a Brazilian subsidiary, par- tially offset by a decrease in debt related to EOG following the sale and exchange of Enron’s interests in August 1999. See Note 2 to the Consolidated Financial Statements.
Minority Interests
Minority interests include the following:
(In millions) 2000 1999 1998 Elektro (a) $ 33 $ 39 $ - Majority-owned limited liability
company and limited partnerships 105 71 - Enron Oil & Gas Company - 2 24 Other 16 23 53
Total $154 $135 $77
(a) Relates to the respective parents of Elektro, which had minority shareholders in 2000 and 1999. See Note 8 to the Consolidated Financial Statements.
Minority interests include Elektro beginning January 1, 1999, a majority-owned limited liability company and majority-owned limited partnerships since their formation during 1998 through 2000 and EOG until the exchange and sale of Enron’s interests in August 1999 (see Note 2 to the Consolidated Financial Statements).
Income Tax Expense
Income tax expense increased in 2000 as compared to 1999 primarily as a result of increased earnings, decreased equity earn- ings and decreased tax benefits related to the foreign tax rate differential, partially offset by an increase in the differences between the book and tax basis of certain assets and stock sales.
Income tax expense decreased in 1999 compared to 1998 primarily as a result of increased equity earnings, tax benefits related to the foreign tax rate differential and the audit settle- ment related to Monthly Income Preferred Shares, partially offset by increased earnings.
Cumulative Effect of Accounting Changes
In 1999, Enron recorded an after-tax charge of $131 million to reflect the initial adoption (as of January 1, 1999) of two new accounting pronouncements, the AICPA Statement of Position 98-5 (SOP 98-5), “Reporting on the Costs of Start-Up Activities,” and the Emerging Issues Task Force Issue No. 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities.” The 1999 charge was primarily related to the adop- tion of SOP 98-5.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was subsequently amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 must be applied to all derivative instru- ments and certain derivative instruments embedded in hybrid instruments and requires that such instruments be recorded in the balance sheet either as an asset or liability measured at its fair value through earnings, with special accounting allowed for cer- tain qualifying hedges. Enron will adopt SFAS No. 133 as of January 1, 2001. Due to the adoption of SFAS No. 133, Enron will recognize an after-tax non-cash loss of approximately $5 million in earnings and an after-tax non-cash gain in “Other Comprehensive Income,” a component of shareholders’ equity, of approximately $22 million from the cumulative effect of a change in accounting principle. Enron will also reclassify $532 million from “Long-Term Debt” to “Other Liabilities” due to the adoption.
The total impact of Enron’s adoption of SFAS No. 133 on earnings and on “Other Comprehensive Income” is dependent upon certain pending interpretations, which are currently under consideration, including those related to “normal purchases and normal sales” and inflation escalators included in certain con- tract payment provisions. The interpretations of these issues, and others, are currently under consideration by the FASB. While the ultimate conclusions reached on interpretations being consid- ered by the FASB could impact the effects of Enron’s adoption of SFAS No. 133, Enron does not believe that such conclusions would have a material effect on its current estimate of the impact of adoption.
FINANCIAL CONDITION
Cash Flows
(In millions) 2000 1999 1998 Cash provided by (used in):
Operating activities $ 4,779 $ 1,228 $ 1,640 Investing activities (4,264) (3,507) (3,965) Financing activities 571 2,456 2,266
Net cash provided by operating activities increased $3,551 million in 2000, primarily reflecting decreases in working capital, positive operating results and a receipt of cash associated with the assumption of a contractual obligation. Net cash provided by operating activities decreased $412 million in 1999, primarily reflecting increases in working capital and net assets from price risk management activities, partially offset by increased earn- ings and higher proceeds from sales of merchant assets and investments. The 1998 amount reflects positive operating cash flow from Enron’s major business segments, proceeds from sales of interests in energy-related merchant assets and cash from timing and other changes related to Enron’s commodity portfo- lio, partially offset by new investments in merchant assets and investments.
Net cash used in investing activities primarily reflects capital expenditures and equity investments, which total $3,314 million in 2000, $3,085 million in 1999 and $3,564 million in 1998, and cash used for business acquisitions. See “Capital Expenditures and Equity Investments” below and see Note 2 to the Consolidated Financial Statements for cash used for business acquisitions. Partially offsetting these uses of cash were proceeds from sales of non-merchant assets, including certain equity instruments by Energy Services and an international power project, which totaled $494 million in 2000. Proceeds from non-merchant asset sales were $294 million in 1999 and $239 million in 1998.
Cash provided by financing activities in 2000 included pro- ceeds from the issuance of subsidiary equity and the issuance of common stock related to employee benefit plans, partially offset by payments of dividends. Cash provided by financing activities in 1999 included proceeds from the net issuance of short- and long-term debt, the issuance of common stock and the issuance of subsidiary equity, partially offset by payments of dividends. Cash provided by financing activities in 1998 included proceeds from the net issuance of short- and long-term debt, the issuance of common stock and the sale of a minority interest in a sub- sidiary, partially offset by payments of dividends.
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Capital Expenditures and Equity Investments
Capital expenditures by operating segment are as follows:
2001 (In millions) Estimate 2000 1999 1998 Transportation and Distribution $ 140 $ 270 $ 316 $ 310 Wholesale Services 570 1,280 1,216 706 Retail Energy Services 50 70 64 75 Broadband Services 700 436 - - Exploration and Production - - 226 690 Corporate and Other 40 325 541 124
Total $1,500 $2,381 $2,363 $1,905
Capital expenditures increased $18 million in 2000 and $458 million in 1999 as compared to the previous year. Capital expen- ditures in 2000 primarily relate to construction of power plants to extend Wholesale Services’ network and fiber optic network infrastructure for Broadband Services. During 1999, Wholesale Services expenditures increased due primarily to construction of domestic and international power plants. The 1999 increase in Corporate and Other reflects the purchase of certain previously leased MTBE-related assets.
Cash used for investments in equity affiliates by the operat- ing segments is as follows:
(In millions) 2000 1999 1998 Transportation and Distribution $ 1 $ - $ 27 Wholesale Services 911 712 703 Corporate and Other 21 10 929
Total $933 $722 $1,659
Equity investments in 2000 relate primarily to capital invested for the ongoing construction, by a joint venture, of a power plant in India as well as other international investments. Equity invest- ments in 1999 relate primarily to an investment in a joint venture that holds gas distribution and related businesses in South Korea and the power plant project in India.
The level of spending for capital expenditures and equity investments will vary depending upon conditions in the energy and broadband markets, related economic conditions and iden- tified opportunities. Management expects that the capital spending program will be funded by a combination of internally generated funds, proceeds from dispositions of selected assets and short- and long-term borrowings.
Working Capital
At December 31, 2000, Enron had working capital of $2.0 billion. If a working capital deficit should occur, Enron has credit facilities in place to fund working capital requirements. At December 31, 2000, those credit lines provided for up to $4.2 billion of committed and uncommitted credit, of which $290 million was outstanding. Certain of the credit agreements contain prefunding covenants. However, such covenants are not expected to restrict Enron’s access to funds under these agreements. In addition, Enron sells commercial paper and has agreements to sell trade accounts receivable, thus providing financing to meet seasonal working capital needs. Management believes that the sources of funding described above are suffi- cient to meet short- and long-term liquidity needs not met by cash flows from operations.
CAPITALIZATION
Total capitalization at December 31, 2000 was $25.0 billion. Debt as a percentage of total capitalization increased to 40.9 percent at December 31, 2000 as compared to 38.5 percent at December 31, 1999. The increase in the ratio primarily reflects increased debt levels and the impact on total equity of the decline in the value of the British pound sterling. This was par- tially offset by the issuances, in 2000, of Enron common stock and the contribution of common shares (see Note 16 to the Consolidated Financial Statements). The issuances of Enron com- mon stock primarily related to the acquisition of a minority shareholder’s interest in Enron Energy Services, LLC and the exercise of employee stock options.
Enron is a party to certain financial contracts which contain provisions for early settlement in the event of a significant market price decline in which Enron’s common stock falls below certain levels (prices ranging from $28.20 to $55.00 per share) or if the credit ratings for Enron’s unsecured, senior long-term debt obligations fall below investment grade. The impact of this early settlement could include the issuance of additional shares of Enron common stock.
Enron’s senior unsecured long-term debt is currently rated BBB+ by Standard & Poor’s Corporation and Fitch IBCA and Baa1 by Moody’s Investor Service. Enron’s continued investment grade status is critical to the success of its wholesale businesses as well as its ability to maintain adequate liquidity. Enron’s management believes it will be able to maintain its credit rating.
Financial Risk Management
Wholesale Services offers price risk management services primarily related to commodities associated with the energy sector (natural gas, electricity, crude oil and natural gas liquids). Energy Services and Broadband Services also offer price risk man- agement services to their customers. These services are provided through a variety of financial instruments including forward contracts, which may involve physical delivery, swap agreements, which may require payments to (or receipt of payments from) counterparties based on the differential between a fixed and variable price for the commodity, options and other contractual arrangements. Interest rate risks and foreign currency risks asso- ciated with the fair value of Wholesale Services’ commodities portfolio are managed using a variety of financial instruments, including financial futures, swaps and options.
On a much more limited basis, Enron’s other businesses also enter into financial instruments such as forwards, swaps and other contracts primarily for the purpose of hedging the impact of market fluctuations on assets, liabilities, production or other contractual commitments. Changes in the market value of these hedge transactions are deferred until the gain or loss is recog- nized 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.
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Market Risk
The use of financial instruments by Enron’s businesses may expose Enron to market and credit risks resulting from adverse changes in commodity and equity prices, interest rates and foreign exchange rates. For Enron’s businesses, the major market risks are discussed below:
Commodity Price Risk. Commodity price risk is a consequence of providing price risk management services to customers. As dis- cussed above, Enron actively manages this risk on a portfolio basis to ensure compliance with Enron’s stated risk management policies.
Interest Rate Risk. Interest rate risk is also a consequence of providing price risk management services to customers and having variable rate debt obligations, as changing interest rates impact the discounted value of future cash flows. Enron utilizes forwards, futures, swaps and options to manage its interest rate risk.
Foreign Currency Exchange Rate Risk. Foreign currency exchange rate risk is the result of Enron’s international operations and price risk management services provided to its worldwide customer base. The primary purpose of Enron’s foreign currency hedging activities is to protect against the volatility associated with foreign currency purchase and sale transactions. Enron pri- marily utilizes forward exchange contracts, futures and purchased options to manage Enron’s risk profile.
Equity Risk. Equity risk arises from Enron’s participation in investments. Enron generally manages this risk by hedging spe- cific 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 num- ber of key assumptions including the selection of a confidence level for expected losses, the holding period for liquidation and the treatment of risks outside the value at risk methodologies, including liquidity risk and event risk. Value at risk represents an estimate of reasonably possible net losses in earnings that would be recognized on its investments assuming hypothetical movements in future market rates and no change in positions. Value at risk is not necessarily indicative of actual results which may occur.
Value at Risk
Enron has performed an entity-wide value at risk analysis of virtually all of Enron’s financial instruments, including price risk management activities and merchant investments. Value at risk incorporates numerous variables that could impact the fair value of Enron’s investments, including commodity prices, interest rates, foreign exchange rates, equity prices and associated volatilities, as well as correlation within and across these variables. Enron estimates value at risk for commodity, interest rate and foreign exchange exposures using a model based on Monte Carlo simulation of delta/gamma positions which captures a significant portion of the exposure related to option positions. The value at risk for equity exposure discussed above is based on J.P. Morgan’s RiskMetrics™ 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 pro- fessional judgment of experienced business and risk managers, are used to supplement the value at risk methodology and cap- ture additional market-related risks, including volatility, liquidity and event, concentration and correlation risks.
The following table illustrates the value at risk for each component of market risk:
December 31, Year ended December 31, 2000
High Low
(In millions) 2000 1999 Average(a) Valuation(a) Valuation(a)
Trading Market Risk: Commodity price (b) $66 $21 $50 $81 $23 Interest rate - - - - - Foreign currency
exchange rate - - - - - Equity (c) 59 26 45 59 36
Non-Trading Market Risk(d): Commodity price 2 1 2 5 2 Interest rate - 2 1 2 - Foreign currency
exchange rate 8 4 8 10 4 Equity 7 3 6 7 5
(a) The average value presents a twelve month average of the month-end values. The high and low valuations for each market risk component represent the highest and lowest month-end value during 2000.
(b) In 2000, increased natural gas prices combined with increased price volatility in power and gas markets caused Enron’s value at risk to increase significantly.
(c) Enron’s equity trading market risk primarily relates to merchant investments (see Note 4 to the Consolidated Financial Statements). In 2000, the value at risk model utilized for equity trading market risk was refined to more closely cor- relate with the valuation methodologies used for merchant activities.
(d) Includes only the risk related to the financial instruments that serve as hedges and does not include the related underlying hedged item.
Accounting Policies
Accounting policies for price risk management and hedging activities are described in Note 1 to the Consolidated Financial Statements.
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Information Regarding Forward-Looking Statements
This Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this document are forward-looking statements. Forward-looking statements include, but are not limited to, statements relating to expansion opportunities for the Transportation Services, extension of Enron’s business model to new markets and industries, demand in the market for broadband services and high bandwidth applications, transaction volumes in the U.S. power market, com- mencement of commercial operations of new power plants and pipeline projects, completion of the sale of certain assets and growth in the demand for retail energy outsourcing solutions. When used in this document, the words “anticipate,” “believe,” “estimate,” “expects,” “intend,” “may,” “project,” “plan,” “should” and similar expressions are intended to be among the statements that identify forward-looking statements. Although Enron believes that its expectations reflected in these forward- looking statements are based on reasonable assumptions, such statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward- looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include success in marketing natural gas and power to wholesale customers; the ability of Enron to penetrate new retail natural gas and electricity markets (including energy outsourcing markets) in the United States and foreign jurisdic- tions; development of Enron’s broadband network and customer demand for intermediation and content services; the timing, extent and market effects of deregulation of energy markets in the United States, including the current energy market condi- tions in California, and in foreign jurisdictions; other regulatory developments in the United States and in foreign countries, including tax legislation and regulations; political developments in foreign countries; the extent of efforts by governments to privatize natural gas and electric utilities and other industries; the timing and extent of changes in commodity prices for crude oil, natural gas, electricity, foreign currency and interest rates; the extent of success in acquiring oil and gas properties and in discovering, developing, producing and marketing reserves; the timing and success of Enron’s efforts to develop international power, pipeline and other infrastructure projects; the effective- ness of Enron’s risk management activities; the ability of coun- terparties to financial risk management instruments and other contracts with Enron to meet their financial commitments to Enron; and Enron’s ability to access the capital markets and equi- ty markets during the periods covered by the forward-looking statements, which will depend on general market conditions and Enron’s ability to maintain the credit ratings for its unsecured senior long-term debt obligations.
Management’s Responsibility for Financial Reporting
The following financial statements of Enron Corp. and sub- sidiaries (collectively, Enron) were prepared by management, which is responsible for their integrity and objectivity. The state- ments have been prepared in conformity with generally accepted accounting principles and necessarily include some amounts that are based on the best estimates and judgments of management.
The system of internal controls of Enron is designed to provide reasonable assurance as to the reliability of financial statements and the protection of assets from unauthorized acquisition, use or disposition. This system is augmented by written policies and guidelines and the careful selection and training of qualified personnel. It should be recognized, however, that there are inherent limitations in the effectiveness of any system of internal control. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to the preparation of reliable financial statements and safeguarding of assets. Further, because of changes in conditions, internal control system effectiveness may vary over time.
Enron assessed its internal control system as of December 31, 2000, 1999 and 1998, relative to current standards of control criteria. Based upon this assessment, management believes that its system of internal controls was adequate during the periods to provide reasonable assurance as to the reliability of financial statements and the protection of assets against unauthorized acquisition, use or disposition.
Arthur Andersen LLP was engaged to audit the financial statements of Enron and issue reports thereon. Their audits included developing an overall understanding of Enron’s accounting systems, procedures and internal controls and con- ducting tests and other auditing procedures sufficient to support their opinion on the financial statements. Arthur Andersen LLP was also engaged to examine and report on management’s assertion about the effectiveness of Enron’s system of internal controls. The Reports of Independent Public Accountants appear in this Annual Report.
The adequacy of Enron’s financial controls and the account- ing principles employed in financial reporting are under the general oversight of the Audit Committee of Enron Corp.’s Board of Directors. No member of this committee is an officer or employee of Enron. The independent public accountants have direct access to the Audit Committee, and they meet with the committee from time to time, with and without financial man- agement present, to discuss accounting, auditing and financial reporting matters.
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Reports Of Independent Public Accountants
To the Shareholders and Board of Directors of Enron Corp.:
We have examined management’s assertion that the system of internal control of Enron Corp. (an Oregon corporation) and subsidiaries as of December 31, 2000, 1999 and 1998 was adequate to provide reasonable assurance as to the reliability of financial statements and the protection of assets from unautho- rized acquisition, use or disposition, included in the accompany- ing report on Management’s Responsibility for Financial Reporting. Management is responsible for maintaining effective internal control over the reliability of financial statements and the protection of assets against unauthorized acquisition, use or disposition. Our responsibility is to express an opinion on management’s assertion based on our examination.
Our examinations were made in accordance with attesta- tion standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the system of internal control, testing and eval- uating the design and operating effectiveness of the system of internal control and such other procedures as we considered necessary in the circumstances. We believe that our examinations provide a reasonable basis for our opinion.
Because of inherent limitations in any system of internal control, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the system of internal control to future periods are subject to the risk that the system of internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assertion that the system of internal control of Enron Corp. and its subsidiaries as of December 31, 2000, 1999 and 1998 was adequate to provide rea- sonable assurance as to the reliability of financial statements and the protection of assets from unauthorized acquisition, use or disposition is fairly stated, in all material respects, based upon current standards of control criteria.
Arthur Andersen LLP
Houston, Texas February 23, 2001
To the Shareholders and Board of Directors of Enron Corp.:
We have audited the accompanying consolidated balance sheet of Enron Corp. (an Oregon corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders’ equity for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of Enron Corp.’s management. Our responsibil- ity is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing stan- dards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enron Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations, cash flows and changes in shareholders’ equity for each of the three years in the period ended December 31, 2000, in conformity with accounting princi- ples generally accepted in the United States.
As discussed in Note 18 to the consolidated financial state- ments, Enron Corp. and subsidiaries changed its method of accounting for costs of start-up activities and its method of accounting for certain contracts involved in energy trading and risk management activities in the first quarter of 1999.
Arthur Andersen LLP
Houston, Texas February 23, 2001
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Enron Corp. and Subsidiaries Consolidated Income Statement
Year ended December 31, (In millions, except per share amounts) 2000 1999 1998 Revenues
Natural gas and other products $ 50,500 $19,536 $13,276 Electricity 33,823 15,238 13,939 Metals 9,234 - - Other 7,232 5,338 4,045
Total revenues 100,789 40,112 31,260
Costs and Expenses Cost of gas, electricity, metals and other products 94,517 34,761 26,381 Operating expenses 3,184 3,045 2,473 Depreciation, depletion and amortization 855 870 827 Taxes, other than income taxes 280 193 201 Impairment of long-lived assets - 441 -
Total costs and expenses 98,836 39,310 29,882
Operating Income 1,953 802 1,378
Other Income and Deductions Equity in earnings of unconsolidated equity affiliates 87 309 97 Gains on sales of non-merchant assets 146 541 56 Gains on the issuance of stock by TNPC, Inc. 121 - - Interest income 212 162 88 Other income, net (37) 181 (37)
Income Before Interest, Minority Interests and Income Taxes 2,482 1,995 1,582
Interest and related charges, net 838 656 550 Dividends on company-obligated preferred securities of subsidiaries 77 76 77 Minority interests 154 135 77 Income tax expense 434 104 175 Net income before cumulative effect of accounting changes 979 1,024 703 Cumulative effect of accounting changes, net of tax - (131) - Net Income 979 893 703
Preferred stock dividends 83 66 17 Earnings on Common Stock $ 896 $ 827 $ 686 Earnings Per Share of Common Stock
Basic Before cumulative effect of accounting changes $ 1.22 $ 1.36 $ 1.07 Cumulative effect of accounting changes - (0.19) -
Basic earnings per share $ 1.22 $ 1.17 $ 1.07 Diluted
Before cumulative effect of accounting changes $ 1.12 $ 1.27 $ 1.01 Cumulative effect of accounting changes - (0.17) -
Diluted earnings per share $ 1.12 $ 1.10 $ 1.01 Average Number of Common Shares Used in Computation
Basic 736 705 642 Diluted 814 769 695
Enron Corp. and Subsidiaries Consolidated Statement of Comprehensive Income
Year ended December 31, (In millions) 2000 1999 1998 Net Income $ 979 $ 893 $ 703 Other comprehensive income:
Foreign currency translation adjustment and other (307) (579) (14) Total Comprehensive Income $ 672 $ 314 $ 689
The accompanying notes are an integral part of these consolidated financial statements.
