UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 Commission File Number 1-13159 ENRON CORP. (Exact name of registrant as specified in its charter) Oregon 47-0255140 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) Enron Building 1400 Smith Street Houston, Texas 77002 (Address of principal executive (Zip Code) offices) (713) 853-6161 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 31, 1998 Common Stock, No Par Value 329,480,873 shares 1 of 38 ENRON CORP. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Income Statement - Three Months Ended June 30, 1998 and 1997 and Six Months Ended June 30, 1998 and 1997 3 Consolidated Balance Sheet - June 30, 1998 and December 31, 1997 4 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 37 ITEM 4. Submission of Matters to a Vote of Security Holders 37 ITEM 6. Exhibits and Reports on Form 8-K 37
<TABLE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENRON CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT (In Millions, Except Per Share Amounts) (Unaudited) <CAPTION> Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Revenues $6,557 $3,251 $12,239 $8,595 Costs and Expenses Cost of gas, electricity and other products 5,528 2,711 10,087 7,343 Operating expenses 570 308 1,007 581 Oil and gas exploration expenses 26 24 60 46 Depreciation, depletion and amortization 190 125 372 249 Taxes, other than income taxes 45 33 103 69 Contract restructuring charge - 675 - 675 6,359 3,876 11,629 8,963 Operating Income (Loss) 198 (625) 610 (368) Other Income and Deductions Equity in earnings of unconsolidated subsidiaries 109 40 153 81 Gains on sales of assets and investments 4 39 4 156 Other income, net 34 (2) 49 12 Income (Loss) Before Interest, Minority Interests and Income Taxes 345 (548) 816 (119) Interest and Related Charges, net 131 79 264 149 Dividends on Company-Obligated Preferred Securities of Subsidiaries 20 16 39 31 Minority Interests 19 17 44 36 Income Tax Expense (Benefit) 30 (240) 110 (137) Net Income (Loss) 145 (420) 359 (198) Preferred Stock Dividends 5 4 9 8 Earnings (Loss) on Common Stock $ 140 $ (424) $ 350 $ (206) Earnings (Loss) Per Share of Common Stock Basic $ 0.44 $(1.71) $ 1.12 $(0.83) Diluted $ 0.42 $(1.71) $ 1.06 $(0.83) Average Number of Common Shares Used in Computation Basic 319 248 312 248 Diluted 346 248 338 248 <FN> The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
<TABLE> PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Millions) (Unaudited) <CAPTION> June 30, December 31, 1998 1997 <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 175 $ 170 Trade receivables 2,815 1,697 Other receivables 703 454 Assets from price risk management activities 2,971 1,577 Other 814 771 Total Current Assets 7,478 4,669 Investments and Other Assets Investments in and advances to unconsolidated subsidiaries 2,761 2,656 Assets from price risk management activities 2,536 1,352 Goodwill 1,884 1,910 Other 4,091 3,665 Total Investments and Other Assets 11,272 9,583 Property, Plant and Equipment, at cost 14,318 13,742 Less accumulated depreciation, depletion and amortization 4,810 4,572 Net Property, Plant and Equipment 9,508 9,170 Total Assets $28,258 $23,422 <FN> The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
<TABLE> PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Millions) (Unaudited) <CAPTION> June 30, December 31, 1998 1997 <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 2,730 $ 2,119 Liabilities from price risk management activities 2,739 1,476 Other 920 817 Total Current Liabilities 6,389 4,412 Long-Term Debt 6,989 6,254 Deferred Credits and Other Liabilities Deferred income taxes 2,052 2,039 Liabilities from price risk management activities 2,252 1,190 Other 1,707 1,769 Total 6,011 4,998 Minority Interests 1,089 1,147 Company-Obligated Preferred Securities of Subsidiaries 993 993 Shareholders' Equity Second preferred stock, cumulative, no par value 132 134 Common stock, no par value 5,084 4,224 Retained earnings 2,051 1,852 Cumulative foreign currency translation adjustment (159) (148) Common stock held in treasury (247) (269) Other (including Flexible Equity Trust) (74) (175) Total 6,787 5,618 Total Liabilities and Shareholders' Equity $28,258 $23,422 <FN> The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
<TABLE> PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Millions) (Unaudited) <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Cash Flows From Operating Activities Reconciliation of net income (loss) to net cash provided by (used in) operating activities Net income (loss) $ 359 $ (198) Depreciation, depletion and amortization 372 249 Oil and gas exploration expenses 60 46 Deferred income taxes 60 (178) Gains on sales of assets and investments (32) (125) Changes in components of working capital (660) (193) Net assets from price risk management activities (253) (67) Amortization of production payment transaction (21) (21) Other, net (16) (36) Net Cash Used in Operating Activities (131) (523) Cash Flows From Investing Activities Proceeds from sales of assets and investments 58 341 Capital expenditures (585) (625) Equity investments (166) (225) Acquisition of subsidiary stock (180) - Business acquisitions, net of cash acquired (25) (40) Other, net (359) (98) Net Cash Used in Investing Activities (1,257) (647) Cash Flows From Financing Activities Net increase in short-term borrowings 769 958 Issuance of long-term debt 305 409 Repayment of long-term debt (341) (302) Issuance of company-obligated preferred securities of subsidiaries - 372 Issuance of common stock 844 - Dividends paid (204) (165) Net (acquisition) disposition of treasury stock 7 (84) Other, net 13 (63) Net Cash Provided by Financing Activities 1,393 1,125 Increase (Decrease) in Cash and Cash Equivalents 5 (45) Cash and Cash Equivalents, Beginning of Period 170 256 Cash and Cash Equivalents, End of Period $ 175 $ 211 Changes in Components of Working Capital Receivables $(1,345) $ 381 Payables 691 (310) Other (6) (264) Total $ (660) $ (193) <FN> The accompanying notes are an integral part of these consolidated financial statements. </TABLE>
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, 1997 (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 1997 amounts to conform with the 1998 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. BUSINESS ACQUISITIONS Effective July 1, 1997, Enron merged with Portland General Corporation (PGC) in a stock-for-stock transaction and in November 1997, Enron acquired the minority interest in Enron Global Power & Pipelines L.L.C. (EPP) in a stock- for-stock transaction. Additionally, during 1997, Enron acquired 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. The following summary presents unaudited pro forma consolidated results of operations for the six months ended June 30, 1997 as if the business acquisitions had occurred at the beginning of 1997. The 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 (in millions, except per share amounts). <TABLE> <CAPTION> Six Months Ended June 30,1997 <S> <C> Revenues $9,272 Income before interest, minority interests and income taxes 36 Net income (loss) (128) Earnings per share Basic $(0.44) Diluted $(0.44) </TABLE> On July 16, 1998 Enron, through a wholly-owned subsidiary, was the successful bidder for an interest in Elektro Eletricidade e Servicos S.A. (Elektro), Brazil's sixth largest electricity distributor. Enron's winning bid for a controlling interest in Elektro was approximately $1.3 billion. Elektro serves approximately 1.5 million customers through approximately 51,000 miles of distribution lines in the state of Sao Paulo. On July 24, 1998 Enron announced an all-cash offer for all outstanding common shares of Wessex Water Plc (Wessex). Wessex provides water supply and wastewater services in southwestern England. The offer, which was made by a subsidiary of Enron, was made based on $10.33, as of July 24, for each share and values the common equity of Wessex, on a fully diluted basis, at approximately $2.2 billion. Enron's offer, which has been unanimously recommended by the board of directors of Wessex, has been submitted to Wessex's shareholders for approval. The shareholders' response to the offer is due on August 28, 1998. The initial funding of these acquisitions will be financed by bridge loans totaling approximately $3.3 billion. Prior to year-end, Enron expects to restructure the initial financing by obtaining permanent financing, attracting new investors and monetizing selected assets. After the restructuring, Enron's total capital structure is not expected to be materially different from that at June 30, 1998. 