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Enron Corp. and Subsidiaries Consolidated Balance Sheet
December 31, (In millions, except shares) 2000 1999 ASSETS
Current Assets
Cash and cash equivalents $ 1,374 $ 288
Trade receivables (net of allowance for doubtful
accounts of $133 and $40, respectively) 10,396 3,030
Other receivables 1,874 518
Assets from price risk management activities 12,018 2,205
Inventories 953 598
Deposits 2,433 81
Other 1,333 535
Total current assets 30,381 7,255
Investments and Other Assets
Investments in and advances to unconsolidated equity affiliates 5,294 5,036
Assets from price risk management activities 8,988 2,929
Goodwill 3,638 2,799
Other 5,459 4,681
Total investments and other assets 23,379 15,445
Property, Plant and Equipment, at cost
Natural gas transmission 6,916 6,948
Electric generation and distribution 4,766 3,552
Fiber-optic network and equipment 839 379
Construction in progress 682 1,120
Other 2,256 1,913
15,459 13,912
Less accumulated depreciation, depletion and amortization 3,716 3,231
Property, plant and equipment, net 11,743 10,681
Total Assets $65,503 $33,381
The accompanying notes are an integral part of these consolidated financial statements.
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December 31, 2000 1999
LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities
Accounts payable $ 9,777 $ 2,154 Liabilities from price risk management activities 10,495 1,836 Short-term debt 1,679 1,001 Customers’ deposits 4,277 44 Other 2,178 1,724
Total current liabilities 28,406 6,759
Long-Term Debt 8,550 7,151
Deferred Credits and Other Liabilities Deferred income taxes 1,644 1,894 Liabilities from price risk management activities 9,423 2,990 Other 2,692 1,587
Total deferred credits and other liabilities 13,759 6,471
Commitments and Contingencies (Notes 13, 14 and 15)
Minority Interests 2,414 2,430
Company-Obligated Preferred Securities of Subsidiaries 904 1,000
Shareholders’ Equity Second preferred stock, cumulative, no par value, 1,370,000 shares authorized,
1,240,933 shares and 1,296,184 shares issued, respectively 124 130 Mandatorily Convertible Junior Preferred Stock, Series B,
no par value, 250,000 shares issued 1,000 1,000 Common stock, no par value, 1,200,000,000 shares authorized,
752,205,112 shares and 716,865,081 shares issued, respectively 8,348 6,637 Retained earnings 3,226 2,698 Accumulated other comprehensive income (1,048) (741) Common stock held in treasury, 577,066 shares and 1,337,714 shares, respectively (32) (49) Restricted stock and other (148) (105)
Total shareholders’ equity 11,470 9,570
Total Liabilities and Shareholders’ Equity $65,503 $33,381
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Enron Corp. and Subsidiaries Consolidated Statement of Cash Flows
Year ended December 31, (In millions) 2000 1999 1998 Cash Flows From Operating Activities Reconciliation of net income to net cash provided by operating activities
Net income $ 979 $ 893 $ 703 Cumulative effect of accounting changes - 131 - Depreciation, depletion and amortization 855 870 827 Impairment of long-lived assets (including equity investments) 326 441 - Deferred income taxes 207 21 87 Gains on sales of non-merchant assets (146) (541) (82) Changes in components of working capital 1,769 (1,000) (233) Net assets from price risk management activities (763) (395) 350 Merchant assets and investments:
Realized gains on sales (104) (756) (628) Proceeds from sales 1,838 2,217 1,434 Additions and unrealized gains (1,295) (827) (721)
Other operating activities 1,113 174 (97) Net Cash Provided by Operating Activities 4,779 1,228 1,640
Cash Flows From Investing Activities Capital expenditures (2,381) (2,363) (1,905) Equity investments (933) (722) (1,659) Proceeds from sales of non-merchant assets 494 294 239 Acquisition of subsidiary stock (485) - (180) Business acquisitions, net of cash acquired (see Note 2) (777) (311) (104) Other investing activities (182) (405) (356)
Net Cash Used in Investing Activities (4,264) (3,507) (3,965)
Cash Flows From Financing Activities Issuance of long-term debt 3,994 1,776 1,903 Repayment of long-term debt (2,337) (1,837) (870) Net increase (decrease) in short-term borrowings (1,595) 1,565 (158) Net issuance (redemption) of company-obligated
preferred securities of subsidiaries (96) - 8 Issuance of common stock 307 852 867 Issuance of subsidiary equity 500 568 828 Dividends paid (523) (467) (414) Net disposition of treasury stock 327 139 13 Other financing activities (6) (140) 89
Net Cash Provided by Financing Activities 571 2,456 2,266
Increase (Decrease) in Cash and Cash Equivalents 1,086 177 (59) Cash and Cash Equivalents, Beginning of Year 288 111 170 Cash and Cash Equivalents, End of Year $ 1,374 $ 288 $ 111 Changes in Components of Working Capital
Receivables $(8,203) $ (662) $(1,055) Inventories 1,336 (133) (372) Payables 7,167 (246) 433 Other 1,469 41 761
Total $ 1,769 $(1,000) $ (233)
The accompanying notes are an integral part of these consolidated financial statements.
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Enron Corp. and Subsidiaries Consolidated Statement of Changes in Shareholders’ Equity
(In millions, except per share 2000 1999 1998 amounts; shares in thousands) Shares Amount Shares Amount Shares Amount
Cumulative Second Preferred Convertible Stock Balance, beginning of year 1,296 $ 130 1,320 $ 132 1,338 $ 134 Exchange of convertible preferred stock for common stock (55) (6) (24) (2) (18) (2) Balance, end of year 1,241 $ 124 1,296 $ 130 1,320 $ 132
Mandatorily Convertible Junior Preferred Stock, Series B Balance, beginning of year 250 $ 1,000 - $ - - $ - Issuances - - 250 1,000 - - Balance, end of year 250 $ 1,000 250 $1,000 - $ -
Common Stock Balance, beginning of year 716,865 $ 6,637 671,094 $5,117 636,594 $4,224 Exchange of convertible preferred stock for common stock 1,509 6 465 (1) - (7) Issuances related to benefit and dividend reinvestment plans 28,100 966 10,054 258 - 45
Sales of common stock - - 27,600 839 34,500 836 Issuances of common stock in business acquisitions
(see Note 2) 5,731 409 7,652 250 - - Other - 330 - 174 - 19 Balance, end of year 752,205 $ 8,348 716,865 $6,637 671,094 $5,117
Retained Earnings Balance, beginning of year $ 2,698 $2,226 $1,852 Net income 979 893 703 Cash dividends
Common stock ($0.5000, $0.5000 and $0.4812 per share in 2000, 1999 and 1998, respectively) (368) (355) (312)
Cumulative Second Preferred Convertible Stock ($13.652, $13.652 and $13.1402 per share in 2000, 1999 and 1998, respectively) (17) (17) (17)
Series A and B Preferred Stock (66) (49) - Balance, end of year $ 3,226 $2,698 $2,226
Accumulated Other Comprehensive Income Balance, beginning of year $ (741) $ (162) $ (148) Translation adjustments and other (307) (579) (14) Balance, end of year $ (1,048) $ (741) $ (162)
Treasury Stock Balance, beginning of year (1,338) $ (49) (9,334) $ (195) (14,102) $ (269) Shares acquired (3,114) (234) (1,845) (71) (2,236) (61) Exchange of convertible preferred stock for common stock - - 181 4 486 9 Issuances related to benefit and dividend reinvestment plans 3,875 251 9,660 213 6,426 124 Issuances of treasury stock in business acquisitions - - - - 92 2 Balance, end of year (577) $ (32) (1,338) $ (49) (9,334) $ (195)
Restricted Stock and Other Balance, beginning of year $ (105) $ (70) $ (175) Issuances related to benefit and dividend reinvestment plans (43) (35) 105 Balance, end of year $ (148) $ (105) $ (70)
Total Shareholders’ Equity $11,470 $9,570 $7,048
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 account- ing principles and prevailing industry practices. The consolidated financial statements include the accounts of all subsidiaries controlled by Enron Corp. after the elimination of significant intercompany accounts and transactions.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
“Enron” is used from time to time herein as a collective reference to Enron Corp. and its subsidiaries and affiliates. The businesses of Enron are conducted by its subsidiaries and affili- ates whose operations are managed by their respective officers.
Cash Equivalents
Enron records as cash equivalents all highly liquid short-term investments with original maturities of three months or less.
Inventories
Inventories consist primarily of commodities, priced at market as such inventories are used in trading activities.
Depreciation, Depletion and Amortization
The provision for depreciation and amortization with respect to operations other than oil and gas producing activities is computed using the straight-line or regulatorily mandated method, based on estimated economic lives. Composite depreci- ation rates are applied to functional groups of property having similar economic characteristics. The cost of utility property units retired, other than land, is charged to accumulated depreciation.
Provisions for depreciation, depletion and amortization of proved oil and gas properties are calculated using the units-of- production method.
Income Taxes
Enron accounts for income taxes using an asset and liability approach under which deferred assets and liabilities are recog- nized 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 out- standing 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 dilut- ed 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 con- nection 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 con- tracts utilized for trading activities and other instruments with third parties are reflected at fair value and are shown as “Assets and Liabilities from Price Risk Management Activities” in the Consolidated Balance Sheet. These activities also include the commodity risk management component embedded in energy outsourcing contracts. Unrealized gains and losses from newly originated contracts, contract restructurings and the impact of price movements are recognized as “Other Revenues.” Changes in the assets and liabilities from price risk management activities result primarily from changes in the valuation of the portfolio of contracts, newly originated transactions and the timing of settle- ment relative to the receipt of cash for certain contracts. The market prices used to value these transactions reflect manage- ment’s best estimate considering various factors including closing exchange and over-the-counter quotations, time value and volatility factors underlying the commitments.
Financial instruments are also utilized for non-trading purposes to hedge the impact of market fluctuations on assets, liabilities, production and other contractual commitments. Hedge accounting is utilized in non-trading activities when there is a high degree of correlation between price movements in the derivative and the item designated as being hedged. In instances where the anticipated correlation of price movements does not occur, hedge accounting is terminated and future changes in the value of the financial instruments are recognized as gains or losses. If the hedged item is sold, the value of the financial instrument is recognized in income. Gains and losses on financial instruments used for hedging purposes are recognized in the Consolidated Income Statement in the same manner as the hedged item.
The cash flow impact of financial instruments is reflected as cash flows from operating activities in the Consolidated Statement of Cash Flows. See Note 3 for further discussion of Enron’s price risk management activities.
Accounting for Development Activity
Development costs related to projects, including costs of feasibility studies, bid preparation, permitting, licensing and con- tract 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 recov- ered 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.
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Computer Software
Direct costs of materials and services consumed in developing or obtaining software, including payroll and payroll-related costs for employees who are directly associated with and who devote time to the software project are capitalized. Costs may begin to be capitalized once the application development stage has begun. All other costs are expensed as incurred. Enron amortizes the costs on a straight-line basis over the useful life of the software. Impairment is evaluated based on changes in the expected useful- ness of the software. At December 31, 2000 and 1999, Enron has capitalized, net of amortization, $381 million and $240 million, respectively, of software costs covering numerous systems, includ- ing trading and settlement, accounting, billing, and upgrades.
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates are accounted for by the equity method, except for certain investments resulting from Enron’s merchant investment activities which are included at market value in “Other Investments” in the Consolidated Balance Sheet. See Notes 4 and 9. Where acquired assets are accounted for under the equity method based on temporary con- trol, earnings or losses are recognized only for the portion of the investment to be retained.
Sale of Subsidiary Stock
Enron accounts for the issuance of stock by its subsidiaries in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) 51. SAB 51 allows for Enron to recog- nize a gain in the amount that the offering price per share of a subsidiary’s stock exceeds Enron’s carrying amount per share.
Foreign Currency Translation
For international subsidiaries, asset and liability accounts are translated at year-end rates of exchange and revenue and expenses are translated at average exchange rates prevailing during the year. For subsidiaries whose functional currency is deemed to be other than the U.S. dollar, translation adjustments are included as a separate component of other comprehensive income and shareholders’ equity. Currency transaction gains and losses are recorded in income.
During 1999, the exchange rate for the Brazilian real to the U.S. dollar declined, resulting in a non-cash foreign currency translation adjustment reducing the value of Enron’s assets and shareholders’ equity by approximately $600 million.
Reclassifications
Certain reclassifications have been made to the consolidated financial statements for prior years to conform with the current presentation.
2 BUSINESS ACQUISITIONS AND DISPOSITIONS
In 2000, Enron, through a wholly-owned subsidiary, acquired all of the outstanding common shares of MG plc, a leading independent international metals market-making business that provides financial and marketing services to the global metals industry, for $413 million in cash and assumed debt of approximately $1.6 billion.
In addition, Enron made other acquisitions including a technology-related company, a facility maintenance company and all minority shareholders’ interests in Enron Energy Services, LLC and Enron Renewable Energy Corp. Enron issued 5.7 million shares of Enron common stock, contributed common stock and warrants of an unconsolidated equity affiliate and paid cash in these transactions.
On August 16, 1999, Enron exchanged approximately 62.3 million shares (approximately 75%) of the Enron Oil & Gas Company (EOG) common stock it held for all of the stock of EOGI-India, Inc., a subsidiary of EOG. Also in August 1999, Enron received net proceeds of approximately $190 million for the sale of 8.5 million shares of EOG common stock in a public offering and issued approximately $255 million of public debt that is exchangeable in July 2002 into approximately 11.5 million shares of EOG common stock. As a result of the share exchange and share sale, Enron recorded a pre-tax gain of $454 million ($345 million after tax, or $0.45 per diluted share) in 1999. As of August 16, 1999, EOG is no longer included in Enron’s consolidated financial statements. EOGI-India, Inc. is included in the consoli- dated financial statements within the Wholesale Services segment following the exchange and sale. Enron accounts for its oil and gas exploration and production activities under the suc- cessful efforts method of accounting.
In August 1998, Enron, through a wholly-owned subsidiary, completed the acquisition of a controlling interest in Elektro Eletricidade e Serviços S.A. (Elektro) for approximately $1.3 bil- lion. Elektro was initially accounted for using the equity method based on temporary control. In 1999, after the acquisition of additional interests, Elektro was consolidated by Enron.
Additionally, during 1999 and 1998, Enron acquired genera- tion, natural gas distribution, renewable energy, telecommunica- tions and energy management businesses for cash, Enron and subsidiary stock and notes.
Enron has accounted for these acquisitions using the pur- chase method of accounting as of the effective date of each transaction. Accordingly, the purchase price of each transaction has been allocated based upon the estimated fair value of the assets and liabilities acquired as of the acquisition date, with the excess reflected as goodwill in the Consolidated Balance Sheet. This and all other goodwill is being amortized on a straight-line basis over 5 to 40 years.
Assets acquired, liabilities assumed and consideration paid as a result of businesses acquired were as follows:
(In millions) 2000 1999 1998(a)
Fair value of assets acquired, other than cash $ 2,641 $ 376 $ 269
Goodwill 963 (71) 94 Fair value of liabilities assumed (2,418) 6 (259) Common stock of Enron issued and
equity of an unconsolidated equity affiliate contributed (409) - -
Net cash paid $ 777 $ 311 $ 104
(a) Excludes amounts related to the 1998 acquisition of Elektro.
On November 8, 1999, Enron announced that it had entered into an agreement to sell Enron’s wholly-owned electric utility subsidiary, Portland General Electric Company (PGE), to Sierra Pacific Resources for $2.1 billion. Sierra Pacific Resources will also assume approximately $1 billion in PGE debt and preferred stock. The transaction has been delayed by the effect of recent events in California and Nevada on the buyer. Enron’s carrying amount of PGE as of December 31, 2000 was approximately $1.6 billion. Income before interest, minority interest and income taxes for PGE was $338 million, $298 million and $284 million for 2000, 1999 and 1998, respectively.
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3 PRICE RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS
Trading Activities
Enron offers price risk management services to wholesale, commercial and industrial customers through a variety of finan- cial and other instruments including forward contracts involving physical delivery, swap agreements, which require payments to (or receipt of payments from) counterparties based on the dif- ferential between a fixed and variable price for the commodity, options and other contractual arrangements. Interest rate risks and foreign currency risks associated with the fair value of the commodity portfolio are managed using a variety of financial instruments, including financial futures.
Notional Amounts and Terms. The notional amounts and terms of these instruments at December 31, 2000 are shown below (dollars in millions):
Fixed Price Fixed Price Maximum Payor Receiver Terms in Years
Commodities (a)
Natural gas 7,331 6,910 23 Crude oil and liquids 3,513 1,990 6 Electricity 2,424 2,388 24 Metals, coal and
pulp and paper 368 413 9 Bandwidth 167 325 11
Financial products Interest rate (b) $4,732 $3,977 29 Foreign currency $ 79 $ 465 22 Equity investments (c) $2,998 $3,768 13
(a) Natural gas, crude oil and liquids and electricity volumes are in TBtue; metals, coal and pulp and paper volumes are in millions of metric tonnes; and bandwidth volumes are in thousands of terabytes.
(b) The interest rate fixed price receiver includes the net notional dollar value of the interest rate sensitive component of the combined commodity portfolio. The remaining interest rate fixed price receiver and the entire interest rate fixed price payor represent the notional contract amount of a portfolio of various financial instruments used to hedge the net present value of the commodity portfolio. For a given unit of price protection, different financial instruments require different notional amounts.
(c) Excludes derivatives on Enron common stock. See Notes 10 and 11.
Enron also has sales and purchase commitments associated with commodity contracts based on market prices totaling 8,169 TBtue, with terms extending up to 16 years, and 7.2 million metric tonnes, with terms extending up to 5 years.
Notional amounts reflect the volume of transactions but do not represent the amounts exchanged by the parties to the financial instruments. Accordingly, notional amounts do not accurately measure Enron’s exposure to market or credit risks. The maximum terms in years detailed above are not indicative of likely future cash flows as these positions may be offset in the markets at any time in response to the company’s price risk management needs to the extent available in the market.
The volumetric weighted average maturity of Enron’s fixed price portfolio as of December 31, 2000 was approximately 1.5 years.
Fair Value. The fair value as of December 31, 2000 and the average fair value of instruments related to price risk manage- ment activities held during the year are set forth below:
Average Fair Value Fair Value for the Year Ended
as of 12/31/00 12/31/00(a)
(In millions) Assets Liabilities Assets Liabilities Natural gas $10,270 $ 9,342 $ 5,525 $ 5,114 Crude oil and liquids 1,549 3,574 1,402 2,745 Electricity 7,335 5,396 3,453 1,613 Other commodities 1,509 1,311 988 757 Equity investments 795 295 492 280
Total $21,458 $19,918 $11,860 $10,509
(a) Computed using the ending balance at each month-end.
The income before interest, taxes and certain unallocated expenses arising from price risk management activities for 2000 was $1,899 million.
Securitizations. From time to time, Enron sells interests in certain of its financial assets. Some of these sales are completed in securitizations, in which Enron concurrently enters into swaps associated with the underlying assets which limits the risks assumed by the purchaser. Such swaps are adjusted to fair value using quoted market prices, if available, or estimated fair value based on management’s best estimate of the present value of future cash flow. These swaps are included in Price Risk Management activities above as equity investments. During 2000, gains from sales representing securitizations were $381 million and proceeds were $2,379 million ($545 million of the proceeds related to sales to Whitewing Associates, L.P. (Whitewing)). See Notes 4 and 9. Purchases of securitized mer- chant financial assets totaled $1,184 million during 2000. Amounts primarily related to equity interests.
Credit Risk. In conjunction with the valuation of its financial instruments, Enron provides reserves for credit risks associated with such activity. Credit risk relates to the risk of loss that Enron would incur as a result of nonperformance by counterparties pursuant to the terms of their contractual obligations. Enron maintains credit policies with regard to its counterparties that management believes significantly minimize overall credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit rating), collateral require- ments 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 min- imizes this credit exposure using monetization of its contract portfolio or third-party insurance contracts.
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The counterparties associated with assets from price risk management activities as of December 31, 2000 and 1999 are summarized as follows:
2000 1999 Investment Investment
(In millions) Grade(a) Total Grade(a) Total Gas and electric utilities $ 5,050 $ 5,327 $1,461 $1,510 Energy marketers 4,677 6,124 544 768 Financial institutions 4,145 4,917 1,016 1,273 Independent power
producers 672 791 471 641 Oil and gas producers 1,308 2,804 379 688 Industrials 607 1,138 336 524 Other 256 357 59 67
Total $16,715 21,458 $4,266 5,471 Credit and other reserves (452) (337) Assets from price risk
management activities (b) $21,006(c) $5,134
(a) “Investment Grade” is primarily determined using publicly available credit rat- ings along with consideration of cash, standby letters of credit, parent compa- ny guarantees and property interests, including oil and gas reserves. Included in “Investment Grade” are counterparties with a minimum Standard & Poor’s or Moody’s rating of BBB- or Baa3, respectively.
(b) One and two customers’ exposures, respectively, at December 31, 2000 and 1999 comprise greater than 5% of Assets From Price Risk Management Activities and are included above as Investment Grade.
(c) At December 31, 2000, Enron held collateral of approximately $5.5 billion, which consists substantially of cash deposits shown as “Customers’ Deposits” on the balance sheet.
This concentration of counterparties may impact Enron’s overall exposure to credit risk, either positively or negatively, in that the counterparties may be similarly affected by changes in economic, regulatory or other conditions. Based on Enron’s policies, its exposures and its credit reserves, Enron does not anticipate a materially adverse effect on financial position or results of operations as a result of counterparty nonperformance.
During 2000, the California power market was significantly impacted by the increase in wholesale power prices. California customer rates are currently frozen, requiring the utilities to finance the majority of their power purchases. If wholesale prices remain at the current levels and no regulatory relief or legislative assistance is obtained, certain California utilities may need to seek bankruptcy protection. During 2000, Enron entered into wholesale power transactions with California utilities, including their nonregulated power marketing affiliates. Enron has pro- vided credit reserves related to such activities based on Enron’s net position with each California utility. Due to the uncertainties surrounding the California power situation, management cannot predict the ultimate outcome but believes these matters will not have a material adverse impact on Enron’s financial condition.
Non-Trading Activities
Enron also enters into financial instruments such as swaps and other contracts primarily for the purpose of hedging the impact of market fluctuations on assets, liabilities, production or other contractual commitments.
Energy Commodity Price Swaps. At December 31, 2000, Enron was a party to energy commodity price swaps covering 18.6 TBtu, 29.9 TBtu and 0.5 TBtu of natural gas for the years 2001, 2002 and 2003, respectively, and 0.3 million barrels of crude oil for the year 2001.
Interest Rate Swaps. At December 31, 2000, Enron had entered into interest rate swap agreements with an aggregate notional principal amount of $1.0 billion to manage interest rate exposure. These swap agreements are scheduled to termi-
nate $0.4 billion in 2001 and $0.6 billion in the period 2002 through 2010.
Foreign Currency Contracts. At December 31, 2000, foreign currency contracts with a notional principal amount of $1.4 billion were outstanding. These contracts will expire $1.0 billion in 2001 and $0.4 billion in the period 2002 through 2006.
Equity Contracts. At December 31, 2000, Enron had entered into Enron common stock swaps, with an aggregate notional amount of $121 million, to hedge certain incentive-based compensation plans. Such contracts will expire in 2001.
Credit Risk. While notional amounts are used to express the volume of various financial instruments, the amounts potentially subject to credit risk, in the event of nonperformance by the third parties, are substantially smaller. Forwards, futures and other contracts are entered into with counterparties who are equivalent to investment grade. Accordingly, Enron does not anticipate any material impact to its financial position or results of operations as a result of nonperformance by the third parties on financial instruments related to non-trading activities.
Financial Instruments
The carrying amounts and estimated fair values of Enron’s financial instruments, excluding trading activities, at December 31, 2000 and 1999 were as follows:
2000 1999 Carrying Estimated Carrying Estimated
(In millions) Amount Fair Value Amount Fair Value Short- and long-term
debt (Note 7) $10,229 $10,217 $8,152 $8,108 Company-obligated
preferred securities of subsidiaries (Note 10) 904 920 1,000 937
Energy commodity price swaps - 68 - (3)
Interest rate swaps - 1 - (55) Foreign currency contracts - 94 - - Equity contracts 15 15 4 4
Enron uses the following methods and assumptions in esti- mating fair values: (a) short- and long-term debt - the carrying amount of variable-rate debt approximates fair value, the fair value of marketable debt is based on quoted market prices and the fair value of other debt is based on the discounted present value of cash flows using Enron’s current borrowing rates; (b) company-obligated preferred securities of subsidiaries - the fair value is based on quoted market prices, where available, or based on the discounted present value of cash flows using Enron’s current borrowing rates if not publicly traded; and (c) energy commodity price swaps, interest rate swaps, foreign currency contracts and equity contracts - estimated fair values have been determined using available market data and valuation methodologies. Judgment is necessarily required in interpreting market data and the use of different market assumptions or estimation methodologies may affect the estimated fair value amounts.
The fair market value of cash and cash equivalents, trade and other receivables, accounts payable and investments accounted for at fair value are not materially different from their carrying amounts.
Guarantees of liabilities of unconsolidated entities and residual value guarantees have no carrying value and fair values which are not readily determinable (see Note 15).
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The differences between taxes computed at the U.S. federal statutory tax rate and Enron’s effective income tax rate are as follows:
2000 1999 1998 Statutory federal income
tax provision 35.0% 35.0% 35.0% Net state income taxes 2.5 1.8 1.7 Foreign tax rate differential (2.4) (7.0) 0.8 Equity earnings 5.3 (10.1) (4.3) Basis and stock sale differences (11.9) (10.8) (14.2) Goodwill amortization 1.6 1.6 2.0 Audit settlement related to Monthly
Income Preferred Shares - (1.8) - Other 0.6 0.5 (1.0)
30.7% 9.2% 20.0%
The principal components of Enron’s net deferred income tax liability are as follows:
December 31, (In millions) 2000 1999 Deferred income tax assets
Alternative minimum tax credit carryforward $ 254 $ 220 Net operating loss carryforward 369 1,302 Other 189 188
812 1,710 Deferred income tax liabilities
Depreciation, depletion and amortization 1,813 1,807 Price risk management activities (182) 1,133 Other 963 782
2,594 3,722 Net deferred income tax liabilities (a) $1,782 $2,012
(a) Includes $138 million and $118 million in other current liabilities for 2000 and 1999, respectively.
Enron has an alternative minimum tax (AMT) credit carry- forward of approximately $254 million which can be used to offset regular income taxes payable in future years. The AMT credit has an indefinite carryforward period.
Enron has a net operating loss carryforward applicable to U.S. subsidiaries of approximately $65 million, which will begin to expire in 2011. Enron has a net operating loss carryforward applicable to non-U.S. subsidiaries of approximately $1.2 billion, of which $1.0 billion can be carried forward indefinitely. The remaining $200 million expires between the years 2001 and 2010. Deferred tax assets have been recognized on the $65 million domestic loss and $1.0 billion of the foreign losses.
U.S. and foreign income taxes have been provided for earn- ings of foreign subsidiary companies that are expected to be remitted to the U.S. Foreign subsidiaries’ cumulative undistrib- uted earnings of approximately $1.8 billion are considered to be permanently reinvested outside the U.S. and, accordingly, no U.S. income taxes have been provided thereon. In the event of a distribution of those earnings in the form of dividends, Enron may be subject to both foreign withholding taxes and U.S. income taxes net of allowable foreign tax credits.
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4 MERCHANT ACTIVITIES
An analysis of the composition of Enron’s merchant investments and energy assets at December 31, 2000 and 1999 is as follows:
December 31, (In millions) 2000 1999 Merchant investments (a)
Energy $137 $ 516 Energy-intensive industries 63 218 Technology-related 99 11 Other 302 341
601 1,086 Merchant assets (b)
Independent power plants 53 152 Natural gas transportation 36 35
89 187
Total $690 $1,273
(a) Investments are recorded at fair value in “Other Assets” with changes in fair value reflected in “Other Revenues.”
(b) Amounts represent Enron’s investment in unconsolidated equity affiliates with oper- ating earnings reflected in “Equity in Earnings of Unconsolidated Equity Affiliates.”
Enron provides capital primarily to energy and technology- related businesses seeking debt or equity financing. The merchant investments made by Enron and certain of its unconsolidated affiliates (see Note 9) are carried at fair value and include public and private equity, government securities with maturities of more than 90 days, debt and interests in limited partnerships. The valu- ation methodologies utilize market values of publicly-traded securities, independent appraisals and cash flow analyses.
Also included in Enron’s wholesale business are investments in merchant assets such as power plants and natural gas pipelines, primarily held through equity method investments. Some of these assets were developed, constructed and operated by Enron. The merchant assets are not expected to be long-term, integrated components of Enron’s energy networks.
For the years ended December 31, 2000, 1999 and 1998, respectively, pre-tax gains from sales of merchant assets and investments totaling $104 million, $756 million and $628 million are included in “Other Revenues,” and proceeds were $1,838 million, $2,217 million and $1,434 million.
5 INCOME TAXES
The components of income before income taxes are as follows:
(In millions) 2000 1999 1998 United States $ 640 $ 357 $197 Foreign 773 771 681
$1,413 $1,128 $878
Total income tax expense is summarized as follows:
(In millions) 2000 1999 1998 Payable currently
Federal $112 $ 29 $ 30 State 22 6 8 Foreign 93 48 50
227 83 88 Payment deferred
Federal 13 (159) (14) State 14 23 11 Foreign 180 157 90
207 21 87 Total income tax expense(a) $434 $104 $175
(a) See Note 11 for tax benefits related to stock options exercised by employees reflected in shareholders’ equity.
6 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest expense, including fees incurred on sales of accounts receivable, is as follows:
(In millions) 2000 1999 1998 Income taxes (net of refunds) $ 62 $ 51 $ 73 Interest (net of amounts capitalized) 834 678 585
Non-Cash Activity
In 2000, Enron acquired all minority shareholders’ interests in Enron Energy Services, LLC and other businesses with Enron common stock. See Note 2.
In 2000 and 1999, Enron entered into various transactions with related parties, which resulted in an exchange of assets and an increase in common stock of $171 million in 2000. See Note 16.
In 2000, a partnership in which Enron was a limited partner made a liquidating distribution to Enron resulting in a non-cash increase in current assets of $220 million, a decrease of $20 million in non-current assets and an increase in current liabilities of $160 million.
During 2000 and 1999, Enron received the rights to specific third-party fiber-optic cable in exchange for the rights on spe- cific fiber-optic cable held for sale by Enron. These exchanges resulted in non-cash increases in assets of $69 million and $111 million, respectively.
During 1999, Enron issued approximately 7.6 million shares of common stock in connection with the acquisition, by an unconsolidated equity affiliate, of interests in three power plants in New Jersey.
In December 1998, Enron extinguished its 6.25% Exchange- able Notes with 10.5 million shares of EOG common stock.
7 CREDIT FACILITIES AND DEBT
Enron has credit facilities with domestic and foreign banks which provide for an aggregate of $1.4 billion in long-term committed credit, of which $150 million relates to Portland General, and $2.4 billion in short-term committed credit. Expiration dates of the committed facilities range from February 2001 to May 2005. Interest rates on borrowings are based upon the London Interbank Offered Rate, certificate of deposit rates or other short- term interest rates. Certain credit facilities contain covenants which must be met to borrow funds. Such debt covenants are not antici- pated to materially restrict Enron’s ability to borrow funds under such facilities. Compensating balances are not required, but Enron is required to pay a commitment or facility fee. At December 31, 2000, $290 million was outstanding under these facilities.
Enron has also entered into agreements which provide for uncommitted lines of credit totaling $420 million at December 31, 2000. The uncommitted lines have no stated expiration dates. Neither compensating balances nor commitment fees are required, as borrowings under the uncommitted credit lines are available subject to agreement by the participating banks. At December 31, 2000, no amounts were outstanding under the uncommitted lines.
In addition to borrowing from banks on a short-term basis, Enron and certain of its subsidiaries sell commercial paper to pro- vide financing for various corporate purposes. As of December 31, 2000 and 1999, short-term borrowings of $15 million and $330 mil- lion, respectively, and long-term debt due within one year of $1,303 million and $670 million, respectively, have been reclassi- fied as long-term debt based upon the availability of committed credit facilities with expiration dates exceeding one year and man- agement’s intent to maintain such amounts in excess of one year. Weighted average interest rates on short-term debt outstanding at December 31, 2000 and 1999 were 6.9% and 6.4%, respectively.
Detailed information on long-term debt is as follows:
December 31, (In millions) 2000 1999 Enron Corp.
Senior debentures 6.75% to 8.25% due 2005 to 2012 $ 262 $ 318
Notes payable(a)
7.00% exchangeable notes due 2002 532 239 6.40% to 9.88% due 2001 to 2028 4,416 4,114 Floating rate notes due 2000 to 2005 92 79 Other 242 34
Northern Natural Gas Company Notes payable
6.75% to 7.00% due 2005 to 2011 500 500 Transwestern Pipeline Company
Notes payable 9.20% due 2004 11 15
Portland General First mortgage bonds
6.47% to 9.46% due 2000 to 2023 328 373 Pollution control bonds
Various rates due 2010 to 2033 200 200 Other 282 129
Other 414 204 Amount reclassified from short-term debt 1,318 1,000 Unamortized debt discount and premium (47) (54) Total long-term debt $8,550 $7,151
(a) Includes debt denominated in foreign currencies of approximately $955 million and $525 million, respectively, at December 31, 2000 and 1999. Enron has entered into derivative transactions to hedge interest rate and foreign currency exchange fluctuations associated with such debt. See Note 3.
The indenture securing Portland General’s First Mortgage Bonds constitutes a direct first mortgage lien on substantially all electric utility property and franchises, other than expressly excepted property.
The aggregate annual maturities of long-term debt out- standing at December 31, 2000 were $2,112 million, $750 million, $852 million, $646 million and $1,592 million for 2001 through 2005, respectively.
In February 2001, Enron issued $1.25 billion zero coupon convertible senior notes that mature in 2021. The notes carry a 2.125 percent yield to maturity with an aggregate face value of $1.9 billion and may be converted, upon certain contingencies being met, into Enron common stock at an initial conversion premium of 45 percent.
8 MINORITY INTERESTS
Enron’s minority interests at December 31, 2000 and 1999 include the following:
(In millions) 2000 1999 Majority-owned limited liability company
and limited partnerships $1,759 $1,773 Elektro(a) 462 475 Other 193 182
$2,414 $2,430
(a) Relates to the respective parents of Elektro, which had minority shareholders in 2000 and 1999.
Enron has formed separate limited partnerships and a limited liability company with third-party investors for various purposes. These entities are included in Enron’s consolidated financial statements, with the third-party investors’ interests reflected in “Minority Interests” in the Consolidated Balance Sheet.
In October 2000, Enron contributed approximately $1.0 bil- lion of net assets to a wholly-owned limited liability company. A third party contributed $500 million for a preferred membership
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interest in the limited liability company. The contribution by the third party was invested in highly liquid investment grade securities (including Enron notes) and short-term receivables. At December 31, 2000, the majority-owned limited liability com- pany held net assets of $1.0 billion.
During 1999, third-party investors contributed cash and merchant investments totaling $1.0 billion to Enron-sponsored entities to invest in highly liquid investment grade securities (including Enron notes) and short-term receivables. The mer- chant investments, totaling $500 million, were sold prior to December 31, 1999. During 2000, Enron acquired a portion of the minority shareholder’s interest for $485 million.
In 1998, Enron formed a wholly-owned limited partnership for the purpose of holding $1.6 billion of assets contributed by Enron. That partnership contributed $850 million of assets and a third party contributed $750 million to a second newly-formed limited partnership. The assets held by the wholly-owned limited partnership represent collateral for a $750 million note receivable held by the second limited partnership. In 2000 and 1999, the wholly-owned and second limited partnerships sold assets valued at approximately $152 million and $460 million, respectively, and invested the proceeds in Enron notes.
Absent certain defaults or other specified events, Enron has the option to acquire the minority holders’ interests in these partnerships. Enron has the option to acquire the minority hold- er’s interest in the limited liability company after November 2002. If Enron does not acquire the minority holders’ interests before December 2004 through May 2009, or earlier upon certain specified events, the minority interest holders may cause the entities to liquidate their assets and dissolve.
In 2000, as part of a restructuring, Jacaré Electrical Distribution Trust (Jacaré) sold a 47 percent interest in Enron Brazil Power Holdings V Ltd, a subsidiary that holds its invest- ment in Elektro, to Whitewing for approximately $460 million. See Note 9. The proceeds were used to acquire the original minority shareholder’s interest in Jacaré.
In 2000, Enron acquired all minority shareholders’ interests in Enron Energy Services, LLC and Enron Renewable Energy Corp. See Note 2.
9 UNCONSOLIDATED EQUITY AFFILIATES
Enron’s investment in and advances to unconsolidated affil- iates which are accounted for by the equity method is as follows:
Net Voting December 31,
(In millions) Interest(a) 2000 1999 Azurix Corp. 34% $ 325 $ 762 Bridgeline Holdings 40% 229 - Citrus Corp. 50% 530 480 Dabhol Power Company 50% 693 466 Joint Energy Development
Investments L.P. (JEDI) (b) 50% 399 211 Joint Energy Development
Investments II L.P. (JEDI II) (b) 50% 220 162 SK – Enron Co. Ltd. 50% 258 269 Transportadora de Gas del Sur S.A. 35% 479 452 Whitewing Associates, L.P.(b) 50% 558 662 Other 1,603 1,572
$5,294(c) $5,036(c)
(a) Certain investments have income sharing ratios which differ from Enron’s voting interests.
(b) JEDI and JEDI II account for their investments at fair value. Whitewing accounts for certain of its investments at fair value. These affiliates held fair value investments total- ing $1,823 million and $1,128 million, respectively, at December 31, 2000 and 1999.
(c) At December 31, 2000 and 1999, the unamortized excess of Enron’s investment in unconsolidated affiliates was $182 million and $179 million, respectively, which is being amortized over the expected lives of the investments.
Enron’s equity in earnings (losses) of unconsolidated equity affiliates is as follows:
(In millions) 2000 1999 1998 Azurix Corp.(a) $(428) $ 23 $ 6 Citrus Corp. 50 25 23 Dabhol Power Company 51 30 - Joint Energy Development
Investments L.P. 197 11 (45) Joint Energy Development
Investments II, L.P. 58 92 (4) TNPC, Inc. (The New Power Company) (60) - - Transportadora de Gas del Sur S.A. 38 32 36 Whitewing Associates, L.P. 58 9 - Other 123 87 81
$ 87 $309 $ 97
(a) During the fourth quarter of 2000, Azurix Corp. (Azurix) impaired the carrying value of its Argentine assets, resulting in a charge of approximately $470 million. Enron’s portion of the charge was $326 million.
Summarized combined financial information of Enron’s unconsolidated affiliates is presented below:
December 31, (In millions) 2000 1999 Balance sheet
Current assets (a) $ 5,884 $ 3,168 Property, plant and equipment, net 14,786 14,356 Other noncurrent assets 13,485 9,459 Current liabilities (a) 4,739 4,401 Long-term debt (a) 9,717 8,486 Other noncurrent liabilities 6,148 2,402 Owners’ equity 13,551 11,694
(a) Includes $410 million and $327 million receivable from Enron and $302 million and $84 million payable to Enron at December 31, 2000 and 1999, respectively.
(In millions) 2000 1999 1998 Income statement (a)
Operating revenues $15,903 $11,568 $8,508 Operating expenses 14,710 9,449 7,244 Net income 586 1,857 142
Distributions paid to Enron 137 482 87
(a) Enron recognized revenues from transactions with unconsolidated equity affil- iates of $510 million in 2000, $674 million in 1999 and $563 million in 1998.
In 2000 and 1999, Enron sold approximately $632 million and $192 million, respectively, of merchant investments and other assets to Whitewing. Enron recognized no gains or losses in connection with these transactions. Additionally, in 2000, ECT Merchant Investments Corp., a wholly-owned Enron subsidiary, contributed two pools of merchant investments to a limited partnership that is a subsidiary of Enron. Subsequent to the contributions, the partnership issued partnership interests representing 100% of the beneficial, economic interests in the two asset pools, and such interests were sold for a total of $545 million to a limited liability company that is a subsidiary of Whitewing. See Note 3. These entities are separate legal entities from Enron and have separate assets and liabilities. In 2000 and 1999, the Related Party, as described in Note 16, contributed $33 million and $15 million, respectively, of equity to Whitewing. In 2000, Whitewing contributed $7.1 million to a partnership formed by Enron, Whitewing and a third party. Subsequently, Enron sold a portion of its interest in the partnership through a securitization. See Note 3.
In 2000, The New Power Company sold warrants convertible into common stock of The New Power Company for $50 million to the Related Party (described in Note 16).
From time to time, Enron has entered into various adminis- trative service, management, construction, supply and operating
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agreements with its unconsolidated equity affiliates. Enron’s management believes that its existing agreements and transac- tions are reasonable compared to those which could have been obtained from third parties.
10 PREFERRED STOCK
Preferred Stock
Enron has authorized 16,500,000 shares of preferred stock, no par value. At December 31, 2000, Enron had outstanding 1,240,933 shares of Cumulative Second Preferred Convertible Stock (the Convertible Preferred Stock), no par value. The Convertible Preferred Stock pays dividends at an amount equal to the higher of $10.50 per share or the equivalent dividend that would be paid if shares of the Convertible Preferred Stock were converted to common stock. Each share of the Convertible Preferred Stock is convertible at any time at the option of the holder thereof into 27.304 shares of Enron’s common stock, subject to certain adjust- ments. The Convertible Preferred Stock is currently subject to redemption at Enron’s option at a price of $100 per share plus accrued dividends. During 2000, 1999 and 1998, 55,251 shares, 23,664 shares and 17,797 shares, respectively, of the Convertible Preferred Stock were converted into common stock.
In 1999, all outstanding shares of Series A Preferred Stock held by Whitewing were exchanged for 250,000 shares of Enron Mandatorily Convertible Junior Preferred Stock, Series B (Series B Preferred Stock). Also in 1999, Enron entered into a Share Settlement Agreement under which Enron could be obligated, under certain circumstances, to deliver additional shares of common stock or Series B Preferred Stock to Whitewing for the amount that the market price of the converted Enron common shares is less than $28 per share. In 2000, Enron increased the strike price in the Share Settlement Agreement to $48.55 per share in exchange for an additional capital contribution in Whitewing by third-party investors. The number of shares of Series B Preferred Stock authorized equals the number of shares necessary to satisfy Enron’s obligation under the Share Settlement Agreement. Absent certain defaults or other specified events, Enron has the option to acquire the third-party investors’ inter- ests. If Enron does not acquire the third-party investors’ interests before January 2003, or earlier upon certain specified events, Whitewing may liquidate its assets and dissolve. At December 31, 2000, Enron had outstanding 250,000 shares of Series B Preferred Stock with a liquidation value of $1.0 billion. The Series B Preferred Stock pays semi-annual cash dividends at an annual rate of 6.50%. Each share of Series B Preferred Stock is mandatorily convertible into 200 shares of Enron common stock on January 15, 2003 or earlier upon the occurrence of certain events.