3. SUPPLEMENTAL CASH FLOW INFORMATION Net cash paid for income taxes for the first half of 1998 and 1997 was $51 million and $24 million, respectively. Cash paid for interest expense for the same periods, net of amounts capitalized, was $295 million and $180 million, respectively. 4. 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 materially adverse impact on Enron's financial position or its results of operations. Litigation. In 1995, several parties (the Plaintiffs) filed suit in Harris County District Court in Houston, Texas, against Intratex Gas Company (Intratex), Houston Pipe Line Company and Panhandle Gas Company (collectively, the Enron Defendants), each of which is a wholly-owned subsidiary of Enron. The Plaintiffs were either sellers or royalty owners under numerous gas purchase contracts with Intratex, many of which have terminated. Early in 1996, the case was severed by the Court into two matters to be tried (or otherwise resolved) separately. In the first matter, the Plaintiffs alleged that the Enron Defendants committed fraud and negligent misrepresentation in connection with the "Panhandle program," a special marketing program established in the early 1980s. This case was tried in October 1996 and resulted in a verdict for the Enron Defendants. In the second matter, the Plaintiffs allege that the Enron Defendants violated state regulatory requirements and certain gas purchase contracts by failing to take the Plaintiffs' gas ratably with other producers' gas at certain times between 1978 and 1988. The court has certified a class action with respect to ratability claims. The Court of Appeals has affirmed the trial court's order granting class certification. An appeal to the Texas Supreme Court has been filed. The Enron Defendants deny the Plaintiffs' claims and have asserted various affirmative defenses, including the statute of limitations. The Enron Defendants believe that they have strong legal and factual defenses, and intend to vigorously contest the claims. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a materially adverse effect on its financial position or results of operations. On November 21, 1996, an explosion occurred in or around the Humberto Vidal Building in San Juan, Puerto Rico. The explosion resulted in fatalities, bodily injuries and damage to the building and surrounding property. San Juan Gas Company, Inc. (San Juan), an Enron subsidiary, operates a propane gas/air distribution system in the vicinity. Although San Juan did not provide service to the building, the National Transportation Safety Board (NTSB) has concluded that the probable cause of the incident was gas leaking from San Juan's distribution system. San Juan and Enron strongly disagree with the NTSB findings. The NTSB investigation found no path of migration of gas from San Juan's system to the building and no forensic evidence that propane gas fueled the explosion. Enron and San Juan have been named as defendants in numerous lawsuits filed in U.S. District Court for the district of Puerto Rico and the Commonwealth court of Puerto Rico. These suits, which seek damages for wrongful death, personal injury, business interruption and property damage, allege that negligence of Enron and San Juan, among others, caused the explosion. Enron and San Juan are vigorously contesting the claims. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. Trojan Investment Recovery. In early 1993, Portland General Electric Company (PGE) ceased commercial operation of the Trojan Nuclear Plant. In April 1996 a circuit court judge in Marion County, Oregon, found that the Oregon Public Utility Commission (OPUC) could not authorize PGE to collect a return on its undepreciated investment in Trojan, contradicting a November 1994 ruling from the same court. The ruling was the result of an appeal of PGE's 1995 general rate order which granted PGE recovery of, and a return on, 87% of its remaining investment in Trojan. The 1994 ruling was appealed to the Oregon Court of Appeals and was stayed pending the appeal of the OPUC's March 1995 order. Both PGE and the OPUC have separately appealed the April 1996 ruling, which appeals were combined with the appeal of the November 1994 ruling at the Oregon Court of Appeals. On June 24, 1998, the Court of Appeals of the State of Oregon ruled that the OPUC does not have the authority to allow PGE to recover a rate of return on its undepreciated investment in the Trojan generating facility. The court upheld the OPUC's authorization of PGE's recovery of its undepreciated investment in Trojan. PGE plans to file a petition for review with the Oregon Supreme Court. The OPUC has stated it will also file such a petition for review. Enron cannot predict the outcome of these actions. Additionally, due to uncertainties in the regulatory process, management cannot predict, with certainty, what ultimate rate-making action the OPUC will take regarding PGE's recovery of a rate of return on its Trojan investment. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. Environmental Matters. Enron is subject to extensive federal, state and local environmental laws and regulations. These laws and regulations require expenditures in connection with the construction of new facilities, the operation of existing facilities and for remediation at various operating sites. The implementation of the Clean Air Act Amendments is expected to result in increased operating expenses. These increased operating expenses are not expected to have a material impact on Enron's financial position or results of operations. The Environmental Protection Agency (EPA) has informed Enron that it is a potentially responsible party at the Decorah Former Manufactured Gas Plant Site (the Decorah Site) in Decorah, Iowa, pursuant to the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, also commonly known as Superfund). The manufactured gas plant in Decorah ceased operations in 1951. A predecessor company of Enron purchased the Decorah Site in 1963. Enron's predecessor did not operate the gas plant and sold the Decorah Site in 1965. The EPA alleges that hazardous substances were released to the environment during the period in which Enron's predecessor owned the site, and that Enron's predecessor assumed the liabilities of the company that operated the plant. Enron contests these allegations. The EPA is interested in determining whether materials from the plant have adversely affected subsurface soils at the Decorah Site. Enron has entered into a consent order with the EPA by which it has agreed, although admitting no liability, to replace affected topsoil and remove impacted subsurface soils in certain areas of the tract where the plant was formerly located. To date, the EPA has identified no other potentially responsible parties with respect to