In connection with the 1998 financial restructuring (yielding proceeds of approximately $1.2 billion) of Enron’s investment in Azurix, Enron committed to cause the sale of Enron convertible preferred stock, if certain debt obligations of the related entity which acquired an interest in Azurix, are defaulted upon, or in certain events, including, among other things, Enron’s credit ratings fall below specified levels. If the sale of the convertible preferred stock is not sufficient to retire such obligations, Enron would be liable for the shortfall. Such obligations will mature in December 2001. The number of common shares issuable upon conversion is based on future common stock prices.
Company-Obligated Preferred Securities of Subsidiaries
Summarized information for Enron’s company-obligated preferred securities of subsidiaries is as follows:
Liquidation (In millions, except per December 31, Value share amounts and shares) 2000 1999 Per Share Enron Capital LLC
8% Cumulative Guaranteed Monthly Income Preferred Shares (8,550,000 shares)(a) $214 $ 214 $ 25
Enron Capital Trust I 8.3% Trust Originated Preferred
Securities (8,000,000 preferred securities)(a) 200 200 25
Enron Capital Trust II 8 1/8% Trust Originated Preferred
Securities (6,000,000 preferred securities)(a) 150 150 25
Enron Capital Trust III Adjustable-Rate Capital Trust Securities
(200,000 preferred securities) - 200 1,000
LNG Power II L.L.C. 6.74% Preference Units
(105,000 shares) (b) 105 - 1,000
Enron Equity Corp. 8.57% Preferred Stock (880 shares)(a) 88 88 100,000 7.39% Preferred Stock (150 shares)(a)(c) 15 15 100,000
Enron Capital Resources, L.P. 9% Cumulative Preferred Securities,
Series A (3,000,000 preferred securities)(a) 75 75 25
Other 57 58 $904 $1,000
(a) Redeemable under certain circumstances after specified dates. (b) Initial rate is 6.74% increasing to 7.79%. (c) Mandatorily redeemable in 2006.
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11 COMMON STOCK
Earnings Per Share
The computation of basic and diluted earnings per share is as follows:
Year Ended December 31, (In millions, except per share amounts) 2000 1999 1998 Numerator:
Basic Income before cumulative effect of accounting changes $ 979 $1,024 $ 703
Preferred stock dividends: Second Preferred Stock (17) (17) (17) Series A Preferred Stock - (30) - Series B Preferred Stock (66) (19) -
Income available to common share- holders before cumulative effect of accounting changes 896 958 686
Cumulative effect of accounting changes - (131) -
Income available to common shareholders $ 896 $ 827 $ 686
Diluted Income available to common share- holders before cumulative effect of accounting changes $ 896 $ 958 $ 686
Effect of assumed conversion of dilutive securities(a):
Second Preferred Stock 17 17 17 Income before cumulative effect of accounting changes 913 975 703
Cumulative effect of accounting changes - (131) -
Income available to common share- holders after assumed conversions $ 913 $ 844 $ 703
Denominator: Denominator for basic earnings per share - weighted-average shares 736 705 642
Effect of dilutive securities: Preferred stock 35 36 36 Stock options 43 28 17
Dilutive potential common shares 78 64 53 Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 814 769 695
Basic earnings per share: Before cumulative effect of accounting changes $1.22 $ 1.36 $1.07
Cumulative effect of accounting changes - (0.19) -
Basic earnings per share $1.22 $ 1.17 $1.07 Diluted earnings per share:
Before cumulative effect of accounting changes $1.12 $ 1.27 $1.01
Cumulative effect of accounting changes - (0.17) -
Diluted earnings per share $1.12 $ 1.10 $1.01
(a) The Series A Preferred Stock and the Series B Preferred Stock were not included in the calculation of diluted earnings per share because conversion of these shares would be antidilutive.
Derivative Instruments
At December 31, 2000, Enron had derivative instruments (excluding amounts disclosed in Note 10) on 54.8 million shares of Enron common stock, of which approximately 12 million shares are with JEDI and 22.5 million are with related parties (see Note 16), at an average price of $67.92 per share on which Enron was a fixed price payor. Shares potentially deliverable to counterparties under the contracts are assumed to be outstand- ing in calculating diluted earnings per share unless they are antidilutive. At December 31, 2000, there were outstanding non-employee options to purchase 6.4 million shares of Enron common stock at an exercise price of $19.59 per share.
Stock Option Plans
Enron applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for its stock option plans. In accordance with APB Opinion 25, no compensation expense has been recognized for the fixed stock option plans. Compensation expense charged against income for the restricted stock plan for 2000, 1999 and 1998 was $220 million, $131 million and $58 million, respectively. Had compensation cost for Enron’s stock option compensation plans been determined based on the fair value at the grant dates for awards under those plans, Enron’s net income and earnings per share would have been $886 million ($1.09 per share basic, $1.01 per share diluted) in 2000, $827 million ($1.08 per share basic, $1.01 per share diluted) in 1999 and $674 million ($1.02 per share basic, $0.97 per share diluted) in 1998.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with weighted-average assumptions for grants in 2000, 1999 and 1998, respectively: (i) dividend yield of 2.4%, 2.4% and 2.5%; (ii) expected volatility of 22.3%, 20.0% and 18.3%; (iii) risk-free interest rates of 5.8%, 5.6% and 5.0%; and (iv) expected lives of 3.2 years, 3.7 years and 3.8 years.
Enron has four fixed option plans (the Plans) under which options for shares of Enron’s common stock have been or may be granted to officers, employees and non-employee members of the Board of Directors. Options granted may be either incentive stock options or nonqualified stock options and are granted at not less than the fair market value of the stock at the time of grant. Under the Plans, Enron may grant options with a maxi- mum term of 10 years. Options vest under varying schedules.
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Summarized information for Enron’s Plans is as follows:
2000 1999 1998 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price Outstanding, beginning of year 93,531 $26.74 79,604 $19.60 78,858 $17.89
Granted 39,167 70.02 35,118 37.49 15,702 24.99 Exercised (a) (32,235) 24.43 (19,705) 18.08 (13,072) 15.70 Forfeited (4,358) 35.68 (1,465) 24.51 (1,498) 19.77 Expired (42) 23.75 (21) 18.79 (386) 19.76
Outstanding, end of year 96,063 $44.24 93,531 $26.74 79,604 $19.60 Exercisable, end of year 46,755 $29.85 52,803 $22.56 45,942 $18.16 Available for grant, end of year (b) 22,066 24,864 10,498 Weighted average fair value of options granted $13.35 $ 7.24 $ 4.20
(a) In 2000, Enron recorded tax benefits related to stock options exercised by employees of approximately $390 million reflected in shareholders’ equity. (b) Includes up to 20,707,969 shares, 22,140,962 shares and 10,497,670 shares as of December 31, 2000, 1999 and 1998, respectively, which may be issued either as
restricted stock or pursuant to stock options.
The following table summarizes information about stock options outstanding at December 31, 2000 (shares in thousands):
Options Outstanding Options Exercisable Weighted Average Weighted Weighted
Number Remaining Average Number Average Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/00 Life Price at 12/31/00 Price $ 6.88 to $ 20.00 15,368 4.7 $16.72 14,001 $16.54
20.06 to 34.81 24,091 6.8 24.79 18,304 24.13 35.03 to 47.31 21,520 6.8 40.52 8,731 40.27 50.48 to 69.00 13,965 6.5 60.18 4,072 61.81 71.06 to 86.63 21,119 5.6 79.69 1,647 72.36
96,063 6.2 $44.24 46,755 $29.85
Restricted Stock Plan
Under Enron’s Restricted Stock Plan, participants may be granted stock without cost to the participant. The shares granted under this plan vest to the participants at various times ranging from immediate vesting to vesting at the end of a five-year period. Upon vesting, the shares are released to the participants. The following summarizes shares of restricted stock under this plan:
(Shares in thousands) 2000 1999 1998 Outstanding, beginning of year 6,781 6,034 5,074
Granted 2,243 2,672 2,122 Released to participants (2,201) (1,702) (1,064) Forfeited (1,444) (223) (98)
Outstanding, end of year 5,379 6,781 6,034 Available for grant, end of year 20,708 22,141 10,498 Weighted average fair value of
restricted stock granted $57.69 $37.38 $23.70
12 PENSION AND OTHER BENEFITS
Enron maintains a retirement plan (the Enron Plan) which is a noncontributory defined benefit plan covering substantially all employees in the United States and certain employees in foreign countries. The benefit accrual is in the form of a cash balance of 5% of annual base pay.
Portland General has a noncontributory defined benefit pension plan (the Portland General Plan) covering substantially all of its employees. Benefits under the Portland General Plan are based on years of service, final average pay and covered compensation.
Enron Facility Services has a noncontributory defined bene- fit pension plan (the EFS Plan) covering substantially all of its
employees. Benefits under the EFS Plan are based on years of service, final average pay and covered compensation.
Enron also maintains a noncontributory employee stock ownership plan (ESOP) which covers all eligible employees. Allocations to individual employees’ retirement accounts within the ESOP offset a portion of benefits earned under the Enron Plan. All shares included in the ESOP have been allocated to the employee accounts. At December 31, 2000 and 1999, 12,600,271 shares and 17,241,731 shares, respectively, of Enron common stock were held by the ESOP, a portion of which may be used to offset benefits under the Enron Plan.
Assets of the Enron Plan, the Portland General Plan and the EFS Plan are comprised primarily of equity securities, fixed income securities and temporary cash investments. It is Enron’s policy to fund all pension costs accrued to the extent required by federal tax regulations.
Enron provides certain postretirement medical, life insur- ance and dental benefits to eligible employees and their eligible dependents. Benefits are provided under the provisions of con- tributory defined dollar benefit plans. Enron is currently funding that portion of its obligations under these postretirement bene- fit plans which are expected to be recoverable through rates by its regulated pipelines and electric utility operations.
Enron accrues these postretirement benefit costs over the service lives of the employees expected to be eligible to receive such benefits. Enron is amortizing the transition obligation which existed at January 1, 1993 over a period of approximately 19 years.
The following table sets forth information related to changes in the benefit obligations, changes in plan assets, a reconciliation of the funded status of the plans and components of the expense recognized related to Enron’s pension and other postretirement plans:
Pension Benefits Other Benefits (In millions) 2000 1999 2000 1999 Change in benefit obligation
Benefit obligation, beginning of year $708 $687 $120 $134
Service cost 33 32 2 2 Interest cost 53 49 10 9 Plan participants’ contributions - - 4 3 Plan amendments - 6 - - Actuarial loss (gain) 9 (51) 10 (12) Acquisitions and divestitures - 36 - - Effect of curtailment and settlements (a) (2) (8) - -
Benefits paid (55) (43) (22) (16) Benefit obligation, end of year $746 $708 $124 $120
Change in plan assets Fair value of plan assets, beginning of year (b) $853 $774 $ 68 $ 60
Actual return on plan assets 41 80 (4) 7 Acquisitions and divestitures - 37 - - Employer contribution 19 5 7 6 Plan participants’ contributions - - 4 3 Benefits paid (55) (43) (11) (8)
Fair value of plan assets, end of year (b) $858 $853 $ 64 $ 68
Reconciliation of funded status, end of year
Funded status, end of year $112 $145 $ (60) $ (52) Unrecognized transition obligation (asset) (6) (13) 44 48
Unrecognized prior service cost 25 32 12 14 Unrecognized net actuarial loss (gain) 55 11 (17) (29)
Prepaid (accrued) benefit cost $186 $175 $ (21) $ (19)
Weighted-average assumptions at December 31
Discount rate 7.75% 7.75% 7.75% 7.75% Expected return on plan assets (pre-tax) (c) (c) (d) (d)
Rate of compensation increase (e) (e) (e) (e)
Components of net periodic benefit cost Service cost $ 33 $ 32 $ 2 $ 2 Interest cost 53 49 10 9 Expected return on plan assets (75) (70) (4) (4) Amortization of transition obligation (asset) (6) (6) 4 4
Amortization of prior service cost 5 5 1 1 Recognized net actuarial loss (gain) - 3 (1) - Effect of curtailment and
settlements (a) - (6) - 6 Net periodic benefit cost $ 10 $ 7 $ 12 $ 18
(a) Represents one-time nonrecurring events including the exchange and sale of EOG (see Note 2) and certain employees ceasing participation in the Portland General Plan as a result of union negotiations.
(b) Includes plan assets of the ESOP of $116 million and $121 million at December 31, 2000 and 1999, respectively.
(c) Long-term rate of return on assets is assumed to be 10.5% for the Enron Plan, 9.0% for the Portland General Plan and 9.5% for the EFS Plan.
(d) Long-term rate of return on assets is assumed to be 7.5% for the Enron assets and 9.5% for the Portland General assets.
(e) Rate of compensation increase is assumed to be 4.0% for the Enron Plan, 4.0% to 9.5% for the Portland General Plan and 5.0% for the EFS Plan.
Included in the above amounts are the unfunded obligations for the supplemental executive retirement plans. At both December 31, 2000 and 1999, the projected benefit obligation for these unfunded plans was $56 million and the fair value of assets was $1 million.
The measurement date of the Enron Plan and the ESOP is September 30, and the measurement date of the Portland General Plan, the EFS Plan and the postretirement benefit plans is December 31. The funded status as of the valuation date of the Enron Plan, the Portland General Plan, the ESOP and the postretirement benefit plans reconciles with the amount detailed above which is included in “Other Assets” on the Consolidated Balance Sheet.
For measurement purposes, 6% and 10% annual rates of increase in the per capita cost of covered health care benefits were assumed for the period 2000 to 2001 for the Enron and Portland General postretirement plans, respectively. The rates were assumed to decrease to 5% by 2002 and 2010 for the Enron and Portland General postretirement plans, respectively. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage (In millions) Point Increase Point Decrease Effect on total of service and
interest cost components $0.4 $(0.3) Effect on postretirement benefit
obligation $4.4 $(3.8)
Additionally, certain Enron subsidiaries maintain various incentive based compensation plans for which participants may receive a combination of cash or stock options, based upon the achievement of certain performance goals.
13 RATES AND REGULATORY ISSUES
Rates and regulatory issues related to certain of Enron’s natural gas pipelines and its electric utility operations are subject to final determination by various regulatory agencies. The domestic interstate pipeline operations are regulated by the Federal Energy Regulatory Commission (FERC) and the electric utility operations are regulated by the FERC and the Oregon Public Utility Commission (OPUC). As a result, these operations are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation,” which recognizes the economic effects of regulation and, accordingly, Enron has recorded regu- latory assets and liabilities related to such operations.
The regulated pipelines operations’ net regulatory assets were $290 million and $250 million at December 31, 2000 and 1999, respectively, and are expected to be recovered over varying time periods.
The electric utility operations’ net regulatory assets were $450 million and $494 million at December 31, 2000 and 1999, respectively. Based on rates in place at December 31, 2000, Enron estimates that it will collect substantially all of its regulatory assets within the next 11 years.
Pipeline Operations
On April 16, 1999, Northern Natural Gas Company (Northern) filed an uncontested Stipulation and Agreement of Settlement (Settlement) with the FERC and an order approving the Settlement was issued by the FERC on June 18, 1999. The rates effectuated by Northern on November 1, 1999 remain in effect. On May 1, 2000, Northern filed to implement an option- al volumetric firm throughput service. An order approving such service was issued November 8, 2000 with effectiveness November 1, 2000; a rehearing request is pending. On November 1, 2000, Northern filed to increase its rates for the recovery of return and taxes on its System Levelized Account.
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On November 22, 2000, the FERC issued an order approving the rates, subject to refund.
On November 1, 2000, Transwestern Pipeline Company implemented a rate escalation of settled transportation rates in accordance with its May 1995 global settlement, as amended in May 1996. On August 23, 1999, Transwestern filed for a new service, Enhanced Firm Backhaul. An order by the FERC was issued February 23, 2000, approving the service.
Electric Utility Operations
On October 2, 2000 PGE filed a restructuring plan with the OPUC that implements the provisions of the State Senate Bill SB1149, signed into law in July 1999. The new law provides indus- trial and commercial customers of investor-owned utilities in the state direct access to competing energy suppliers by October 1, 2001. As filed, PGE’s plan also proposes an increase in base rates, with new tariffs effective on October 1, 2001. PGE is a 67.5% owner of the Trojan Nuclear Plant (Trojan). In September 2000, PGE entered into an agreement with the OPUC related to Trojan. See Note 14. At December 31, 2000, PGE’s regulatory asset relat- ed to recovery of Trojan decommissioning costs from customers was $190 million.
Enron believes, based upon its experience to date and after considering appropriate reserves that have been established, that the ultimate resolution of pending regulatory matters will not have a material impact on Enron’s financial position or results of operations.
14 LITIGATION AND OTHER CONTINGENCIES
Enron is a party to various claims and litigation, the signifi- cant 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 estab- lished, that the ultimate resolution of such items, individually or in the aggregate, will not have a material adverse impact on Enron’s financial position or results of operations.
Litigation
In 1995, several parties (the Plaintiffs) filed suit in Harris County District Court in Houston, Texas, against Intratex Gas Company (Intratex), Houston Pipe Line Company and Panhandle Gas Company (collectively, the Enron Defendants), each of which is a wholly-owned subsidiary of Enron. The Plaintiffs were either sellers or royalty owners under numerous gas purchase contracts with Intratex, many of which have terminated. Early in 1996, the case was severed by the Court into two matters to be tried (or otherwise resolved) separately. In the first matter, the Plaintiffs alleged that the Enron Defendants committed fraud and negli- gent misrepresentation in connection with the “Panhandle pro- gram,” a special marketing program established in the early 1980s. This case was tried in October 1996 and resulted in a ver- dict for the Enron Defendants. In the second matter, the Plaintiffs allege that the Enron Defendants violated state regulatory requirements and certain gas purchase contracts by failing to take the Plaintiffs’ gas ratably with other producers’ gas at certain times between 1978 and 1988. The trial court certified a class action with respect to ratability claims. On March 9, 2000, the Texas Supreme Court ruled that the trial court’s class certification was improper and remanded the case to the trial court. The Enron Defendants deny the Plaintiffs’ claims and have asserted various affirmative defenses, including the statute of limitations. The Enron Defendants believe that they have strong legal and factual defenses, and intend to vigorously contest the claims. Although no assurances can be given, Enron believes that the ultimate
resolution of these matters will not have a material adverse effect on its financial position or results of operations.
On November 21, 1996, an explosion occurred in or around the Humberto Vidal Building in San Juan, Puerto Rico. The explo- sion resulted in fatalities, bodily injuries and damage to the building and surrounding property. San Juan Gas Company, Inc. (San Juan Gas), an Enron affiliate, operated a propane/air distribution system in the vicinity, but did not provide service to the building. Enron, San Juan Gas, four affiliates and their insur- ance carriers were named as defendants, along with several third parties, including The Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Telephone Company, Heath Consultants Incorporated, Humberto Vidal, Inc. and their insurance carriers, in numerous lawsuits filed in U.S. District Court for the District of Puerto Rico and the Superior Court of Puerto Rico. These suits seek damages for wrongful death, personal injury, business inter- ruption and property damage allegedly caused by the explosion. After nearly four years without determining the cause of the explosion, all parties have agreed not to litigate further that issue, but to move these suits toward settlements or trials to determine whether each plaintiff was injured as a result of the explosion and, if so, the lawful damages attributable to such injury. The defendants have agreed on a fund for settlements or final awards. Numerous claims have been settled. Although no assurances can be given, Enron believes that the ultimate resolu- tion of these matters will not have a material adverse effect on its financial position or results of operations.
Trojan Investment Recovery
In early 1993, PGE ceased commercial operation of the Trojan nuclear power generating facility. The OPUC granted PGE, through a general rate order, recovery of, and a return on, 87 percent of its remaining investment in Trojan.
The OPUC’s general rate order related to Trojan has been sub- ject to litigation in various state courts, including rulings by the Oregon Court of Appeals and petitions to the Oregon Supreme Court filed by parties opposed to the OPUC’s order, including the Utility Reform Project (URP) and the Citizens Utility Board (CUB).
In August 2000, PGE entered into agreements with CUB and the staff of the OPUC to settle the litigation related to PGE’s recovery of its investment in the Trojan plant. Under the agree- ments, CUB agreed to withdraw from the litigation and to sup- port the settlement as the means to resolve the Trojan litigation. The OPUC approved the accounting and ratemaking elements of the settlement on September 29, 2000. As a result of these approvals, PGE’s investment in Trojan is no longer included in rates charged to customers, either through a return on or a return of that investment. Collection of ongoing decommissioning costs at Trojan is not affected by the settlement agreements or the September 29, 2000 OPUC order. With CUB’s withdrawal, URP is the one remaining significant adverse party in the litigation. URP has indicated that it plans to continue to challenge the OPUC order allowing PGE recovery of its investment in Trojan.
Enron cannot predict the outcome of these actions. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations.
Environmental Matters
Enron is subject to extensive federal, state and local envi- ronmental 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
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es associated with the above guarantees. In addition, certain commitments have been made related to capital expenditures and equity investments planned in 2001.
On December 15, 2000, Enron announced that it had entered into an agreement with Azurix under which the holders of Azurix’s approximately 39 million publicly traded shares would receive cash of $8.375 in exchange for each share. The agree- ment, which is subject to the approval of Azurix shareholders, is expected to close in early 2001.
16 RELATED PARTY TRANSACTIONS
In 2000 and 1999, Enron entered into transactions with lim- ited partnerships (the Related Party) whose general partner’s managing member is a senior officer of Enron. The limited part- ners of the Related Party are unrelated to Enron. Management believes that the terms of the transactions with the Related Party were reasonable compared to those which could have been negotiated with unrelated third parties.
In 2000, Enron entered into transactions with the Related Party to hedge certain merchant investments and other assets. As part of the transactions, Enron (i) contributed to newly-formed entities (the Entities) assets valued at approximately $1.2 billion, including $150 million in Enron notes payable, 3.7 million restricted shares of outstanding Enron common stock and the right to receive up to 18.0 million shares of outstanding Enron common stock in March 2003 (subject to certain conditions) and (ii) transferred to the Entities assets valued at approximately $309 million, including a $50 million note payable and an invest- ment in an entity that indirectly holds warrants convertible into common stock of an Enron equity method investee. In return, Enron received economic interests in the Entities, $309 million in notes receivable, of which $259 million is recorded at Enron’s carryover basis of zero, and a special distribution from the Entities in the form of $1.2 billion in notes receivable, subject to changes in the principal for amounts payable by Enron in con- nection with the execution of additional derivative instruments. Cash in these Entities of $172.6 million is invested in Enron demand notes. In addition, Enron paid $123 million to purchase share-settled options from the Entities on 21.7 million shares of Enron common stock. The Entities paid Enron $10.7 million to terminate the share-settled options on 14.6 million shares of Enron common stock outstanding. In late 2000, Enron entered into share-settled collar arrangements with the Entities on 15.4 million shares of Enron common stock. Such arrangements will be accounted for as equity transactions when settled.
In 2000, Enron entered into derivative transactions with the Entities with a combined notional amount of approximately $2.1 billion to hedge certain merchant investments and other assets. Enron’s notes receivable balance was reduced by $36 million as a result of premiums owed on derivative transactions. Enron recognized revenues of approximately $500 million related to the subsequent change in the market value of these derivatives, which offset market value changes of certain merchant invest- ments and price risk management activities. In addition, Enron recognized $44.5 million and $14.1 million of interest income and interest expense, respectively, on the notes receivable from and payable to the Entities.
In 1999, Enron entered into a series of transactions involving a third party and the Related Party. The effect of the transactions was (i) Enron and the third party amended certain forward contracts to purchase shares of Enron common stock, resulting in Enron having forward contracts to purchase Enron common shares at the market price on that day, (ii) the Related Party received 6.8 million shares of Enron common stock subject to cer- tain restrictions and (iii) Enron received a note receivable, which
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expenses. These increased operating expenses are not expected to have a material impact on Enron’s financial position or results of operations.
Enron’s natural gas pipeline companies conduct soil and groundwater remediation on a number of their facilities. Enron does not expect to incur material expenditures in connection with soil and groundwater remediation.
15 COMMITMENTS
Firm Transportation Obligations
Enron has firm transportation agreements with various joint venture and other pipelines. Under these agreements, Enron must make specified minimum payments each month. At December 31, 2000, the estimated aggregate amounts of such required future payments were $91 million, $88 million, $89 mil- lion, $85 million and $77 million for 2001 through 2005, respec- tively, and $447 million for later years.
The costs recognized under firm transportation agreements, including commodity charges on actual quantities shipped, totaled $68 million, $55 million and $30 million in 2000, 1999 and 1998, respectively.
Other Commitments
Enron leases property, operating facilities and equipment under various operating leases, certain of which contain renewal and purchase options and residual value guarantees. Future commitments related to these items at December 31, 2000 were $123 million, $98 million, $69 million, $66 million and $49 million for 2001 through 2005, respectively, and $359 million for later years. Guarantees under the leases total $556 million at December 31, 2000.
Total rent expense incurred during 2000, 1999 and 1998 was $143 million, $143 million and $147 million, respectively.
Enron has entered into two development agreements whereby Enron is required to manage construction of a certain number of power projects on behalf of third-party owners. Under one development agreement, where construction is expected to be completed on or before March 31, 2004, Enron has agreed to enter into power offtake agreements for varying portions of the offtake from each facility. Under both develop- ment agreements, Enron maintains purchase options, which may be assigned to a third party. In addition to the purchase option under the other development agreement, Enron main- tains lease options on the power projects. If upon completion, which is expected to occur on or before August 31, 2002, Enron has failed to exercise one of its options, Enron may participate in the remarketing of the power projects which Enron has guar- anteed the recovery of 89.9 percent of certain project costs, of which approximately $140 million has been incurred through December 31, 2000.
Enron guarantees the performance of certain of its uncon- solidated equity affiliates in connection with letters of credit issued on behalf of those entities. At December 31, 2000, a total of $264 million of such guarantees were outstanding, including $103 million on behalf of EOTT Energy Partners, L.P. (EOTT). In addition, Enron is a guarantor on certain liabilities of uncon- solidated equity affiliates and other companies totaling approxi- mately $1,863 million at December 31, 2000, including $538 million related to EOTT trade obligations. The EOTT letters of credit and guarantees of trade obligations are secured by the assets of EOTT. Enron has also guaranteed $386 million in lease obligations for which it has been indemnified by an “Investment Grade” company. Management does not consider it likely that Enron would be required to perform or otherwise incur any loss-
was repaid in December 1999, and certain financial instruments hedging an investment held by Enron. Enron recorded the assets received and equity issued at estimated fair value. In connection with the transactions, the Related Party agreed that the senior officer of Enron would have no pecuniary interest in such Enron common shares and would be restricted from voting on matters related to such shares. In 2000, Enron and the Related Party entered into an agreement to terminate certain financial instru- ments that had been entered into during 1999. In connection with this agreement, Enron received approximately 3.1 million shares of Enron common stock held by the Related Party. A put option, which was originally entered into in the first quarter of 2000 and gave the Related Party the right to sell shares of Enron common stock to Enron at a strike price of $71.31 per share, was terminated under this agreement. In return, Enron paid approxi- mately $26.8 million to the Related Party.
In 2000, Enron sold a portion of its dark fiber inventory to the Related Party in exchange for $30 million cash and a $70 million note receivable that was subsequently repaid. Enron recognized gross margin of $67 million on the sale.
In 2000, the Related Party acquired, through securitizations, approximately $35 million of merchant investments from Enron. In addition, Enron and the Related Party formed partnerships in which Enron contributed cash and assets and the Related Party contributed $17.5 million in cash. Subsequently, Enron sold a por- tion of its interest in the partnership through securitizations. See Note 3. Also, Enron contributed a put option to a trust in which the Related Party and Whitewing hold equity and debt interests. At December 31, 2000, the fair value of the put option was a $36 million loss to Enron.
In 1999, the Related Party acquired approximately $371 mil- lion of merchant assets and investments and other assets from Enron. Enron recognized pre-tax gains of approximately $16 mil- lion related to these transactions. The Related Party also entered into an agreement to acquire Enron’s interests in an unconsoli- dated equity affiliate for approximately $34 million.
17 ASSET IMPAIRMENT
In 1999, continued significant changes in state and federal rules regarding the use of MTBE as a gasoline additive have significantly impacted Enron’s view of the future prospects for this business. As a result, Enron completed a reevaluation of its position and strategy with respect to its operated MTBE assets which resulted in (i) the purchase of certain previously-leased MTBE related assets, under provisions within the lease, in order to facilitate future actions, including the potential disposal of such assets and (ii) a review of all MTBE-related assets for impair- ment considering the recent adverse changes and their impact on recoverability. Based on this review and disposal discussions with market participants, in 1999, Enron recorded a $441 million pre-tax charge for the impairment of its MTBE-related assets.
18 ACCOUNTING PRONOUNCEMENTS
Cumulative Effect of Accounting Changes
In 1999, Enron recorded an after-tax charge of $131 million to reflect the initial adoption (as of January 1, 1999) of two new accounting pronouncements, the AICPA Statement of Position 98-5 (SOP 98-5), “Reporting on the Costs of Start-Up Activities” and the Emerging Issues Task Force Issue No. 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities.” The 1999 charge was primarily related to the adop- tion of SOP 98-5.
Recently Issued Accounting Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which was subsequently amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 must be applied to all derivative instruments and certain derivative instruments embedded in hybrid instruments and requires that such instru- ments be recorded in the balance sheet either as an asset or liability measured at its fair value through earnings, with special accounting allowed for certain qualifying hedges. Enron will adopt SFAS No. 133 as of January 1, 2001. Due to the adoption of SFAS No. 133, Enron will recognize an after-tax non-cash loss of approximately $5 million in earnings and an after-tax non- cash gain in “Other Comprehensive Income,” a component of shareholders’ equity, of approximately $22 million from the cumulative effect of a change in accounting principle. Enron will also reclassify $532 million from “Long-Term Debt” to “Other Liabilities” due to the adoption.
The total impact of Enron’s adoption of SFAS No. 133 on earnings and on “Other Comprehensive Income” is dependent upon certain pending interpretations, which are currently under consideration, including those related to “normal pur- chases and normal sales” and inflation escalators included in certain contract payment provisions. The interpretations of these issues, and others, are currently under consideration by the FASB. While the ultimate conclusions reached on interpre- tations being considered by the FASB could impact the effects of Enron’s adoption of SFAS No. 133, Enron does not believe that such conclusions would have a material effect on its cur- rent estimate of the impact of adoption.
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19 QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
(In millions, except First Second Third Fourth Total per share amounts) Quarter Quarter Quarter Quarter Year (a)
2000 Revenues $13,145 $16,886 $30,007 $40,751 $100,789 Income before interest, minority
interests and income taxes 624 609 666 583 2,482 Net income 338 289 292 60 979 Earnings per share:
Basic $ 0.44 $ 0.37 $ 0.37 $ 0.05 $ 1.22 Diluted 0.40 0.34 0.34 0.05 1.12
1999 Revenues $ 7,632 $ 9,672 $11,835 $10,973 $ 40,112 Income before interest, minority
interests and income taxes 533 469 520 473 1,995 Net income 122 222 290 259 893 Earnings per share:
Basic $ 0.17 $ 0.29 $ 0.38 $ 0.33 $ 1.17 Diluted 0.16 0.27 0.35 0.31 1.10
(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 informa- tion is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. Enron’s chief operating decision- making group is the Office of the Chairman.
Enron’s chief operating decision-making group evaluates performance and allocates resources based on income before interest, minority interests and income taxes (IBIT) as well as on net income. Certain costs related to company-wide functions are allocated to each segment. However, interest on corporate debt is primarily maintained at Corporate and is not allocated to the segments. Therefore, management believes that IBIT is the dom- inant measurement of segment profits consistent with Enron’s consolidated financial statements. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies in Note 1.
Beginning in 2000, Enron’s communications business is being managed as a separate operating segment named Broadband Services and therefore, based on criteria set by SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” is reported separately.
Enron has divided its operations into the following reportable segments, based on similarities in economic charac- teristics, products and services, types of customers, methods of distributions and regulatory environment.
Transportation and Distribution – Regulated industries. Interstate transmission of natural gas. Management and opera- tion of pipelines. Electric utility operations.
Wholesale Services – Energy commodity sales and services, risk management products and financial services to wholesale customers. Development, acquisition and operation of power plants, natural gas pipelines and other energy-related assets.
Retail Energy Services – Sales of natural gas and electricity directly to end-use customers, particularly in the commercial and industrial sectors, including the outsourcing of energy- related activities.
Broadband Services – Construction and management of a nationwide fiber optic network, the marketing and management of bandwidth and the delivery of high-bandwidth content.
Exploration and Production – Natural gas and crude oil exploration and production primarily in the United States, Canada, Trinidad and India until August 16, 1999. See Note 2.
Corporate and Other – Includes operation of water and renewable energy businesses as well as clean fuels plants.
Financial information by geographic and business segment follows for each of the three years in the period ended December 31, 2000.
Geographic Segments
Year Ended December 31, (In millions) 2000 1999 1998 Operating revenues from unaffiliated customers
United States $ 77,891 $30,176 $25,247 Foreign 22,898 9,936 6,013
$100,789 $40,112 $31,260 Income before interest, minority interests and income taxes
United States $ 2,131 $ 1,273 $ 1,008 Foreign 351 722 574
$ 2,482 $ 1,995 $ 1,582 Long-lived assets
United States $ 10,899 $ 8,286 $ 9,382 Foreign 844 2,395 1,275
$ 11,743 $10,681 $10,657
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Business Segments
Transportation Retail Corporate and Wholesale Energy Broadband and
(In millions) Distribution Services Services Services Other (d) Total 2000 Unaffiliated revenues (a) $2,742 $93,278 $3,824 $ 408 $ 537 $100,789 Intersegment revenues (b) 213 1,628 791 - (2,632) -
Total revenues 2,955 94,906 4,615 408 (2,095) 100,789 Depreciation, depletion and amortization 278 343 38 77 119 855 Operating income (loss) 565 1,668 58 (64) (274) 1,953 Equity in earnings of unconsolidated equity affiliates 65 486 (60) 1 (405) 87 Gains on sales of assets and investments 25 9 74 - 38 146 Gain on the issuance of stock by TNPC, Inc. - - 121 - - 121 Interest income 6 171 5 3 27 212 Other income, net 71 (74) (33) - (1) (37) Income (loss) before interest, minority
interests and income taxes 732 2,260 165 (60) (615) 2,482 Capital expenditures 270 1,280 70 436 325 2,381 Identifiable assets 7,509 43,920 4,266 1,313 3,201 60,209 Investments in and advances to
unconsolidated equity affiliates 774 4,014 104 24 378 5,294 Total assets $8,283 $47,934 $4,370 $1,337 $ 3,579 $ 65,503
Transportation Retail Exploration Corporate and Wholesale Energy and and
(In millions) Distribution Services Services Production(c) Other (d) Total 1999 Unaffiliated revenues (a) $2,013 $35,501 $1,518 $ 429 $ 651 $ 40,112 Intersegment revenues (b) 19 786 289 97 (1,191) -
Total revenues 2,032 36,287 1,807 526 (540) 40,112 Depreciation, depletion and amortization 247 294 29 213 87 870 Operating income (loss) 551 889 (81) 66 (623) 802 Equity in earnings of unconsolidated equity affiliates 50 237 - - 22 309 Gains on sales of assets and investments 19 11 - - 511 541 Interest income 20 126 5 - 11 162 Other income, net 45 54 8 (1) 75 181 Income (loss) before interest, minority
interests and income taxes 685 1,317 (68) 65 (4) 1,995 Capital expenditures 316 1,216 64 226 541 2,363 Identifiable assets 7,148 18,501 956 - 1,740 28,345 Investments in and advances to
unconsolidated equity affiliates 811 2,684 - - 1,541 5,036 Total assets $7,959 $21,185 $ 956 $ - $ 3,281 $ 33,381
1998 Unaffiliated revenues (a) $1,833 $27,220 $1,072 $ 750 $ 385 $ 31,260 Intersegment revenues (b) 16 505 - 134 (655) -
Total revenues 1,849 27,725 1,072 884 (270) 31,260 Depreciation, depletion and amortization 253 195 31 315 33 827 Operating income (loss) 562 880 (124) 133 (73) 1,378 Equity in earnings of unconsolidated equity affiliates 33 42 (2) - 24 97 Gains on sales of assets and investments 31 4 - - 21 56 Interest income 9 67 - 1 11 88 Other income, net 2 (25) 7 (6) (15) (37) Income (loss) before interest, minority
interests and income taxes 637 968 (119) 128 (32) 1,582 Capital expenditures 310 706 75 690 124 1,905 Identifiable assets 6,955 12,205 747 3,001 2,009 24,917 Investments in and advances to
unconsolidated equity affiliates 661 2,632 - - 1,140 4,433 Total assets $7,616 $14,837 $ 747 $3,001 $ 3,149 $ 29,350
(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.
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Selected Financial and Credit Information (Unaudited) The following review of the credit characteristics of Enron Corp. and its subsidiaries and affiliates should be read in conjunction with the
Consolidated Financial Statements. The credit information that follows represents management’s calculation of certain key credit ratios of Enron.
(In millions) 2000 1999 Source Total Obligations Balance sheet debt (short- and long-term) $10,229 $ 8,152 Balance Sheet
Items added to liability profile: Guarantees (a) 213 180 Note 15 Residual value guarantees of synthetic leases 556 715 Note 15 Net liability from price risk management activities (b) - - Balance Sheet Debt exchangeable for EOG Resources, Inc. shares (c) (532) (239) Note 7 Debt of unconsolidated equity affiliates (d) - - Note 9 Firm transportation obligations (e) - - Note 15
Total Obligations $10,466 $ 8,808
Shareholders’ Equity and Certain Other Items Shareholders’ Equity $11,470 $ 9,570 Balance Sheet
Items added to shareholders’ equity: Minority interests 2,414 2,430 Balance Sheet, Note 8 Company-obligated preferred securities of subsidiaries 904 1,000 Balance Sheet, Note 10
Total Shareholders’ Equity and Certain Other Items $14,788 $13,000
Funds Flow from Operations Net cash provided by operating activities $ 4,779 $ 1,228 Cash Flow Statement
Changes in working capital 1,769 (1,000) Cash Flow Statement Funds Flow from Operations $ 3,010 $ 2,228
Interest and Estimated Lease Interest Expense Interest incurred $ 876 $ 710 Capitalized interest (38) (54) Management’s Discussion and Analysis Interest and Related Charges, net $ 838 $ 656 Income Statement
Estimated Lease Interest Expense (f) $ 106 $ 124
Adjusted Earnings for Credit Analysis Income before interest, minority interests and income taxes $ 2,482 $ 1,995 Income Statement
Adjustments to IBIT: Gain on sales of non-merchant assets (146) (541) Cash Flow Statement Impairment of long-lived assets (including equity investments) 326 441 Cash Flow Statement Distributions in excess of (less than) earnings
of unconsolidated equity affiliates (276) 173 Note 9 Estimated lease interest expense (f) 106 124
Total Adjusted Earnings for Credit Analysis $ 2,492 $ 2,192
Key Credit Ratios Funds flow interest coverage (g) 4.07 3.67 Pretax interest coverage (h) 2.54 2.63 Funds flow from operations/Total obligations 28.8% 25.3% Total obligations/Total obligations plus Total
shareholders’ equity and certain other items 41.4% 40.4% Debt/Total Capital ( i) 40.9% 38.5%
(a) Management estimates Enron’s risk adjusted exposure on uncollateralized guarantees is approximately 10% of the total nominal value of the guarantees issued. (b) Excess of price risk management liabilities over price risk management assets. (c) Enron expects to extinguish this obligation by delivering shares of EOG Resources, Inc. stock. (d) Debt of unconsolidated equity affiliates is non-recourse and therefore is excluded from Enron’s obligations. (e) Firm transportation obligations are excluded, as contracted capacity has market value. (f) Management estimates Enron’s lease interest expense for the year based on the average minimum lease payment or commitment (excluding principal repayments and other items). (g) Calculated as funds flow from operations plus interest incurred and estimated lease interest expense, divided by interest incurred and estimated lease interest expense. (h) Calculated as total adjusted earnings divided by interest incurred and estimated lease interest expense. (i) Total capital includes debt, minority interests, company-obligated preferred securities of subsidiaries and shareholders’ equity.
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Communication We have an obligation to communicate. Here, we take the time to talk with one another… and to listen. We believe that information is meant to move and that information moves people.
Respect We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment.
Integrity We work with customers and prospects openly, honestly and sin- cerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we won’t do it.
Excellence We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be.
OUR VALUES
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Board of Directors
ROBERT A. BELFER (1, 3)
New York, New York Chairman, Belco Oil & Gas Corp.
NORMAN P. BLAKE, JR. (3, 4)
Colorado Springs, Colorado Chairman, President and CEO, Comdisco, Inc., and Former CEO and Secretary General, United States Olympic Committee
RONNIE C. CHAN (2, 3)
Hong Kong Chairman, Hang Lung Group
JOHN H. DUNCAN (1*, 4)
Houston, Texas Former Chairman of the Executive Committee of Gulf & Western Industries, Inc.
WENDY L. GRAMM (2, 5)
Washington, D.C. Director of the Regulatory Studies Program of the Mercatus Center at George Mason University Former Chairman, U.S. Commodity Futures Trading Commission
KEN L. HARRISON Portland, Oregon Former Chairman and CEO, Portland General Electric Company
ROBERT K. JAEDICKE (2*, 4)
Stanford, California Professor of Accounting (Emeritus) and Former Dean, Graduate School of Business, Stanford University
KENNETH L. LAY (1)
Houston, Texas Chairman, Enron Corp.
CHARLES A. LEMAISTRE (1, 4*)
San Antonio, Texas President Emeritus, University of Texas M.D. Anderson Cancer Center
JOHN MENDELSOHN (2, 5)
Houston, Texas President, University of Texas M.D. Anderson Cancer Center
JEROME J. MEYER (3, 5)
Wilsonville, Oregon Chairman, Tektronix, Inc.