this site. Enron believes that expenses incurred in connection with this matter will not have a materially adverse effect on its financial position or results of operations. Enron has also received from the EPA an Order issued under CERCLA alleging that Enron and two other parties are responsible for the cost of demolition and proper disposal of two 110 foot towers that apparently had been used in the manufacture of carbon dioxide at a site called the "City Bumper Site" in Cincinnati, Ohio. The carbon dioxide plant, according to agency documents, was in operation from 1926 to 1966. Houston Natural Gas Corporation, a predecessor of Enron Corp., merged with Liquid Carbonic Industries (LCI) on January 31, 1969. Liquid Carbonic Corporation (LCC), a subsidiary of LCI, had title to the site. Twenty-eight days after the merger, on February 28, 1969, the site was sold to a third party. In 1984, LCC was sold to an unaffiliated party in a stock sale. Although Enron does not admit liability with respect to any costs at this site, it has agreed to cooperate with the EPA and other potentially responsible parties to undertake the work contemplated by EPA's Order. The agency has estimated that the demolition of the towers and the disposal of their contents, some of which may be hazardous waste, will cost approximately $500,000. Enron does not expect to incur material expenditures in connection with this site. 5. EARNINGS PER SHARE The computation of basic and diluted earnings per share is as follows (in millions, except per share amounts): <TABLE> <CAPTION> Six Months Ended Second Quarter June 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Numerator: Net income (loss) $ 145 $ (420) $ 359 $ (198) Preferred stock dividends (5) (4) (9) (8) Numerator for basic earnings per share - income available to common shareholders 140 (424) 350 (206) Effect of dilutive securities: Preferred stock dividends(a) 5 - 9 - Numerator for diluted earnings per share - income available to common shareholders after assumed conversions $ 145 $ (424) $ 359 $ (206) Denominator: Denominator for basic earnings per share - weighted-average shares 319 248 312 248 Effect of dilutive securities: Preferred stock(a) 18 - 18 - Stock options(a) 9 - 8 - Dilutive potential common shares 27 - 26 - Denominator for diluted earnings per share - adjusted weighted- average shares and assumed conversions 346 248 338 248 Basic earnings (loss) per share $0.44 $(1.71) $1.12 $(0.83) Diluted earnings (loss) per share $0.42 $(1.71) $1.06 $(0.83) <FN> (a) For the three and six months ended June 30, 1997, the dividends and conversion of preferred stock and stock options have been excluded from the computation because they are antidilutive. </TABLE> 6. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130 - "Reporting Comprehensive Income." Enron had adopted this standard which establishes standards for reporting and displaying comprehensive income and its components. Comprehensive income includes the following (in millions): <TABLE> <CAPTION> Six Months Ended Second Quarter June 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Earnings (loss) on common stock $ 140 $(424) $ 350 $(206) Other comprehensive income: Foreign currency translation adjustment (12) 13 (11) (2) Total comprehensive income (loss) $ 128 $(411) $ 339 $(208) </TABLE>
PART I. FINANCIAL INFORMATION - (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENRON CORP. AND SUBSIDIARIES RESULTS OF OPERATIONS Second Quarter 1998 vs. Second Quarter 1997 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 second quarter 1998 net income was $145 million compared to a net loss of $420 million in the second quarter of 1997. The results of operations discussion focuses on core businesses, the retail energy services business (primarily serving commercial and light industrial end-use customers) and items impacting comparability of operations. Core businesses include Exploration and Production (Enron Oil & Gas Company), Transportation and Distribution (Gas Pipeline Group and Portland General) and Wholesale Energy Operations and Services (Enron Capital & Trade Resources and Enron International). The results of Portland General have been included in Enron's Consolidated Financial Statements beginning July 1, 1997. See Note 2 to the Consolidated Financial Statements. Items impacting comparability are discussed in the respective segment results. Net income (loss) includes the following (in millions): <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> After-tax results from: Core businesses $ 174 $ 120 Retail Energy Services (29) (16) 145 104 Items impacting comparability(a) J-Block contract restructuring charge - (450) Charge to reflect depressed MTBE margins on committed production - (74) Net income (loss) $ 145 $(420) <FN> (a) Tax affected at 35%, except where a specific tax rate applied. </TABLE> Basic and diluted earnings (loss) per share of common stock were as follows: <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> Basic earnings (loss) per share $ 0.44 $(1.71) Diluted earnings (loss) per share: Results from core businesses $ 0.50 $ 0.44 Results from Retail Energy Services (0.08) (0.06) Items impacting comparability: J-Block contract restructuring charge - (1.66) Charge to reflect depressed MTBE margin on committed production - (0.27) Effect of anti-dilution(a) - (0.16) Diluted earnings (loss) per share $ 0.42 $(1.71) <FN> (a) The conversion of certain options and preferred shares to common for purposes of the diluted earnings (loss) per share calculation was anti-dilutive by $0.16 per share. However, in order to present comparable results, per share amounts for each earnings component were calculated after considering conversion. </TABLE> Income Before Interest, Minority Interests and Income Taxes The following table presents income (loss) before interest, minority interests and income taxes (IBIT) for each of Enron's operating segments (in millions): <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> Exploration and Production $ 29 $ 30 Transportation and Distribution: Gas Pipeline Group 72 73 Portland General 62 - Wholesale Energy Operations and Services 241 130 Retail Energy Services (43) (25) Corporate and Other (16) (756) Income (loss) before interest, minority interests and taxes $ 345 $(548) </TABLE> Exploration and Production Enron's exploration and production operations are conducted by Enron Oil & Gas Company (EOG). IBIT of Exploration and Production totaled $29 million and $30 million for the second quarter of 1998 and 1997, respectively. Wellhead volume and price statistics (including intercompany amounts) are as follows: <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> Natural gas volumes (MMcf/d)(a) North America 722 781 Trinidad 132 114 India 53 1 Total 907 896 Average natural gas prices ($/Mcf) North America $1.96 $1.80 Trinidad 1.08 1.04 India 2.57 2.97 Composite 1.87 1.70 Crude oil/condensate volumes (MBbl/d)(a) North America 14.7 13.6 Trinidad 2.9 3.5 India 4.8 - Total 22.4 17.1 Average crude oil/condensate prices ($/Bbl) North America $12.82 $18.89 Trinidad 13.31 16.09 India 13.41 - Composite 13.01 18.31 <FN> (a) Million cubic feet per day or thousand barrels per day, as applicable. </TABLE> The following analyzes the significant changes in the various components of IBIT for Exploration and Production (in millions): <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> Net revenues $179 $172 Operating expenses 38 38 Exploration expenses 26 24 Depreciation, depletion and amortization 73 69 Taxes, other than income taxes 13 12 Other income, net - 1 Income before interest, minority interests and taxes $ 29 $ 30 </TABLE> Net Revenues Exploration and Production's