PAULO V. FERRAZ PEREIRA(2, 3)
Rio de Janeiro, Brazil Executive Vice President of Group Bozano Former President and COO, Meridional Financial Group, and Former President and CEO, State Bank of Rio de Janeiro, Brazil
FRANK SAVAGE (3, 4)
Stamford, Connecticut Chairman, Alliance Capital Management International (a division of Alliance Capital Management L.P.)
JEFFREY K. SKILLING (1)
Houston, Texas President and CEO, Enron Corp.
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JOHN A. URQUHART (3)
Fairfield, Connecticut Senior Advisor to the Chairman, Enron Corp., President, John A. Urquhart Associates, and Former Senior Vice President of Industrial and Power Systems, General Electric Company
JOHN WAKEHAM (2, 5*)
London, England Former U.K. Secretary of State for Energy and Leader of the Houses of Lords and Commons
HERBERT S. WINOKUR, JR. (1, 3*)
Greenwich, Connecticut President, Winokur Holdings, Inc., and Former Senior Executive Vice President, Penn Central Corporation
(1) Executive Committee (2) Audit Committee (3) Finance Committee (4) Compensation Committee (5) Nominating Committee * Denotes Chairman
FROM LEFT TO RIGHT: Top row: John Mendelsohn, Jeffrey K. Skilling and Frank Savage Middle row: Charles A. LeMaistre, Ronnie C. Chan, Herbert S. Winokur, Jr., Kenneth L. Lay, Wendy L. Gramm, Robert K. Jaedicke, John Wakeham and Robert A. Belfer Bottom row: John H. Duncan, Paulo V. Ferraz Pereira, John A. Urquhart, Norman P. Blake, Jr., Ken L. Harrison and Jerome J.Meyer
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Enron Corporate Policy Committee
KEN LAY Chairman, Enron
JEFF SKILLING President and Chief Executive Officer, Enron
CLIFF BAXTER Vice Chairman & Chief Strategic Officer, Enron
RICK CAUSEY Executive Vice President & Chief Accounting Officer, Enron
DAVE DELAINEY Chairman & CEO, Enron Energy Services
JIM DERRICK Executive Vice President & General Counsel, Enron
ANDY FASTOW Executive Vice President & Chief Financial Officer, Enron
MARK FREVERT Chairman & CEO, Enron Wholesale Services
KEVIN HANNON Chief Operating Officer, Enron Broadband Services
STAN HORTON Chairman & CEO, Enron Transportation Services
STEVE KEAN Executive Vice President & Chief of Staff, Enron
LOU PAI Chairman & CEO, Enron Xcelerator
KEN RICE Chairman & CEO, Enron Broadband Services
JOHN SHERRIFF President & CEO, Enron Europe
GREG WHALLEY President & COO, Enron Wholesale Services
TRANSFER AGENT, REGISTRAR, DIVIDEND PAYING AND REINVESTMENT PLAN AGENT (DIRECTSERVICE PROGRAM) First Chicago Trust Company c/o EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 (800) 519-3111 (201) 324-1225 TDD: (201) 222-4955 For direct deposit of dividends only, call: (800) 870-2340 Internet address: http://www.equiserve.com
2000 ANNUAL REPORT This Annual Report and the statements contained herein are submitted for the general information of the shareholders of Enron Corp. and are not intended for use in connection with or to induce the sale or purchase of securities.
ADDITIONAL INFORMATION Enron Corp.’s Annual Report to share- holders and Form 10-K report to the Securities and Exchange Commission are available upon request on Enron’s Internet address http://www.enron.com For information regarding specific shareholder questions, write or call the Transfer Agent.
Financial analysts and investors who need additional information should contact: Enron Corp. Investor Relations Dept. P.O. Box 1188, Suite 4926B Houston, TX 77251-1188 (713) 853-3956 Enron’s Internet address: http://www.enron.com
ANNUAL MEETING OF SHAREHOLDERS The Annual Meeting of Shareholders will be held in Houston, Texas, in the LaSalle Ballroom of the Doubletree Hotel at Allen Center, 400 Dallas Street, on Tuesday, May 1, 2001, at 10 a.m. Information with respect to this meeting is contained in the Proxy Statement sent with this Annual Report to holders of record of Enron Corp.’s Common Stock and the Cumulative Second Preferred Convertible Stock on March 2, 2001. The 2000 Annual Report is not to be considered a part of the proxy soliciting material.
DIVIDEND REINVESTMENT The Transfer Agent offers holders of Enron Corp. Common Stock the oppor- tunity to reinvest part or all of their dividends in the purchase of additional shares of Common Stock by participating
in the DirectSERVICE Program for Shareholders of Enron Corp. This pro- gram gives almost everyone the oppor- tunity to purchase additional shares of Common Stock without paying a bro- kerage commission. Anyone wishing to participate in the program may, upon timely application, reinvest some, all, or none of the cash dividends paid on their Common Stock, or make optional cash payments of as little as $25, after an initial investment of $250 for new shareholders, with a limit of $120,000 per calendar year. Direct requests for further information to: DirectSERVICE Program for Shareholders of Enron Corp. c/o First Chicago Trust Company c/o EquiServe P.O. Box 2598 Jersey City, NJ 07303-2598 Shareholders may call: (800) 519-3111 Non-shareholders requests for program materials: (800) 662-7662 Internet address: http://www.equiserve.com TDD: (201) 222-4955
Shareholder Information
En ro
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n n u al R
ep o rt 2
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1400 Smith Street Houston, Texas 77002-7361 www.enron.com
© 2001 Enron Corp. Enron and the Enron logo are registered trademarks, and Endless possibilities, EnronOnline, DealBench, energydesk.com, Commoditylogic and Clickpaper.com are trademarks of Enron Corp. or one of its subsidiaries. Other company, product and services names may be trademarks of others.
- Financial Highlights
- To Our Shareholders
- Enron Wholesale Services
- Enron Energy Services
- Enron Broadband Services
- Enron Transportation Services
- Financial Review
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Financial Risk Management
- Information Regarding Forward-Looking Statements
- Management's Responsibility for Financial Reporting
- Reports of Independent Public Accountants
- Enron Corp. and Subsidiaries Consolidated Income Statement
- Enron Corp. and Subsidiaries Consolidated Statement of Comprehensive Income
- Enron Corp. and Subsidiaries Consolidated Balance Sheet
- Enron Corp. and Subsidiaries Consolidated Statement of Cash Flows
- Enron Corp. and Subsidiaries Consolidated Statement of Changes in Shareholders' Equity
- Enron Corp. and Subsidiaries Notes to Consolidated Financial Statements
- Selected Financial and Credit Information (Unaudited)
- Our Values
- Board of Directors
- Enron Corporate Policy Committee
- Shareholder Information
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 March 31, 2001
Commission File Number 1−13159 ENRON CORP. (Exact name of registrant as specified in its charter)
Oregon 47−0255140 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number)
Enron Building 1400 Smith Street Houston, Texas 77002 (Address of principal executive (Zip Code) offices)
(713) 853−6161 (Registrant's telephone number, including area code)
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 April 30, 2001
Common Stock, No Par Value 746,105,146 shares
1 of 31
ENRON CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Condensed Income Statement − Three Months Ended March 31, 2001 and 2000 3 Consolidated Balance Sheet − March 31, 2001 and December 31, 2000 4 Consolidated Statement of Cash Flows − Three Months Ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 29
ITEM 6. Exhibits and Reports on Form 8−K 29
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENRON CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED INCOME STATEMENT (In Millions, Except Per Share Amounts) (Unaudited)
Three Months Ended March 31, 2001 2000
Revenues $50,129 $13,145 Costs and Expenses Cost of gas, electricity and other products 48,159 11,888 Operating expenses 993 747 Depreciation, depletion and amortization 213 172 Taxes, other than income taxes 88 66 49,453 12,873 Operating Income 676 272 Other Income and Deductions Equity in earnings of unconsolidated equity affiliates 74 264 Gains on sales of non−merchant assets 32 18 Other income, net 13 70 Income before Interest, Minority Interests and Income Taxes 795 624 Interest and Related Charges, net 201 161 Dividends on Company−Obligated Preferred Securities of Subsidiaries 18 18 Minority Interests 40 35 Income Taxes 130 72 Net Income Before Cumulative Effect of Accounting Changes 406 338 Cumulative Effect of Accounting Changes, net of tax 19 − Net Income 425 338 Preferred Stock Dividends 20 20
Earnings on Common Stock $ 405 $ 318
Earnings per Share of Common Stock Basic Before Cumulative Effect of Accounting Changes $ 0.51 $ 0.44 Cumulative Effect of Accounting Changes 0.03 − Basic Earnings per Share $ 0.54 $ 0.44
Diluted Before Cumulative Effect of Accounting Changes $ 0.47 $ 0.40 Cumulative Effect of Accounting Changes 0.02 − Diluted Earnings per Share $ 0.49 $ 0.40
Average Number of Common Shares Used in Computation Basic 752 723 Diluted 872 852
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)
March 31, December 31, 2001 2000
ASSETS
Current Assets Cash and cash equivalents $ 1,086 $ 1,374 Trade receivables (net of allowance for doubtful accounts of $416 and $133, respectively) 8,949 10,396 Other receivables 2,361 1,874 Assets from price risk management activities 12,672 12,018 Inventories 650 953 Deposits 2,349 2,433 Other 1,100 1,333 Total Current Assets 29,167 30,381
Investments and Other Assets Investments in and advances to unconsolidated equity affiliates 5,694 5,294 Assets from price risk management activities 9,998 8,988 Goodwill 3,609 3,638 Other 7,217 5,459 Total Investments and Other Assets 26,518 23,379
Property, Plant and Equipment, at cost Natural gas transmission 6,987 6,916 Electric generation and distribution 4,518 4,766 Fiber−optic network and equipment 912 839 Construction in progress 696 682 Other 2,184 2,256 15,297 15,459 Less accumulated depreciation, depletion and amortization 3,722 3,716 Property, Plant and Equipment, net 11,575 11,743
Total Assets $67,260 $65,503
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)
March 31, December 31, 2001 2000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities Accounts payable $ 8,686 $ 9,777 Liabilities from price risk management activities 10,840 10,495 Short−term debt 2,159 1,679 Customers' deposits 3,495 4,277 Other 2,390 2,178 Total Current Liabilities 27,570 28,406
Long−Term Debt 9,763 8,550
Deferred Credits and Other Liabilities Deferred income taxes 1,625 1,644 Liabilities from price risk management activities 10,472 9,423 Other 2,781 2,692 Total Deferred Credits and Other Liabilities 14,878 13,759
Minority Interests 2,418 2,414
Company−Obligated Preferred Securities of Subsidiaries 904 904
Shareholders' Equity Second preferred stock, cumulative, no par value 121 124 Mandatorily Convertible Junior Preferred Stock, Series B, no par value 1,000 1,000 Common stock, no par value 9,513 8,348 Retained earnings 3,525 3,226 Accumulated other comprehensive income (1,193) (1,048) Common stock held in treasury (1,082) (32) Restricted stock and other (157) (148) Total Shareholders' Equity 11,727 11,470
Total Liabilities and Shareholders' Equity $67,260 $65,503
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)
Three Months Ended March 31, 2001 2000
Cash Flows From Operating Activities Reconciliation of net income to net cash used in operating activities Net income $ 425 $ 338 Cumulative effect of accounting changes, net of tax (19) − Depreciation, depletion and amortization 213 172 Deferred income taxes 113 30 Gains on sales of non−merchant assets (32) (18) Changes in components of working capital (599) (313) Net assets from price risk management activities (270) (52) Merchant assets and investments: Realized gains on sales 26 (31) Proceeds from sales 135 199 Additions and unrealized gains (74) (517) Other operating activities (382) (265) Net Cash Used in Operating Activities (464) (457) Cash Flows From Investing Activities Capital expenditures (382) (496) Equity investments (716) (316) Proceeds from sales of non−merchant investments 339 17 Acquisition of subsidiary stock − (485) Business acquisitions, net of cash acquired (33) (144) Other investing activities (332) (69) Net Cash Used in Investing Activities (1,124) (1,493) Cash Flows From Financing Activities Issuance of long−term debt 1,747 1,361 Repayment of long−term debt (996) (393) Net increase in short−term borrowings 799 962 Issuance of common stock 119 179 Issuance of preferred securities of subsidiaries − 105 Dividends paid (143) (156) Net (acquisition) disposition of treasury stock (226) 70 Net Cash Provided by Financing Activities 1,300 2,128 Increase in Cash and Cash Equivalents (288) 178 Cash and Cash Equivalents, Beginning of Period 1,374 288 Cash and Cash Equivalents, End of Period $ 1,086 $ 466
Changes in Components of Working Capital Receivables $ 627 $ (824) Inventories 169 156 Payables (1,062) 732 Other (333) (377) Total $ (599) $ (313)
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 included in Enron's Annual Report on Form 10−K for the year ended December 31, 2000 (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 2000 amounts to conform with the 2001 presentation.
"Enron" is used from time to time herein as a collective reference to Enron Corp. and its subsidiaries and affiliates. The businesses of Enron are conducted by the subsidiaries and affiliates whose operations are managed by their respective officers.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid for income taxes for the first quarter of 2001 and 2000 was $100 million and $11 million, respectively. Cash paid for interest for the same periods, net of amounts capitalized, was $200 million and $164 million, respectively.
In 2000, Enron entered into an agreement with Azurix under which the holders of Azurix's approximately 39 million publicly traded shares would receive cash of $8.375 in exchange for each share. On March 16, 2001, Azurix shareholders approved the agreement whereby Enron paid approximately $330 million for an equivalent number of shares held by the public and all publicly traded shares of Azurix Corp were redeemed.
Non−Cash Activity. In March 2001, Enron acquired the limited partner's interests in an unconsolidated equity affiliate, Joint Energy Development Investments Limited Partnership (JEDI), for $35 million. As a result of the acquisition, JEDI has been consolidated. JEDI's balance sheet as of the date of acquisition consisted of net assets of approximately $500 million, including an investment of 12 million shares of Enron common stock valued at approximately $785 million, merchant investments and other assets of approximately $670 million and third−party debt and debt owed to Enron of approximately $950 million. Enron repaid the third−party debt of approximately $620 million prior to March 31, 2001. Also see Note 8.
3. LITIGATION AND OTHER CONTINGENCIES
Enron is a party to various claims and litigation, the significant items of which are discussed below. Although no assurances can be given, Enron believes, based on its
experience to date and after considering appropriate reserves that have been established, that the ultimate resolution of such items, individually or in the aggregate, will not have a material adverse impact on Enron's financial position or results of operations.
Litigation. In 1995, several parties (the Plaintiffs) filed suit in Harris County District Court in Houston, Texas, against Intratex Gas Company (Intratex), Houston Pipe Line Company and Panhandle Gas Company (collectively, the Enron Defendants), each of which is a wholly−owned subsidiary of Enron. The Plaintiffs were either sellers or royalty owners under numerous gas purchase contracts with Intratex, many of which have terminated. Early in 1996, the case was severed by the Court into two matters to be tried (or otherwise resolved) separately. In the first matter, the Plaintiffs alleged that the Enron Defendants committed fraud and negligent misrepresentation in connection with the "Panhandle program," a special marketing program established in the early 1980s. This case was tried in October 1996 and resulted in a verdict for the Enron Defendants. In the second matter, the Plaintiffs allege that the Enron Defendants violated state regulatory requirements and certain gas purchase contracts by failing to take the Plaintiffs' gas ratably with other producers' gas at certain times between 1978 and 1988. The trial court certified a class action with respect to ratability claims. On March 9, 2000, the Texas Supreme Court ruled that the trial court's class certification was improper and remanded the case to the trial court. The Enron Defendants deny the Plaintiffs' claims and have asserted various affirmative defenses, including the statute of limitations. The Enron Defendants believe that they have strong legal and factual defenses, and intend to vigorously contest the claims. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations.
On November 21, 1996, an explosion occurred in or around the Humberto Vidal Building in San Juan, Puerto Rico. The explosion resulted in fatalities, bodily injuries and damage to the building and surrounding property. San Juan Gas Company, Inc. (San Juan Gas), an Enron affiliate, operated a propane/air distribution system in the vicinity, but did not provide service to the building. Enron, San Juan Gas, four affiliates and their insurance carriers were named as defendants, along with several third parties, including The Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Telephone Company, Heath Consultants Incorporated, Humberto Vidal, Inc. and their insurance carriers, in numerous lawsuits filed in U.S. District Court for the District of Puerto Rico and the Superior Court of Puerto Rico. These suits seek damages for wrongful death, personal injury, business interruption and property damage allegedly caused by the explosion. After nearly four years without determining the cause of the explosion, all parties have agreed not to litigate further that issue, but to move these suits toward settlements or trials to determine whether each plaintiff was injured as a result of the explosion and, if so, the lawful damages attributable to such injury. The defendants have agreed on a fund for settlements or final awards. Numerous claims have been settled. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations.
Trojan Investment Recovery. In early 1993, Portland General Electric (PGE) ceased commercial operation of the Trojan nuclear power generating facility. The Oregon Public Utility Commission (OPUC) granted PGE, through a general rate order, recovery of, and a return on, 87 percent of its remaining investment in Trojan.
The OPUC's general rate order related to Trojan has been subject to litigation in various state courts, including rulings by the Oregon Court of Appeals and petitions to the Oregon Supreme Court filed by parties opposed to the OPUC's order, including the Utility Reform Project(URP) and the Citizens Utility Board (CUB).
In August 2000, PGE entered into agreements with the CUB and the staff of the OPUC to settle the litigation related
to PGE's recovery of its investment in the Trojan plant. Under the agreements, the CUB agreed to withdraw from the litigation and to support the settlement as the means to resolve the Trojan litigation. The OPUC approved the accounting and ratemaking elements of the settlement on September 29, 2000. As a result of these approvals, PGE's investment in Trojan is no longer included in rates charged to customers, either through a return on or a return of that investment. Collection of ongoing decommissioning costs at Trojan is not affected by the settlement agreements or the September 29, 2000 OPUC order. With the CUB's withdrawal, the URP is the one remaining significant adverse party in the litigation. The URP has indicated that it plans to continue to challenge the OPUC order allowing PGE recovery of and a return on its investment in Trojan.
Enron cannot predict the outcome of these actions. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations.
Environmental Matters. Enron is subject to extensive federal, state and local environmental laws and regulations. These laws and regulations require expenditures in connection with the construction of new facilities, the operation of existing facilities and for remediation at various operating sites. The implementation of the Clean Air Act Amendments is expected to result in increased operating expenses. These increased operating expenses are not expected to have a material impact on Enron's financial position or results of operations.
Enron's natural gas pipeline companies conduct soil and groundwater remediation on a number of their facilities. Enron does not expect to incur material expenditures in connection with soil and groundwater remediation.
4. EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows (in millions, except per share amounts):
Three Months Ended March 31, 2001 2000
Numerator: Basic Income before cumulative effect of accounting changes $ 406 $ 338 Preferred stock dividends: Second Preferred Stock (4) (4) Series B Preferred Stock (16) (16) Income available to common shareholders before cumulative effect of accounting changes 386 318 Cumulative effect of accounting changes 19 − Income available to common shareholders $ 405 $ 318 Diluted Income available to common shareholders before cumulative effect of accounting changes $ 386 $ 318 Effect of assumed conversion of dilutive securities: Second Preferred Stock 4 4 Series B Preferred Stock 16 16 Income before cumulative effect of accounting changes 406 338 Cumulative effect of accounting changes 19 − Income available to common shareholders after assumed conversion $ 425 $ 338
Denominator: Denominator for basic earnings per share − weighted−average shares 752 723 Effect of dilutive securities: Preferred stock: Second Preferred Stock 33 35 Series B Preferred Stock 50 50
Stock options and other equity instruments 37 44 Dilutive potential common shares 120 129 Denominator for diluted earnings per share − adjusted weighted−average shares and assumed conversions 872 852
Basic earnings per share: Before cumulative effect of accounting changes $0.51 $0.44 Cumulative effect of accounting changes 0.03 − Basic earnings per share $0.54 $0.44
Diluted earnings per share: Before cumulative effect of accounting changes $0.47 $0.40 Cumulative effect of accounting changes 0.02 − Diluted earnings per share $0.49 $0.40
5. COMPREHENSIVE INCOME
Comprehensive income includes the following (in millions):
First Quarter 2001 2000
Net income $ 425 $ 338 Other comprehensive income (net of tax): Foreign currency translation adjustment (150)(a) (2) Derivative instruments: Cumulative effect of accounting changes 25 − Deferred loss on derivative instruments associated with hedges of future cash flows (8) − Recognition in earnings of previously deferred gaines related to derivative instruments used as cash flow hedges (13)(b) − Change in value of available−for−sale investments 1 (13) Total comprehensive income $ 280 $ 323
(a) Change primarily reflects the decline in value of the Brazilian real. (b) Includes an after−tax gain of $10 million related to the discontinuance of a cash flow hedge of a forecasted transaction that became probable of not occurring.
6. BUSINESS SEGMENT INFORMATION
Enron's business is divided into operating segments, defined as components of an enterprise about which financial information is available and evaluated regularly by the Office of the Chairman, which serves as the chief operating decision making group.
Beginning in 2001, the commodity−related risk management activities of Retail Energy Services' North American customer contracts were transferred to the Wholesale Services segment, consolidating all energy commodity risk management activities within one operating segment. In 2001, Retail Energy Services' business includes origination of new commodity and energy asset management and services contracts, execution of energy asset management and services activity and management of customer relationships. Year 2000 results in the following table have been restated to reflect this change.