revenues, net of cost of gas sold in connection with natural gas marketing, increased $7 million in the second quarter of 1998 as compared to the same period in 1997, primarily due to higher wellhead natural gas prices in North America and increased production volumes of natural gas and crude oil and condensate in India, partially offset by lower wellhead crude oil and condensate prices and lower natural gas production volumes in North America. Costs and Expenses Operating expenses, including taxes other than income taxes, depreciation, depletion and amortization and exploration expenses increased primarily due to increased production and exploration activities. Transportation and Distribution Transportation and Distribution consists of Gas Pipeline Group and Portland General. Gas Pipeline Group includes Enron's interstate natural gas pipelines, primarily Northern Natural Gas Company (Northern), Transwestern Pipeline Company (Transwestern) and Enron's 50% interest in Florida Gas Transmission Company (Florida Gas). Portland General primarily reflects the results of Portland General Electric Company (PGE) since the July 1, 1997 merger (see Note 2 to the Consolidated Financial Statements). Gas Pipeline Group. The following table summarizes total volumes transported for each of Enron's interstate natural gas pipelines. <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> Total Volumes Transported (Bbtu/d)(a) Northern Natural Gas 3,900 4,085 Transwestern Pipeline 1,675 1,476 Florida Gas Transmission 1,328 1,440 Northern Border Pipeline 1,737 1,785 <FN> (a) Reflects 100% of each entity's throughput volumes. </TABLE> Significant components of IBIT are as follows (in millions): <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> Net revenues $137 $139 Operating expenses 68 76 Depreciation and amortization 17 16 Equity in earnings 9 8 Other income, net 11 18 Income before interest and taxes $ 72 $ 73 </TABLE> Net Revenues Revenues, net of cost of sales, of Gas Pipeline Group (GPG) declined $2 million in the second quarter of 1998 as compared to the same period in 1997. The change was primarily due to warmer weather in Northern's service territory in the beginning of the second quarter. Costs and Expenses Operating expenses decreased $8 million (11%) during the second quarter of 1998 as compared to the same period in 1997. The decline of operating expenses is primarily due to a change in allocation of indirect overhead charges. Other Income, net Other income, net decreased $7 million in the second quarter of 1998 as compared to the second quarter of 1997, primarily as a result of income recognized in the second quarter of 1997 related to liquids assets sold in the first quarter of 1997. Portland General. Results for Portland General have been included in Enron's Consolidated Financial Statements beginning July 1, 1997. For the second quarter of 1998, Portland General realized IBIT of $62 million, as follows (in millions): <TABLE> <CAPTION> Second Quarter 1998 <S> <C> Revenues $269 Purchased power and fuel 94 Operating expenses 78 Depreciation and amortization 45 Other income, net 10 Income before interest and taxes $ 62 </TABLE> Statistics for PGE for the second quarter of 1998 and 1997 (including amounts for 1997 for comparative purposes only) are as follows: <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> Electricity Sales (Thousand MWh)(a) Residential 1,524 1,462 Commercial 1,613 1,623 Industrial 1,106 1,086 Total Retail 4,243 4,171 Wholesale(c) 2,382 6,958 Total Electricity Sales 6,625 11,129 Average Billed Revenue (cents per kWh) Residential 6.40 5.68 Commercial 5.07 5.14 Industrial 2.64 3.46 Total Retail 4.97 4.92 Wholesale 1.72 1.44 Total Sales 3.91 2.77 Resource Mix Coal 12% 4% Combustion Turbine 6 - Hydro 11 6 Total Generation 29 10 Firm Purchases 64 82 Secondary Purchases 7 8 Total Resources 100% 100% Average Variable Power Cost (Mills/kWh)(b) Generation 6.6 4.4 Firm Purchases 14.3 12.3 Secondary Purchases 12.4 10.7 Total Average Variable Power Cost 13.2 12.1 Retail Customers (end of period, thousands) 694 677 <FN> (a) Thousand megawatt-hours. (b) Mills (1/10 cent) per kilowatt-hour. (c) Wholesale electricity trading activities after December 1997 were transferred to the Wholesale Energy Operations and Services business segment. </TABLE> The results for the second quarter of 1998 include the impact of lower margins on sales primarily attributed to higher average power costs. The period also reflects an increase in the number of retail customers. Wholesale Energy Operations and Services Enron's Wholesale Energy Operations and Services (Enron Wholesale) business, conducted by Enron Capital & Trade Resources (ECT) and Enron International(EI), provides integrated energy related products and services to wholesale customers, including the development and construction of pipelines and power plants worldwide (Asset Development and Construction), the physical delivery of energy commodities and operation of physical assets of this segment (Cash and Physical), energy-related risk management services (Risk Management) and finance products for large energy intensive customers and a significant number of energy-related investments (Finance and Investing). Enron continues to be a leading provider of energy commodity sales and services and the development, construc- tion and operation of energy infrastructure worldwide. These activities have been and will continue to be a significant part of Enron Wholesale's business. In addition, economic value is being created as Enron expands its worldwide energy businesses and offers comprehensive energy products and services to its customers. An increasing amount of earnings is derived from the growing number of energy-related investments. Examples of these investments include investments in debt and equity securities of oil and gas producers and other energy-intensive companies as well as Enron's international energy investments such as power plants and natural gas pipelines. Earnings from these investments primarily result from changes in the market value of merchant banking related investments held during the period, equity earnings and gains on sales or restructurings of other investments. Enron will continue to manage its assets in order to maximize the value and minimize the risks associated with this activity and to provide overall liquidity. In this process, Enron utilizes portfolio and risk management disciplines including certain hedging transactions to manage market exposures (commodity, interest rate, foreign currency and equity exposures). Enron Wholesale from time to time monetizes its contract portfolios (producing cash and transferring counterparty credit risk to third parties) and sells interests in investments and assets. The following table reflects IBIT for each of Enron Wholesale's business lines (in millions): <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> Asset Development and Construction $ 47 $ 30 Cash and Physical 101 82 Risk Management 8 11 Finance and Investing 125 38 Unallocated expenses (40) (31) Income before interest, minority interests and taxes $241 $130 </TABLE> The following discussion analyzes the contributions to IBIT and the outlook for each of the business lines. Asset Development and Construction. This line of business includes the development and construction of power plants, pipelines and other energy infrastructure. Earnings from the asset development and construction business increased to $47 million in the second quarter of 1998 from $30 million in the same period of 1997 primarily as a result of earnings related to Enron's international power plant and pipeline projects, partially offset by development costs. Cash and Physical. The cash and physical operations include earnings from physical contracts of one year or less involving marketing and transportation of natural gas, liquids, electricity and other commodities, earnings from the management of Enron's contract portfolio and earnings related to the operating assets of this segment. Also included are the effects of actual settlements of long-term physical and notional quantity-based contracts. Enron Wholesale markets, transports and provides energy commodities as reflected in the following table (including intercompany amounts): <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> Physical Volumes (BBtue/d)(a)(b) Gas: United States 6,696 7,330 Canada 3,295 2,123 Europe 1,062 572 Other 5 - 11,058 10,025 Transport Volumes 630 686 Total Gas Volumes 11,688 10,711 Oil 2,534 454 Liquids 550 1,080 Electricity(c) 9,463 4,193 Total 24,235 16,438 Electricity Volumes Marketed (Thousand MWh) United States 86,075 38,141 Europe 40 18 Total 86,115 38,159 Financial Settlements (Notional) (BBtue/d) 67,411 45,647 <FN> (a) Billion British thermal units equivalent per day. (b) Includes third-party transactions by Enron Energy Services. (c) Represents electricity transaction volumes marketed, converted to BBtue/d. </TABLE> The earnings from cash and physical increased 23% to $101 million in the second quarter of 1998 as compared to $82 million in the same period of 1997 primarily due to earnings related to Enron's domestic assets and increased profits from power marketing. The volume of electricity marketed has increased over 100% from the second quarter of 1997. Risk Management. Enron Wholesale's risk management operations consist of market origination activity on new long-term contracts (transactions greater than one year) and restructuring of existing long-term contracts, including development activity related to such contracts. Earnings from risk management decreased by $3 million in the second quarter of 1998 as compared to the second quarter of 1997. Finance and Investing. The finance and investing operations provide a variety of capital products to its worldwide customers, including loans and equity investments. These products are offered directly or through joint ventures. Additionally, the finance and investing business includes the management of Enron Wholesale's capital investments, both operating and financial, as well as certain of Enron's equity investments. Accordingly, the results of this business include earnings from changes in the composition and market value of these investments. Market value changes result from both underlying operating strengths and favorable conditions in the equity markets. Exposures related to these investments are managed through certain hedging transactions as well as through the overall diversity of the investments. Earnings from the finance and investing operations increased to $125 million in the second quarter of 1998 as compared to $38 million in the same period of 1997 as a result of continued originations in the North American and European markets and increased earnings associated with Enron's energy investments. Unallocated Expenses. Net unallocated expenses such as rent, systems expenses and other support group costs increased in 1998 due to continued expansion into new markets and system upgrades. Investing Activity. Included in the Enron Wholesale business lines described above, for the second quarter of 1998, was approximately $240 million of gross margin (before certain direct and indirect expenses) resulting from the management of investments, as compared with approximately $40 million during the second quarter of 1997. These earnings have been reflected in the business lines discussed above based on the type of activity to which the investment related. Cash proceeds from this activity totaled approximately $450 million and $80 million for the quarter ended June 30, 1998 and 1997, respectively. Retail Energy Services Enron Energy Services (Energy Services) is extending Enron's energy expertise to end-use customers. This includes sales of natural gas, electricity and energy management services directly to commercial and light industrial customers. Energy Services reported an operating loss before interest, minority interest and taxes of $43 million in the second quarter of 1998 compared to a loss of $25 million in the second quarter of 1997. These results primarily reflect the costs associated with developing the commodity, capital and services capability to deliver on contracts signed to date by Energy Services. Corporate and Other Significant components of IBIT are as follows: <TABLE> <CAPTION> Second Quarter 1998 1997 <S> <C> <C> IBIT before items impacting comparability $(16) $ 19 Items impacting comparability: J-Block gas contract restructuring charge - (675) Charge to reflect depressed MTBE margins on committed production - (100) IBIT $(16) $(756) </TABLE> The decrease in IBIT before items impacting comparability reflects the results of certain investments, including Enron Renewable Energy Corp. (EREC), EOTT Energy Corp. (EOTT) and the operations of Enron's methanol and MTBE plants. Interest and Related Charges, net Interest and related charges, net is reported net of interest capitalized of $9 million and $4 million for the second quarter of 1998 and 1997, respectively. The net expense increased $52 million in the second quarter of 1998 as compared to the same period of 1997, primarily due to higher debt levels, including $1.5 billion of debt issued by Enron in the second half of 1997 and $1.1 billion of debt assumed in connection with the merger with PGC. Dividends on Company-Obligated Preferred Securities of Subsidiaries Dividends on company-obligated preferred securities of subsidiaries increased from $16 million in the second quarter of 1997 to $20 million in the second quarter of 1998, primarily due to the issuance of approximately $200 million of additional preferred securities by an Enron subsidiary in June 1997. Minority Interests Minority interests increased $2 million in the second quarter of 1998 compared to the same period in 1997, primarily due to the minority owner's share of dividends on preferred stock issued in connection with the formation of an Enron-controlled joint venture in late 1997, partially offset by Enron's acquisition of the Enron Global Power & Pipelines, L.L.C. minority interest in November 1997 and lower net income from EOG in the second quarter of 1998. Income Tax Expense Income taxes increased during the second quarter of 1998 as compared to the second quarter of 1997 primarily as a result of pretax losses in 1997 due to the non-recurring charges for the restructuring of Enron's J-Block contract and for depressed MTBE margins on committed production. The effective tax rate differed from the statutory rate due to equity earnings, tight gas sands tax credits and asset and stock sale differences. RESULTS OF OPERATIONS Six Months Ended June 30, 1998 vs. Six Months Ended June 30, 1997 RESULTS OF OPERATIONS Consolidated Net Income Enron reported net income of $359 million for the first six months of 1998 compared to a loss of $198 million during the same period in 1997. Net income (loss) includes the following (in millions): <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> After-tax results from: Core businesses $407 $ 285 Retail Energy Services (48) (25) 359 260 Items impacting comparability(a) Gains on sales of liquids assets - 66 J-Block contract restructuring charge - (450) Charge to reflect depressed MTBE margin on committed production - (74) Net income (loss) $359 $(198) <FN> (a) Tax affected at 35%, except where a specific tax rate applied. </TABLE> Basic and diluted earnings (loss) per