Retail Transportation Corporate Wholesale Energy Broadband and and (In Millions) Services(c) Services(c) Services Distribution Other(d) Total
Three Months Ended March 31, 2001
Unaffiliated revenues(a) $48,407 $ 642 $ 85 $ 933 $ 62 $50,129 Intersegment revenues(b) 99 51 (2) 80 (228) − Total revenues $48,506 $ 693 $ 83 $1,013 $ (166) $50,129 Income (loss) before interest, minority interests and income taxes $ 755 $ 40 $ (35) $ 193 $ (158) $ 795
Three Months Ended March 31, 2000
Unaffiliated revenues(a) $12,162 $ 288 $ 59 $ 599 $ 37 $13,145 Intersegment revenues(b) 167 26 − 4 (197) − Total revenues $12,329 $ 314 $ 59 $ 603 $ (160) $13,145 Income (loss) before interest, minority interests and income taxes $ 429 $ 6 $ − $ 233 $ (44) $ 624
(a) Unaffiliated revenues include sales to unconsolidated affiliates. (b) Intersegment sales are made at prices comparable to those received from unaffiliated customers and in some instances are affected by regulatory considerations. (c) The 2000 amounts have been restated. Prior to the restatement, Retail Energy Services reported revenues and IBIT of $642 million and $16 million, respectively, for the first quarter of 2000. Revenues and IBIT were $4,615 million and $165 million, respectively, for the full year 2000. Restated full year 2000 revenues and IBIT were $1,766 million and $173 million, respectively. Operating results in 2001 include servicing charges from Wholesale Services for management of Retail Services' risk management activities. (d) Includes consolidating eliminations.
Total assets by segment are as follows (in millions):
March 31, December 31, 2001 2000
Wholesale Services $52,766 $51,131 Retail Energy Services 1,287 1,173(a) Broadband Services 1,418 1,337 Transportation and Distribution 8,438 8,283 Corporate and Other 3,351 3,579 Total Assets $67,260 $65,503
(a) Retail Energy Services' total assets have been restated. Prior to the restatement, total assets at December 31, 2000 were $4,370 million.
7. DERIVATIVE INSTRUMENTS
On January 1, 2001, Enron recognized an after−tax non− cash gain of $19 million in earnings and deferred an after−tax non−cash gain of $25 million in "Accumulated Other Comprehensive Income" (OCI), a component of shareholders' equity and reclassified $277 million from "Long−Term Debt" to "Other Liabilities" to reflect the initial adoption of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 must be applied to all derivative instruments and requires that such instruments be recorded in the balance sheet either as an asset or a liability measured at its fair value through earnings, with special accounting permitted for certain qualifying hedges as described in the following paragraphs.
In the ordinary course of business, Enron enters into derivative instruments, as defined in SFAS No. 133, as part of its normal risk management operations, which are subject to parameters established by Enron's Board of Directors. The adoption of SFAS No. 133 has no impact on the way Enron accounts for its risk management business activities.
On a much more limited basis, Enron's other businesses enter into derivative instruments, such as forwards, swaps and other contracts, in order to hedge certain non−trading risks, including interest rate risk, commodity price risk and foreign currency exchange rate risk. Enron primarily uses cash flow hedges, for which Enron's objective is to provide protection against variability in cash flows due to an associated variable risk. Enron accounts for such hedging
activity by initially deferring the gain or loss related to the fair value changes in derivative instruments in OCI. The deferred change in fair value is then reclassified into income concurrently with the recognition in income of the cash flow item hedged. The net after−tax amount expected to be reclassified from OCI within the next 12 months is immaterial. Enron has also entered into a limited number of fair value hedges to protect the fair value of certain liabilities from variability caused by fluctuations in either interest rates or foreign currency exchange rates. Enron accounts for these hedges by recognizing the fair value of both the derivative instrument and the hedged item into income concurrently. Enron had no material ineffectiveness in any cash flow or fair value hedges in the first quarter of 2001. Enron also holds a limited number of derivative instruments in its non−risk management businesses, which do not meet the requirements of SFAS No. 133 for hedge accounting, but provide Enron with an economic hedge of an associated risk.
The maximum amount of time over which cash flow exposure in forecasted transactions are hedged excluding hedges of variable interest rate risk on existing financial instruments is approximately 20 years. Derivative contracts are entered into with counterparties who are equivalent to investment grade. Accordingly, Enron does not anticipate any material impact to its financial position or results of operations as a result of nonperformance by the third parties on derivative instruments related to non−risk management business activities.
The impact of Enron's accounting for SFAS No. 133 on earnings and on OCI is dependent upon certain pending interpretations, including those related to application of the "normal purchases and normal sales" exclusion to certain power contracts in an electric utility business. For purposes of determining the impact upon adoption, Enron has elected to treat under the "normal purchases and normal sales" exception certain contracts related to the regulated activities at PGE for the purchase and sale of electricity. The interpretation of this issue, and others, are currently under consideration by the Financial Accounting Standards Board (FASB). While the ultimate conclusions reached on interpretations being considered by the FASB could impact the effects of Enron's accounting for SFAS No. 133, Enron does not believe that such conclusions would have a material effect on Enron's financial position or results of operations.
8. RELATED PARTY TRANSACTION
During the first quarter of 2001, Enron entered into transactions with limited partnerships (the Related Party), whose general partner is a senior officer of Enron. The limited partners of the Related Party are unrelated to Enron. All transactions with the Related Party are approved by Enron's senior risk officers as well as reviewed annually by the Board of Directors. Management believes that the terms of the transactions with the Related Party were reasonable compared to those which could have been negotiated with unrelated third parties.
Enron entered into transactions with the Related Party to hedge certain merchant investments and other assets. As part of these transactions, Enron has entered into agreements with entities formed in 2000 (the Entities), which included the obligation to deliver 12 million shares of Enron common stock in March 2005 (the Commitment) and entered into derivative instruments which eliminated the contingent nature of existing restricted forward contracts executed in 2000. The Commitment and the shares to be delivered under the derivative instruments are restricted through March 2005. In exchange, Enron received note receivables from the Entities totaling approximately $827.6 million. In addition, Enron entered into share settled costless collar arrangements with the Entities on the 12 million shares of Enron common stock. Such transactions will be accounted for as equity transactions when settled. Enron received a $6.5 million note receivable from the Entities to terminate share−settled options on 7.1 million shares of Enron common stock. The transactions resulted in non−cash increases to non−current assets and equity.
In the first quarter of 2001, Enron recognized net revenues of approximately $236.1 million, primarily related
to the change in the market value of derivatives instruments entered into with the Entities in 2000 to hedge certain merchant investments and other assets. Revenues recognized on the derivative instruments offset market value changes of certain merchant investments and price risk management activities. In addition, Enron and the Entities terminated certain derivative instruments (originally entered into in 2000) with a combined notional value of approximately $658.5 million. Enron received a note receivable from the Entities for approximately $81.7 million related to such terminations. At March 31, 2001, cash in the Entities of $138 million was invested in Enron demand notes. Enron recognized $22 million and $3.5 million of interest income and interest expense, respectively, on notes receivable from and notes payable to the Entities.
In the first quarter of 2001, Enron received approximately $62 million from Whitewing Associates, LP, an unconsolidated equity affiliate, related to securitizations.
9. RECENT DEVELOPMENTS
Developments in the California Power Market. During 2000, prices for wholesale electricity in California significantly increased as a result of a combination of factors, including higher natural gas prices, reduction in available hydroelectric generation resources, increased demand, over−reliance on the spot market for electricity and limitations on supply. California's regulatory regime instituted in 1996 permitted wholesale price increases but froze retail prices below market levels. The resulting disparity between costs of supply and customer revenues caused two of California's public utilities, Pacific Gas & Electric Company (PG&E) and Southern California Edison Company (SCE), to accrue substantial unrecovered wholesale power costs and certain obligations related to the difference between third party power purchase costs and frozen rates charged to retail customers. PG&E and SCE have defaulted on or are challenging payments owed for certain outstanding obligations, including wholesale power purchased through the California Power Exchange (the Power Exchange), from the California Independent System Operator (the Independent System Operator), and from qualifying facilities. In addition, PG&E and the Power Exchange each have filed a voluntary petition for bankruptcy.
Various legislative, regulatory and legal remedies to the energy situation in California have been implemented or are being pursued, and may result in restructuring of markets in California and elsewhere. Additional initiatives are likely at the Federal, state and local level, but it is not possible to predict their outcome at this time.
Enron has entered into a variety of transactions with California utilities, the Power Exchange, the Independent System Operator, end users of energy in California, and other third parties, and is owed amounts by certain of these entities. Enron has established reserves related to such activities and believes that the combination of such reserves in accounts receivables and price risk management assets and other credit offsets with such parties are adequate to cover its exposure to developments in the California power market. Due to the uncertainties involved, the ultimate outcome of the California power situation cannot be predicted, but Enron believes these matters will not have a material adverse impact on Enron's financial condition or results of operations.
India. Enron indirectly owns 50% of the net voting interest in Dabhol Power Company (Dabhol), which owns a 740 megawatt power plant and is developing an additional 1,444 megawatt power plant together with an LNG regasification facility in India. Enron accounts for its investment in Dabhol under the equity methodand the debt of Dabhol is non− recourse to Enron. Dabhol has been in dispute with the Maharashtra State Electricity Board (MSEB), the purchaser of power from Dabhol, and the Government of Maharashtra (GOM) and the federal government of India (GOI), the guarantors of payments by the MSEB pursuant to the terms and conditions of the power purchase agreements (PPA) and the other project documents. The contract disputes relate principally to the failure by the MSEB to pay certain capacity and energy
payments under the PPA, and the failure of the GOM and GOI to satisfy certain guarantee obligations under the project documents. There is no assurance that Dabhol will be able to resolve such disputes to its favor and to successfully collect on and to enforce any judgment or settlement. However, Dabhol believes that the MSEB's actions are in clear violation of the terms of the PPA, and Dabhol intends to pursue all available legal remedies under the project documents. Accordingly, Enron does not believe that any contract dispute related to Dabhol would have a material adverse impact on Enron's financial condition or results of operations.
Termination of Portland General Sales Agreement. On April 26, 2001, Enron announced that the previously disclosed agreement to sell Portland General to Sierra Pacific Resources had been terminated by the mutual consent of both parties because the effect of developments in California and Nevada on the purchaser had made completion of the transaction impractical.
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
First Quarter 2001 vs. First Quarter 2000
The following review of Enron's results of operations should be read in conjunction with the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Consolidated Net Income Enron's first quarter 2001 net income was $406 million (excluding a gain of $19 million related to the cumulative effect of accounting changes) compared to $338 million in the first quarter of 2000. Enron's business is divided into five operating segments including:
Wholesale Services. Wholesale Services includes Enron's wholesale businesses around the world. Wholesale Services operates in developed markets such as North America and Europe, as well as developing or newly deregulating markets including South America, India and Japan.
Retail Energy Services. Enron, through its subsidiary Enron Energy Services, LLC (Energy Services), is extending its energy expertise and capabilities to end−use retail customers in the industrial and commercial business sectors to manage their energy requirements and reduce their total energy costs.
Broadband Services. Enron's broadband services business (Broadband Services) provides customers with a single source for broadband services, including network services intermediation and the delivery of premium content.
Transportation and Distribution. Transportation and Distribution consists of Enron Transportation Services (Transportation Services) and Portland General. Transportation Services includes Enron's interstate natural gas pipelines, primarily Northern Natural Gas Company (Northern), Transwestern Pipeline Company (Transwestern), Enron's 50% interest in Florida Gas Transmission Company (Florida Gas) and Enron's interests in Northern Border Partners, L.P. and EOTT Energy Partners, L.P. (EOTT).
Corporate and Other. Corporate and Other includes Enron's investment in Azurix Corp. (Azurix), which provides water and wastewater services, results of Enron Renewable Energy Corp. (EREC), which develops and constructs wind− generated power projects, and the operations of Enron's methanol and MTBE plants as well as overall corporate activities of Enron.
Basic and diluted earnings per share of common stock were as follows:
First Quarter 2001 2000
Basic earnings per share: Before cumulative effect of accounting changes $ 0.51 $ 0.44 Cumulative effect of accounting changes 0.03 − $ 0.54 $ 0.44
Diluted earnings per share: Before cumulative effect of accounting changes $ 0.47 $ 0.40 Cumulative effect of accounting changes 0.02 − $ 0.49 $ 0.40
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 (in millions):
First Quarter 2001 2000
Wholesale Energy Operations and Services $ 755 $ 429 Retail Energy Services 40 6 Broadband Services (35) − Transportation and Distribution: Transportation Services 133 128 Portland General 60 105 Corporate and Other (158) (44)
Income before interest, minority interests and taxes $ 795 $624
Wholesale Services Enron builds its wholesale businesses through the creation of networks involving selective asset ownership, contractual access to third−party assets and market−making activities. Each market in which Wholesale Services operates utilizes these components in a slightly different manner and is at a different stage of development. This network strategy has enabled Wholesale Services to establish a leading position in its markets. Wholesale Services' activities are categorized into two business lines: (a) Commodity Sales and Services and (b) Assets and Investments. Activities may be integrated into a bundled product offering for Enron's customers.
Wholesale Services manages its portfolio of contracts and assets in order to maximize value, minimize the associated risks and provide overall liquidity. In doing so, Wholesale Services uses portfolio and risk management disciplines, including offsetting or hedging transactions, to manage exposures to market price movements (commodities, interest rates, foreign currencies and equities). Additionally, Wholesale Services manages its liquidity and exposure to third−party credit risk through monetization of its contract portfolio or third−party insurance contracts. Wholesale Services also sells interests in certain investments and other assets to improve liquidity and overall return, the timing of which is dependent on market conditions and management's expectations of the investment's value.
The following table reflects IBIT for each business line (in millions):
First Quarter 2001 2000
Commodity Sales and Services $785 $256 Assets and Investments 59 220 Unallocated expenses (89) (47) Income before interest, minority interests and taxes $755 $429
The following discussion analyzes the contributions to IBIT for each of the business lines.
Commodity Sales and Services. Wholesale Services provides reliable commodity delivery and predictable pricing to its customers through forwards and other contracts. Activity includes the purchase, sale, marketing and delivery of natural gas, electricity, liquids and other commodities, as well as the management of Wholesale Services' own portfolio of contracts. Contracts associated with this
activity are accounted for using the mark−to−market method of accounting. Wholesale Services' market−making activity is facilitated through a network of capabilities including selective asset ownership. Accordingly, certain assets involved in the delivery of these services are included in this business (such as intrastate natural gas pipelines, gas storage facilities and certain electric generation assets).
Enron Wholesale markets, transports and provides energy commodities as reflected in the following table (including intercompany amounts):
First Quarter 2001 2000
Physical Volumes (BBtue/d)(a) Gas: United States 20,898 16,217 Canada 6,358 4,389 Europe and Other 8,699 2,469 35,955 23,075 Transportation Volumes 506 456 Total Gas Volumes 36,461 23,531 Crude Oil and Liquids 6,836 6,134 Electricity(b) 25,732 12,170 Total 69,029 41,835
Electricity Volumes Marketed (Thousand MWh)(c) United States 195,246 102,903 Europe and Other 36,339 7,844 Total 231,585 110,747
Financial Settlements (Notional) (BBtue/d) 302,694 141,865
(a) Billion British thermal units equivalent per day. (b) Represents electricity volumes, converted to BBtue/d. (c) Thousand megawatt−hours.
Earnings from commodity sales and services increased $529 million in the first quarter of 2001 as compared to the same period in 2000. Profits from North American gas and power marketing operations increased significantly. European gas and power marketing operations and earnings from new businesses, such as coal and forest products, also contributed to the earnings growth of Enron's commodity sales and services business. Commodity Sales and Services' results in 2001 were also positively impacted by the sale of certain peaking power plants. Volumes growth, which increased 65 percent in the first quarter of 2001 as compared to the first quarter of 2000, and price volatility in both the gas and power markets were the key contributors to increased profits in the gas and power intermediation businesses.
Assets and Investments. Enron's Wholesale businesses make investments in various energy and certain related assets as a part of its network strategy. Wholesale Services either purchases the asset from a third party or develops and constructs the asset. In most cases, Wholesale Services operates and manages such assets. Earnings principally result from operations of the assets or sales of ownership interests.
Additionally, Wholesale Services invests in debt and equity securities of energy−related businesses, which may also utilize Wholesale Services' products and services. With these merchant investments, Enron's influence is much more limited relative to assets Enron develops or constructs. Earnings from these activities, which are accounted for on a fair value basis and are included in revenues, result from changes in the market value of the securities. Wholesale Services uses risk management disciplines, including hedging transactions, to manage the impact of market price movements on its merchant investments.
Earnings from assets and investments decreased $161 million in the first quarter of 2001 as compared to the same period in 2000 as a result of a decrease in the value of Wholesale Services' merchant investments. Earnings from international asset operations were comparable to 2000 levels.
Unallocated Expenses. Net unallocated expenses such as systems expenses and performance−related costs increased in 2001 due to the growth of Wholesale Services' businesses.
Retail Energy Services Energy Services sells or manages the delivery of natural gas, electricity, liquids and other commodities to industrial and commercial customers located in North America and Europe. Energy Services also provides outsourcing solutions to customers for full energy management. This integrated product includes the management of commodity delivery, energy information and energy assets, and price risk management activities.
Significant components of Energy Services' results are as follows (in millions):
First Quarter 2001 2000(a)
Revenues $693 $314 Cost of sales 495 234 Operating expenses 164 86 Depreciation and amortization 9 9 Equity (loss) income (15) 1 Other, net 30 20 Income before interest, minority interests and taxes $ 40 $ 6
(a) Amounts for the first quarter of 2000 have been restated. See Note 6 to the Consolidated Financial Statements.
Operating Results Revenues and gross margin increased $379 million and $118 million, respectively, in the first quarter of 2001 compared to the first quarter of 2000, primarily as a result of long− term energy contracts originated in 2001 and the growth of Energy Services' European operations. Operating expenses increased primarily as a result of higher employee−related costs. Other, net in the first quarter of 2001 and 2000 consisted primarily of gains associated with the securitization of equity investments. Equity losses reflect Energy Services' portion of losses of The New Power Company.
Broadband Services In implementing Enron's network strategy, Broadband Services constructed the Enron Intelligent Network (the EIN), a nationwide fiber optic network that consists of both fiber deployed by Enron and acquired capacity on non−Enron networks and is managed by Enron's Broadband Operating System software. The EIN, which connects 25 pooling points in North America, Europe and Japan, provides the infrastructure for Broadband Services' other businesses. Enron is extending its market−making and risk management skills from its energy business to develop the network services intermediation business. Broadband Services' intermediation business helps customers manage unexpected fluctuation in the price, supply and demand of network− related requirements, including bandwidth and storage. Enron's bandwidth−on−demand platform allows delivery of high− bandwidth media−rich content such as video−on−demand and high capacity data transport. Broadband Services also makes investments in companies with related technologies and with the potential for capital appreciation. Earnings from these merchant investments, which are accounted for on a fair value basis and are included in revenues, result from changes in the market value of the securities. Broadband Services uses risk management disciplines, including hedging transactions, to manage the impact of market price movements
on its merchant investments. Broadband Services also sells interests in certain investments and other assets to improve liquidity and overall return, the timing of which is dependent on market conditions and management's expectations of the investment's value.
The components of Broadband Services' businesses include network services intermediation, the delivery of content and the optimization of Enron's fiber network.
Significant components of Broadband Services' results are as follows (in millions):
2001 2000
Gross margin $ 54 $ 51 Operating expenses (including depreciation) 92 52 Other, net 3 1 Loss before interest, minority interests and taxes $(35) $ −
Gross margin increased $3 million in the first quarter of 2001 compared to the first quarter of 2000. First quarter 2001 gross margin included the realized appreciation associated with a portion of Enron's broadband content delivery platform. Gross margin for the first quarter of 2000 primarily reflects earnings from sales of excess fiber capacity and an increase in the market value of Broadband Services' merchant investments. Operating expenses increased due to higher employee−related costs and depreciation on fiber−optic related equipment placed into service in late 2000.
Transportation and Distribution Transportation Services. The following table summarizes total volumes transported for each of Enron's interstate natural gas pipelines.
First Quarter 2001 2000
Total Volumes Transported (BBtu/d)(a) Northern Natural Gas 3,750 4,147 Transwestern Pipeline 1,744 1,566 Florida Gas Transmission 1,234 1,563 Northern Border Pipeline 2,490 2,464
(a) Billion British thermal units per day. Reflects 100% of each entity's throughput volumes. Florida Gas and Northern Border Pipeline are unconsolidated equity affiliates.
Significant components of IBIT are as follows (in millions):
First Quarter 2001 2000
Net revenues $243 $201 Operating expenses 107 65 Depreciation and amortization 17 16 Equity in earnings 14 7 Other, net − 1 Income before interest and taxes $133 $128
Operating Results Revenues, net of cost of sales (net revenues) of Transportation Services increased $42 million in the first quarter of 2001 as compared to the first quarter of 2000 primarily due to increased transportation and storage revenues received by Northern and increased volumes transported and operational gas volumes sold by Transwestern. Higher gas prices in 2001 positively impacted
revenues from operational gas sales. Operating Expenses increased $42 million primarily as a result of higher gas prices and other costs associated with the increase in volumes transported by Transwestern and the timing of other pipeline expenses. Equity in earnings increased $7 million in the first quarter of 2001 as compared to the same period in 2000 primarily due to improved operating results from EOTT.