share of common stock were as follows: <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Basic earnings (loss) per share $ 1.12 $(0.83) Diluted earnings (loss) per share: Results from core businesses $ 1.20 $ 1.05 Results from Retail Energy Services (0.14) (0.09) Items impacting comparability: Gains on sales of liquids assets - 0.24 J-Block contract restructuring charge - (1.65) Charge to reflect depressed MTBE margins on committed production - (0.27) Effect of anti-dilution(a) - (0.11) Diluted earnings (loss) per share $ 1.06 $(0.83) <FN> (a) The conversion of certain options and preferred shares to common for purposes of the diluted earnings (loss) per share calculation was anti-dilutive by $0.11 per share. However, in order to present comparable results, per share amounts for each earnings component were calculated after considering conversion. </TABLE> Income Before Interest, Minority Interests and Income Taxes The following table presents IBIT for each of Enron's operating segments (in millions): <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Exploration and Production $ 72 $ 72 Transportation and Distribution: Gas Pipeline Group 198 310 Portland General 141 - Wholesale Energy Operations and Services 490 297 Retail Energy Services (70) (39) Corporate and Other (15) (759) Income (loss) before interest, minority interests and taxes $816 $(119) </TABLE> Exploration and Production IBIT of Exploration and Production totaled $72 million for the first six months of both 1998 and 1997. Wellhead volume and price statistics (including intercompany amounts) are as follows: <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Natural gas volumes (MMcf/d)(a) North America 733 759 Trinidad 121 113 India 50 1 Total 904 873 Average natural gas prices ($/Mcf) North America $1.94 $2.18 Trinidad 1.08 1.04 India 2.63 2.97 Composite 1.87 2.03 Crude oil/condensate volumes (MBbl/d)(a) North America 15.0 13.3 Trinidad 2.8 3.6 India 4.5 1.4 Total 22.3 18.3 Average crude oil/condensate prices ($/Bbl) North America $13.70 $20.19 Trinidad 13.66 18.86 India 14.31 22.99 Composite 13.82 20.15 <FN> (a) Million cubic feet per day or thousand barrels per day, as applicable. </TABLE> The following analyzes the significant changes in the various components of IBIT for Exploration and Production (in millions): <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Net revenues $385 $352 Operating expenses 79 74 Exploration expenses 60 46 Depreciation, depletion and amortization 145 132 Taxes, other than income taxes 28 30 Other income (expense), net (1) 2 Income before interest, minority interests and taxes $ 72 $ 72 </TABLE> Net Revenues Exploration and Production's revenues, net of cost of gas sold in connection with natural gas marketing, increased $33 million in the first half of 1998 as compared to the same period in 1997. Total production volumes increased in the first half of 1998 as compared with the first half of 1997, although wellhead revenues declined due to lower prices. Other marketing activities, including natural gas and crude oil hedging and trading transactions, resulted in a decrease to net revenues of less than $1 million in the first half of 1998, an improvement from the prior year, which reflected a reduction of $53 million in net revenues. Costs and Expenses Operating expenses, including taxes other than income taxes, depreciation, depletion and amortization and exploration expenses increased primarily due to increased production and exploration activities and overall market increases. Transportation and Distribution Gas Pipeline Group. The following table summarizes total volumes transported for each of Enron's interstate natural gas pipelines. <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Total Volumes Transported (Bbtu/d)(a) Northern Natural Gas 4,185 4,445 Transwestern Pipeline 1,666 1,364 Florida Gas Transmission 1,248 1,331 Northern Border Pipeline 1,788 1,820 <FN> (a) Reflects 100% of each entity's throughput volumes. </TABLE> Significant components of IBIT are as follows (in millions): <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Net revenues $329 $345 Operating expenses 137 149 Depreciation and amortization 33 34 Equity in earnings 20 18 Other income, net 19 28 IBIT before items impacting comparability 198 208 Gains on sales of liquids assets - 102 Income before interest and taxes $198 $310 </TABLE> Net Revenues Revenues, net of cost of sales, of GPG declined $16 million (5%) in the first half of 1998 as compared to the same period in 1997. The decrease is primarily due to the sale of the liquids assets in the first quarter of 1997 and the unusually warm winter in Northern's service territory in 1998. Costs and Expenses Operating expenses decreased $12 million (8%) during the first half of 1998 as compared to the same period in 1997. The decline is primarily due to reduced expenses related to the sale of natural gas liquids assets in the first half of 1997. Items Impacting Comparability During the first quarter of 1997, gains of $102 million were recognized related to the sales of liquids assets, including processing plants and Enron's interest in the Enron Liquids Pipeline L.P. Portland General. Results for Portland General have been included in Enron's Consolidated Financial Statements beginning July 1, 1997. For the first half of 1998, Portland General realized IBIT of $141 million, as follows (in millions): <TABLE> <CAPTION> Six Months Ended June 30, 1998 <S> <C> Revenues $589 Purchased power and fuel 218 Operating expenses 154 Depreciation and amortization 89 Other income, net 13 Income before interest and taxes $141 </TABLE> Statistics for PGE for the first half of 1998 and 1997 (including amounts for 1997 for comparative purposes only) are as follows: <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Electricity Sales (Thousand MWh)(a) Residential 3,600 3,604 Commercial 3,273 3,334 Industrial 2,096 2,069 Total Retail 8,969 9,007 Wholesale(c) 5,957 13,377 Total Electricity Sales 14,926 22,384 Average Billed Revenue (cents per kWh) Residential 6.12 5.54 Commercial 5.06 5.10 Industrial 2.85 3.41 Total Retail 5.05 4.97 Wholesale 1.78 1.61 Total Sales 3.84 3.02 Resource Mix Coal 13% 4% Combustion Turbine 6 - Hydro 10 8 Total Generation 29 12 Firm Purchases 65 81 Secondary Purchases 6 7 Total Resources 100% 100% Average Variable Power Cost (Mills/kWh)(b) Generation 6.8 4.3 Firm Purchases 15.4 14.3 Secondary Purchases 13.2 11.3 Total Average Variable Power Cost 13.9 13.4 Retail Customers (end of period, thousands) 694 677 <FN> (a) Thousand megawatt-hours. (b) Mills (1/10 cent) per kilowatt-hour. (c) Wholesale electricity trading activities after December 1997 were transferred to the Wholesale Energy Operations and Services business segment. </TABLE> The results for the first six months of 1998 include the impact of the warmer than normal winter and increased operating expenses related to the January 1998 ice storm in Portland General's customer service area. Wholesale Energy Operations and Services The following table reflects IBIT for each of Enron Wholesale's business lines (in millions): <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Asset Development and Construction $ 62 $ 39 Cash and Physical 254 218 Risk Management 39 45 Finance and Investing 205 54 Unallocated expenses (70) (59) Income before interest, minority interests and taxes $490 $297 </TABLE> The following discussion analyzes the contributions to IBIT and the outlook for each of the business lines. Asset Development and Construction. Earnings from the asset development and construction business increased to $62 million in the first half of 1998 from $39 million in the same period of 1997, primarily as a result of earnings related to Enron's international power plant and pipeline projects, partially offset by development costs. Cash and Physical. Enron Wholesale markets, transports and provides energy commodities as reflected in the following table (including intercompany amounts): <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> Physical Volumes (BBtue/d)(a)(b) Gas: United States 6,984 7,967 Canada 3,087 2,115 Europe 1,093 516 Other 3 - 11,167 10,598 Transport Volumes 540 448 Total Gas Volumes 11,707 11,046 Oil 2,147 558 Liquids 602 1,164 Electricity(c) 8,866 3,947 Total 23,322 16,715 Electricity Volumes Marketed (Thousand MWh) United States 160,347 71,383 Europe 122 68 Total 160,469 71,451 Financial Settlements (Notional) (BBtue/d) 68,658 42,797 <FN> (a) Billion British thermal units equivalent per day. (b) Includes third-party transactions by Enron Energy Services. (c) Represents electricity transaction volumes marketed, converted to BBtue/d. </TABLE> The earnings from cash and physical increased 17% in the first half of 1998 as compared to the same period of 1997 primarily due to earnings related to Enron's domestic assets and increased profits from power marketing where volumes showed continued strength in the growing deregulated market, partially offset by lower gas marketing margins resulting from warmer weather and low price volatility during the first half of 1998. Risk Management. Earnings from risk management decreased 13% in the first half of 1998 as compared to the first half of 1997 primarily due to lower contract originations. Finance and Investing. Earnings from the finance and investing operations increased to $205 million in the first half of 1998 as compared to $54 million in the same period of 1997 as a result of continued originations in the North American and European markets and increased earnings associated with Enron's energy investments. Unallocated Expenses. Net unallocated expenses such as rent, systems expenses and other support group costs increased in 1998 due to continued expansion into new markets and system upgrades. Investing Activities. Included in the Enron Wholesale business lines described above, for the six months ended June 30, 1998, was approximately $320 million of gross margin (before certain direct and indirect expenses) resulting from the management of investments, as compared with approximately $70 million during the six months ended June 30, 1997. These earnings have been reflected in the business lines discussed above based on the type of activity to which the investment related. Cash proceeds from this activity totaled approximately $500 million and $100 million for the six months ended June 30, 1998 and 1997, respectively. Retail Energy Services Energy Services reported an operating loss before interest, minority interest and taxes of $70 million in the first half of 1998 compared to a loss of $39 million for the same period of 1997. These results primarily reflect the costs associated with developing the commodity, capital and services capability to deliver on contracts signed to date by Energy Services, as well as income from investments in related businesses. Corporate and Other Corporate and Other realized a loss of $15 million in the first half of 1998 compared to a loss of $759 million for the same period in 1997. Significant components of IBIT are as follows: <TABLE> <CAPTION> Six Months Ended June 30, 1998 1997 <S> <C> <C> IBIT before items impacting comparability $ (15) $ 16 Items impacting comparability: J-Block gas contract restructuring charge - (675) Charge to reflect depressed MTBE margins on committed production - (100) IBIT $ (15) $(759) </TABLE> The decrease in IBIT before items impacting comparability reflects the results of certain investments, including EREC, EOTT and the operations of Enron's methanol and MTBE plants. Interest and Related Charges, net Interest and related charges, net, is reported net of interest capitalized of $15 million and $8 million for the first half of 1998 and 1997, respectively. The net expense increased $115 million in the first half of 1998 as compared to the same period of 1997, primarily due to higher debt levels, including $1.5 billion of debt issued by Enron in the second half of 1997 and $1.1 billion of debt assumed in connection with the merger with PGC. Dividends on Company-Obligated Preferred Securities of Subsidiaries Dividends on company-obligated preferred securities of subsidiaries increased from $31 million in the first half of 1997 to $39 million in the first half of 1998, primarily due to the issuance of approximately $200 million of additional preferred securities by an Enron subsidiary in June 1997. Minority Interests Minority interests increased $8 million to $44 million in the first half of 1998 compared to the same period in 1997, primarily due to the minority owner's share of dividends on preferred stock issued in connection with the formation of an Enron-controlled joint venture in late 1997, partially offset by Enron's acquisition of the Enron Global Power & Pipelines, L.L.C. minority interest in November 1997 and decreased net income from EOG in the first half of 1998. Income Tax Expense Income taxes increased during the first six months of 1998 as compared to the same period in 1997 primarily as a result of pretax losses in 1997 due to the non-recurring charges for the restructuring of Enron's J-Block contract and for depressed MTBE margins on committed production. The effective tax rate differed from the statutory rate due to various transactions, including equity earnings, tight gas sands tax credits and asset and stock sale differences. YEAR 2000 The Year 2000 problem results from the use in computer hardware and software of two digits rather than four digits to define the applicable year. The use of two digits was a common practice for decades when computer storage and processing was much more expensive than today. When computer systems must process dates both before and after January 1, 2000, two-digit year "fields" may create processing ambiguities that can cause errors and system failures. For example, computer programs that have date- sensitive features may recognize a date represented by "00" as the year 1900 instead of 2000. These errors or failures may have limited effects, or the effects may be widespread, depending on the computer chip, system or software, and its location and function. The effects of the Year 2000 problem are exacerbated because of the interdependence of computer and telecommunications systems in the United States and throughout the world. This interdependence certainly is true for Enron and Enron's suppliers, trading partners, and customers, as well as among the governments of countries around the world where Enron does business. Enron Year 2000 Plan Enron's Board of Directors has been briefed about the Year 2000 problem generally and as it may affect Enron. The Board has adopted a Year 2000 plan (the Plan) covering all of Enron's business units. Enron is implementing the Plan, which will be modified as events warrant. Implementation of Enron's Year 2000 plan is directly supervised by a Senior Vice President who is aided by a Year 2000 Project Director. The Project Director coordinates the implementation of the Plan among Enron's business units. Each business unit in turn has developed, and is implementing, a Year 2000 plan specific to it, as part of the overall Plan. Enron also has engaged certain outside consultants, technicians and other external resources to aid in formulating and implementing the Plan. Under the Plan, Enron will continue to inventory its computer hardware and software systems and embedded chips and software; assess the