Portland General. Statistics for Portland General for the first quarter of 2001 and 2000 are as follows:
First Quarter 2001 2000
Electricity Sales (Thousand MWh) Residential 2,171 2,361 Commercial 1,820 1,872 Industrial 1,200 1,169 Total Retail 5,191 5,402 Wholesale 2,739 4,281 Total Electricity Sales 7,930 9,683
Average Billed Revenue (cents per kWh) 9.53 4.00
Resource Mix Coal 16% 13% Combustion Turbine 17 10 Hydro 6 8 Total Generation 39 31 Firm Purchases 53 62 Secondary Purchases 8 7 Total Resources 100% 100%
Average Variable Power Cost (Mills/kWh)(a) 71.9 20.8
Retail Customers (end of period, thousands) 728 724
(a) Mills (1/10 cent) per kilowatt−hour.
Significant components of IBIT are as follows (in millions):
First Quarter 2001 2000
Revenues $767 $397 Purchased power and fuel 582 202 Operating expenses 67 78 Depreciation and amortization 51 46 Other, net (7) 34 Income before interest and taxes $ 60 $105
Operating Results Revenues, net of purchased power and fuel costs, decreased $10 million in the first quarter of 2001 as compared to the first quarter of 2000. The decrease was due to higher purchased power and fuel costs resulting from general market conditions, including lower hydroelectric generation and higher gas prices. Operating expenses decreased primarily as a result of lower costs incurred for transmission line repairs and lower overhead expenses. Depreciation and amortization increased in 2001 primarily as a result of increased regulatory amortization. Other, net in 2001 included the impact of a decline in the value of investments. Other, net in 2000 was favorably impacted by certain regulatory events.
On April 26, 2001, Enron announced that the agreement to sell Portland General to Sierra Pacific Resources has been terminated. See Note 9 to the Consolidated Financial Statements.
Corporate and Other Corporate and Other realized a loss before interest, minority interests and taxes of $158 million and $44 million in the first quarter of 2001 and 2000, respectively. First quarter 2001 results include higher unallocated corporate− wide expenses and operating losses from non−core businesses, including Azurix.
Interest and Related Charges, net Interest and related charges, net, is reported net of interest capitalized of $15 million and $13 million for the first three months of 2001 and 2000, respectively. Net expense increased $40 million in the first quarter of 2001 as compared to the same period of 2000, primarily due to increased debt levels.
Income Tax Expense The projected effective tax rate for 2001 is lower than the statutory rate mainly due to equity earnings and differences between the book and tax basis of certain assets and stock sales. Income taxes increased during the first quarter of 2001 as compared to the first quarter of 2000 primarily as a result of increased pretax earnings.
Enron recorded tax benefits in shareholders' equity related to stock options exercised by employees of approximately $130 million in the first quarter of 2001.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
On January 1, 2001, Enron recognized an after−tax non− cash gain of $19 million in earnings and deferred an after−tax non−cash gain of $25 million in "Accumulated Other Comprehensive Income," a component of shareholders' equity and reclassified $277 million from "Long−Term Debt" to "Other Liabilities" to reflect the initial adoption of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 must be applied to all derivative instruments and requires that such instruments be recorded in the balance sheet either as an asset or a liability measured at its fair value through earnings, with special accounting permitted for certain qualifying hedges.
FINANCIAL CONDITION
Cash Flows
First Quarter (In Millions) 2001 2000
Cash provided by (used in): Operating activities $ (464) $ (457) Investing activities (1,124) (1,493) Financing activities 1,300 2,128
Cash used in operating activities totaled $464 million during the first three months of 2001 as compared to cash used of $457 million in the same period last year. Cash used in operating activities in the first quarter of 2001 reflects cash provided by first quarter operations offset by increased working capital requirements. Cash used in the first quarter of 2000 reflects the acquisition of merchant assets and investments and working capital requirements. Enron expects increased cash flows from operating activities in subsequent quarters of 2001 related to its price risk management activities.
Cash used in investing activities totaled $1,124 million during the first quarter of 2001 as compared to $1,493 million during the same period in 2000. The first quarter 2001 amount reflects cash used for investments in unconsolidated equity affiliates and energy network−related capital expenditures. Investments in unconsolidated equity affiliates in 2001 include the acquisition of a company whose assets include a newsprint mill and related assets and the purchase of all publicly traded shares of Azurix Corp.
Cash provided by financing activities totaled $1,300 million during the first quarter of 2001 as compared to $2,128 million during the same period in 2000. The first three months of 2001 includes the net issuances of short− and long−term debt of $1,549 million and the issuance of common stock related to employee benefit plans, partially offset by the acquisition of treasury stock and payments of dividends.
Enron is able to fund its normal working capital requirements mainly through operations or, when necessary, through the utilization of credit facilities and its ability to sell commercial paper and accounts receivable.
Capitalization Total capitalization at March 31, 2001 was $27.0 billion. Debt as a percentage of total capitalization increased to 44.2% at March 31, 2001 as compared to 40.9% at December 31, 2000. The increase in the ratio reflects increased long− term debt, including the issuance in January 2001 of $1.25 billion of notes payable and increased net short−term borrowings in the first quarter of 2001.
FINANCIAL RISK MANAGEMENT
Wholesale Services offers price risk management services primarily related to commodities associated with the energy sector (natural gas, electricity, crude oil and natural gas liquids). Broadband Services also offers price risk management services to its customers. Enron's other businesses also enter into forwards, swaps and other contracts primarily for the purpose of hedging the impact of market fluctuations on assets, liabilities, production and other contractual commitments. Enron utilizes value at risk measures that assume a one−day holding period and a 95% confidence level. For a complete discussion of the types of financial risk management products used by Enron, the types of market risks associated with Enron's portfolio of transactions, and the methods used by Enron to manage market risks, see Enron's Annual Report on Form 10−K for the year ended December 31, 2000.
Enron's value at risk amounts at March 31, 2001 were consistent with December 31, 2000 levels.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
This Report and the Form 10−K include forward−looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this document are forward− looking statements. Forward−looking statements include, but are not limited to, statements relating to expansion opportunities for the Transportation Services, extension of Enron's business model to new markets and industries, demand in the market for broadband services and high bandwidth applications, transaction volumes in the U.S. power market, commencement of commercial operations of new power plants and pipeline projects, completion of the sale of certain assets and growth in the demand for retail energy outsourcing solutions. When used in this document, the words "anticipate," "believe," "estimate," "expects," "intend," "may," "project," "plan," "should" and similar expressions are intended to be among the statements that identify forward−looking statements. Although Enron believes that its expectations reflected in these forward− looking statements are based on reasonable assumptions, such statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward−looking statements. Important factors that could cause actual results to differ materially from those in the forward−looking statements herein include success in marketing natural gas and power to wholesale customers; the ability of Enron to penetrate new retail natural gas and electricity markets (including energy outsourcing markets) in the United States and foreign jurisdictions; development of Enron's broadband network and customer demand for intermediation and content services; the timing, extent and market effects of deregulation of energy markets in the United States, including the current energy market conditions in California, and in foreign jurisdictions;
other regulatory developments in the United States and in foreign countries, including tax legislation and regulations; political developments in foreign countries; the extent of efforts by governments to privatize natural gas and electric utilities and other industries; the timing and extent of changes in commodity prices for crude oil, natural gas, electricity, foreign currency and interest rates; the extent of success in acquiring oil and gas properties and in discovering, developing, producing and marketing reserves; the timing and success of Enron's efforts to develop international power, pipeline and other infrastructure projects; the effectiveness of Enron's risk management activities; the ability of counterparties to financial risk management instruments and other contracts with Enron to meet their financial commitments to Enron; and Enron's ability to access the capital markets and equity markets during the periods covered by the forward−looking statements, which will depend on general market conditions and Enron's ability to maintain the credit ratings for its unsecured senior long−term debt obligations.
PART II. OTHER INFORMATION ENRON CORP. AND SUBSIDIARIES
ITEM 1. Legal Proceedings
See Part I. Item 1, Note 3 to Consolidated Financial Statements entitled "Litigation and Other Contingencies," which is incorporated herein by reference.
ITEM 6. Exhibits and Reports on Form 8−K
(a) Exhibits.
Exhibit 12 Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8−K
Current Report on Form 8−K filed January 31, 2001, disclosing Enron Corp.'s plans to issue zero coupon convertible debt securities convertible into Enron common stock.
Current Report on Form 8−K filed February 27, 2001, containing Enron Corp. Consolidated Financial Statements for the year ended December 31, 2000.
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: May 14, 2001 By: RICHARD A. CAUSEY Richard A. Causey Executive Vice President and Chief Accounting Officer (Principal Accounting Officer)
Exhibit 12
ENRON CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) (Unaudited)
Three Months Ended Year Ended December 31, 3/31/01 2000 1999 1998 1997 1996
Earnings available for fixed charges Net income $406 $ 979 $1,024 $ 703 $105 $ 584 Less: Undistributed earnings and losses of less than 50% owned affiliates (12) 20 (12) (44) (89) (39) Capitalized interest of nonregulated companies (16) (44) (61) (66) (16) (10) Add: Fixed charges(a) 286 1,184 948 809 674 454 Minority interest 40 154 135 77 80 75 Income tax expense 145 478 137 204 (65) 297 Total $849 $2,771 $2,171 $1,683 $689 $1,361
Fixed Charges Interest expense(a) $274 $1,136 $ 900 $ 760 $624 $ 404 Rental expense representative of interest factor 12 48 48 49 50 50 Total $286 $1,184 $948 $ 809 $674 $ 454
Ratio of earnings to fixed charges 2.97 2.34 2.29 2.08 1.02 3.00
(a) Amounts exclude costs incurred on sales of accounts receivables.
_______________________________________________ Created by 10KWizard Technology www.10KWizard.com
Enron Finanical Statements
Enron Corp. and Subsidiaries | |||
Balance Sheet | |||
December 31, | 2000 | 1999 | 1998 |
Assets | |||
Current Assets | |||
Cash and cash equivalents | 1,374 | 288 | 111 |
Trade receivables, net | 10,396 | 3,030 | 2,060 |
Other receivables | 1,874 | 518 | 833 |
Assets from price risk management activities | 12,018 | 2,205 | 1,904 |
Inventories | 953 | 598 | 514 |
Deposits | 2,433 | 81 | 0 |
Other receivables | 1,333 | 535 | 511 |
Total Current Assets | 30,381 | 7,255 | 5,933 |
Investments and Other Assets | |||
Investments in and advances to unconsolidated equity affiliates | 5,294 | 5,036 | 4,433 |
Assets from price risk management activities | 8,988 | 2,929 | 1,941 |
Goodwill | 3,638 | 2,799 | 1,949 |
Other | 5,459 | 4,681 | 4,437 |
Total investments and other assets | 23,379 | 15,445 | 12,760 |
Property, Plant and Equipment at cost | |||
Natural gas transmission | 6,916 | 6,948 | 6,936 |
Electric generation and distribution | 4,766 | 3,552 | 2,061 |
Fiber-optic network and equipment | 839 | 379 | 989 |
Construction in progress | 682 | 1,120 | 4,814 |
Other | 2,256 | 1,913 | 992 |
15,459 | 13,912 | 15,792 | |
less accumulated depreciation | 3,716 | 3,231 | 5,135 |
Property, Plant and Equipment, net | 11,743 | 10,681 | 10,657 |
Total Assets | 65,503 | 33,381 | 29,350 |
Liabilities and Shareholders' Equity | |||
Current Liabilities | |||
Accounts payable | 9,777 | 2,154 | 2,380 |
Liabilities from price risk management activities | 10,495 | 1,836 | 2,511 |
Short-term debt | 1,679 | 1,001 | 0 |
Customers' deposits | 4,277 | 44 | 0 |
Other | 2,178 | 1,724 | 1,216 |
Total Current Liabilities | 28,406 | 6,759 | 6,107 |
Long-term Debt | 8,550 | 7,151 | 7,357 |
Deferred Credits and Other Liabilities | |||
Deferred income Taxes | 1,644 | 1,894 | 2,357 |
Liabilities from price risk management activities | 9,423 | 2,990 | 1,421 |
Other | 2,692 | 1,587 | 1,916 |
Total Deferred Credits and Other Liabilities | 13,759 | 6,471 | 5,694 |
Minority Interest in Consolidated Subsidaries | 2,414 | 2,430 | 2,143 |
Company-Obligated Preferred Securities of Subsidiaries | 904 | 1,000 | 1,001 |
Shareholder's Equity | |||
Second preferrred stock | 124 | 130 | 132 |
Mandatorily Convertible Junior Preferred Stock | 1,000 | 1,000 | 0 |
Common Stock | 8,348 | 6,637 | 5,117 |
Retained Earnings | 3,226 | 2,698 | 2,226 |
Accumulated Other Comprehensive Income | (1,048) | (741) | (162) |
Common Stock Held in the Treasury | (32) | (49) | (195) |
Restricted Stock and Other | (148) | (105) | (70) |
Total Shareholder's Equity | 11,470 | 9,570 | 7,048 |
Total Liabilities and Shareholder's Equity | 65,503 | 33,381 | 29,350 |
Enron Corp. and Subsidiaries | |||
Income Statement | |||
Year ended December 31, | 2000 | 1999 | 1998 |
Revenues | |||
Natural gas and other products | 50,500 | 19,536 | 13,276 |
Electricity | 33,823 | 15,238 | 13,939 |
Metals | 9,234 | 0 | 0 |
Other | 7,232 | 5,338 | 4,045 |
Total Revenues | 100,789 | 40,112 | 31,260 |
Cost and Expenses | |||
Cost of gas, electricy metals and other products | 94,517 | 34,761 | 26,381 |
Operating expenses | 3,184 | 3,045 | 2,473 |
Depreciation, depletion and amortization | 855 | 870 | 827 |
Taxes, other than income taxes | 280 | 193 | 201 |
Impairment of long-lived assets | 0 | 441 | 0 |
Total costs and expenses | 98,836 | 39,310 | 29,882 |
Operating income | 1,953 | 802 | 1,378 |
Other income and deductions | |||
Equity in earnings of unconsolidated equity affiliates | 87 | 309 | 97 |
Gains on sales of non-merchant assets | 146 | 541 | 56 |
Gains on the issuance of stock by TNPC, Inc. | 121 | 0 | 0 |
Interest income | 212 | 162 | 88 |
Other income, net | (37) | 181 | (37) |
Total other income and deductions | 529 | 1,193 | 204 |
Income Before Interest, Minority Interests and Income Taxes | 2,482 | 1,995 | 1,582 |
Other | |||
Interest and related charges, net | 838 | 656 | 550 |
Dividends on company-obligated preferred securities of subsidiaries | 77 | 76 | 77 |
Minority interests in (earnings) losses of unconsolidated subsidaries | 154 | 135 | 77 |
Income tax expense | 434 | 104 | 175 |
Other charges | 1,503 | 971 | 879 |
Net income before cumulative effect of accounting changes | 979 | 1,024 | 703 |
Cumulative effect of accounting change, net of tax | 0 | (131) | 0 |
Net income | 979 | 893 | 703 |
Enron Corp. and Subsidiaries | |||
Statement of Cash Flows | |||
Year ended December 31, | 2000 | 1999 | 1998 |
Cash Flow From Operating Activities | |||
Reconciliation of net income to net cash provided by operating activities | |||
Net income | 979 | 893 | 703 |
Cumulative effect of accounting chagnes | 0 | 131 | 0 |
Depreciation, depletion and amortization | 855 | 870 | 827 |
Impairment of long-lived assets (including equity investments) | 326 | 441 | 0 |
Deferred income taxes | 207 | 21 | 87 |
Gains on sales of non-merchant assets | (146) | (541) | (82) |
Changes in the components of working capital | 1,769 | (1,000) | (233) |
Net assets from price risk managemetn activities | (763) | (395) | 350 |
Merchant assets and investments | |||
Realized gains on sales | (104) | (756) | (628) |
Proceeds from sales | 1,838 | 2,217 | 1,434 |
Additions and unrealized gains | (1,295) | (827) | (721) |
Other operating activities | 1,113 | 174 | (97) |
4,779 | 1,228 | 1,640 | |
Cash Flows from Investing Activities | |||
Capital expenditures | (2,381) | (2,363) | (1,905) |
Equity investments | (933) | (722) | (1,659) |
Proceeds from sales of non-merchant assets | 494 | 294 | 239 |
Acquisition of subsidiary stock | (485) | 0 | (180) |
Business acquisitions, net of cash acquired | (777) | (311) | (104) |
Other investing activities | (182) | (405) | (356) |
Net Cash Used in Investing Activities | (4,264) | (3,507) | (3,965) |
Cash Flows from Financing Activities | |||
Issuance of long-term debt | 3,994 | 1,776 | 1,903 |
Repayment of long-term debt | (2,337) | (1,837) | (870) |
Net incrase (decrease) in short-term borrowing | (1,595) | 1,565 | (158) |
Net issuance (redemption) of company obligated preferred securities | |||
of subsidiaries | (96) | 0 | 8 |
Issuance of common stock | 307 | 852 | 867 |
Issuance of subsidiary equity | 500 | 568 | 828 |
Dividends paid | (523) | (467) | (414) |
Net disposition of treasury stock | 327 | 139 | 13 |
Other financing activities | (6) | (140) | 89 |
Net Cash Provided by Financing Activities | 571 | 2,456 | 2,266 |
Increase (Decrease) in Cash and Cash Equivalents | 1,086 | 177 | (59) |
Cash and Cash Equivalents, Beginning of the Year | 288 | 111 | 170 |
Cash and Cash Equivalents, End of the Year | 1,374 | 288 | 111 |
Changes in Components of Working Capital | |||
Receivables | (8,203) | (662) | (1,055) |
Inventories | 1,336 | (133) | (372) |
Payables | 7,167 | (246) | 433 |
Other | 1,469 | 41 | 761 |
1,769 | (1,000) | (233) | |
ACTG 495
Graded Case - Enron (Individual)
On December 2, 2001 Enron Corporation filed for bankruptcy and shocked the financial world. Enron was the seventh
largest company (by revenue) in the United States. How could this high profile company have failed? A number of articles
and books have profiled the company’s aggressive personnel policies where every year they “weeded out” a bottom tier of
employees. There have been significant discussions of Enron’s use of special purpose entities and “off balance sheet” debt
(however, there has been little discussion of off balance sheet assets). Other topics include Enron’s use of “mark-to-market”
accounting and other transactions designed to simply allow Enron to hit targets so that managers could earn their bonuses.
Some of these transactions involved collusion with Enron’s lenders. Early in 2002, Congress, the SEC, the Justice
Department, and the press were all investigating this case for evidence of wrongdoing. You will find a number of articles in
business and news magazines from mid December 2001 through March 2002 with substantial details about the Enron
collapse. However, there is a significant aspect of the story that is not told. Few have discussed what could have been
learned from Enron’s financial statements.
There are two parts to this case. Part I focuses on what information was in the public domain as of the last audited financial
statement for the year ended December 31, 2000. Part II focuses on the information that was in the public domain as of
November 19, 2001 when Enron filed its 10-Q for the third quarter of 2001 and the events that led to Enron’s bankruptcy
as of December 1, 2001. The most important thing about this case is that you must support your conclusions with
evidence from Enron’s public filings only. Feel free to read as many articles as you would like to help with understanding
Enron, but only use information from the public filings (e.g. 10-Ks and 10-Qs). When analyzing the company please use the
Commonly Used Ratios that have been reviewed in past class discussions and cases (note: please don’t constrain your
analysis to the ratios, knowledge of the business, management discussion and disclosures are also helpful)
Requirements
Part I: In late February of 2001, you have been chosen to write an article for Investors Monthly to be published in the
magazine in April 2001. The deadline for publication is March 10, 2001. Investor’s Monthly regularly analyzes the
financial statements of public companies. Enron has just published its financial statements for the year ended December
31, 2000. At the time you are given the assignment Enron’s share price is over $80 per share.
Investor’s Monthly wants you to tell investors what they need to know from the financial statements. Your assessment
needs to be a combination of both a fundamental financial analysis, covering profitability, cash flow, liquidity and
solvency risk and a view of the business model and its risks and other insights gleaned from the documents filed with the
SEC.
Your article must not be longer than 1,500 words or it cannot be published in the available space. Any conclusions need
to be supported by reference to the data presented in the financial statements.
Part II: On December 2, 2001, Enron Corporation has filed for bankruptcy. On December 5, 2001 Investor’s Monthly
approaches you again to ask you to describe the economic events that led to Enron’s Bankruptcy. Investor’s Monthly
wants you to make reference to your comments in the first article while focusing primarily on what additional information
was disclosed in Enron’s first, second and third quarter 10-Qs.
In your article, address at least the following questions:
1. What were the facts behind Enron’s bankruptcy?
2. What were the economic events that led to Enron’s failure? Use financial statement analysis as a tool. Hint:
don’t forget about the types of ratios you created & analyzed in the first article
3. Should Investors have been able to see this coming, especially if they had read your April 2001 article?
4. What actions, in any, could management of the company have taken to hold off bankruptcy?
Who were the key stakeholders involved and how were they treated by the management team?
For this second article, Investor’s Monthly has given you a 1,000 word limit.
Extra Credit: Please let me know if you’d like to present a few creative PowerPoint slides summarizing each article

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