effects of Year 2000 problems on all Enron enterprises; remedy those problems to the maximum practicable extent; verify and test the systems to which remediation efforts have been applied; and attempt to ameliorate those aspects of the Year 2000 problem that cannot practicably be remediated by January 1, 2000, including the development of contingency plans to cope with the consequences of Year 2000 problems that have not been identified or remediated by that date. The Plan also recognizes that the computer, telecommunications, and other systems (Outside Systems) of outside entities (Outside Entities) play a major role in the conduct of Enron's business. Enron does not have control of these Outside Entities or Outside Systems. (In some cases, Outside Entities are foreign governments or businesses located in foreign countries.) However, Enron's Plan includes an ongoing process of contacting Outside Entities whose systems have, or may have, a substantial effect on Enron's ability to continue to conduct business without disruption from Year 2000 problems. The Plan envisions Enron's attempting to inventory and assess the extent to which these Outside Systems may not be "Year 2000 ready" or "Year 2000 compatible" (that is, able to process data reliably, both before and after January 1, 2000, without disruption due to an inability to reliably process date information). Enron will attempt diligently to coordinate with these Outside Entities in an ongoing effort to obtain assurance that these Outside Systems will be Year 2000 compatible well before January 1, 2000. Consequently, Enron will work prudently with Outside Entities in a reasonable attempt to inventory, assess, remediate, verify and test Enron's connections to Outside Systems to ascertain the extent to which they are, or can be made to be, Year 2000 ready and compatible with Enron's remediation of its own systems. To the extent that Outside Systems are not reasonably expected to be Year 2000 ready, Enron intends to develop contingency plans in an attempt to minimize the disruptions or other adverse effects resulting from year 2000 incompatibilities. Current Status Enron and all its business units are in the process of completing preliminary assessments of Enron's Year 2000 problem, and Enron's business units are at various stages in implementation of the Plan. Although it is difficult to estimate the total costs of implementing the Plan through January 1, 2000 and beyond, Enron's preliminary estimate is that such costs will not be material. However, although management believes that its estimates are reasonable, there can be no assurance, for the reasons stated in the next paragraph, that the actual costs of implementing the Plan will not differ materially from the estimated costs. Outlook From a forward-looking perspective, the extent and magnitude of the Year 2000 problem as it will affect Enron, both before and for some period after January 1, 2000, are difficult to predict or quantify for a number of reasons. Among the most important are the difficulty of locating all software internal to Enron that is not Year 2000 compatible, as well as "embedded" chips that may be in a great variety of hardware used for process or flow control, environmental, transportation, access, communications and other systems. Enron believes that it will be able to identify and remediate mission-critical internal computer systems and systems containing embedded chips and will have contingency plans to deal with these systems. Other important difficulties relate to the lack of control over, and difficulty inventorying, assessing, remediating, verifying and testing, Outside Systems connected, and vital, to Enron's computer, telecommunications or other mission- critical systems; and the unavailability of certain necessary internal or external resources, including but not limited to trained hardware and software engineers, technicians and other personnel to perform adequate remediation, verification and testing of Enron systems or Outside Systems. Year 2000 costs are difficult to estimate accurately because of unanticipated vendor delays, technical difficulties, the impact of tests of Outside Systems and similar events. Additionally, there can be no assurance for example that all Outside Systems will be adequately remediated so that they are Year 2000 ready by January 1, 2000, or by some earlier date, so as not to create a material disruption to Enron's business. If, despite Enron's diligent, prudent efforts under its Year 2000 Plan, there are Year 2000-related failures that create substantial disruptions to Enron's business, the adverse impact on Enron's business could be material. Moreover, the estimated costs, referred to above, of implementing the Plan do not take into account the costs, if any, that might be incurred as a result of Year 2000-related failures that occur despite Enron's implementation of the Plan. NEW ACCOUNTING PRONOUNCEMENTS On April 3, 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities," which generally requires that costs for start- up activities and organization costs should be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after 1998 and initial adoption is required to be reflected as a cumulative effect of accounting change. Enron is evaluating the impact of SOP 98-5 and is currently unable to estimate the impact of adopting this accounting pronouncement. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance, however, SFAS No. 133 cannot be applied retroactively. Enron has not yet determined the timing of or method of adoption of SFAS No. 133. Enron believes that SFAS No. 133 will not have an impact on its accounting for price risk management activities but has not yet quantified the effect on its hedging activities. FINANCIAL CONDITION <TABLE> Cash Flows <CAPTION> Six Months Ended June 30, (In Millions) 1998 1997 <S> <C> <C> Cash provided by (used in): Operating activities $ (131) $ (523) Investing activities (1,257) (647) Financing activities 1,393 1,125 </TABLE> Cash used in operating activities totaled $131 million in the first half of 1998 as compared to $523 million in the same period last year. The change reflects higher earnings in 1998 and payments of $440 million made in 1997 in connection with the resolution of the J-block gas contract partially offset by higher working capital requirements and an increase in net assets from price risk management activities. The changes in the receivable and payable components of working capital and net assets from price risk management activities were primarily a result of the high volume of power marketed by Enron and the increase in the per unit price of power in the second quarter of 1998. Enron expects that its working capital requirements will decrease by year-end. Cash used in investing activities totaled $1,257 million in the first six months of 1998 as compared to $647 million in the same period of 1997. The 1998 amount reflects increased cash used to acquire merchant investments (investments by Enron Wholesale in connection with its finance and investing line of business) and 7.7 million shares of EOG stock and a decrease in the amount of proceeds received from asset sales. Cash provided by financing activities totaled $1,393 million in the first half of 1998 as compared to $1,125 million during the same period of 1997. Financing activities in the first half of 1998 include net proceeds of approximately $837 million from the sale of 17.25 million shares of Enron common stock and net issuances of short- and long-term debt of $733 million. Proceeds were primarily used to fund investment activities. 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. FINANCIAL RISK MANAGEMENT Enron Wholesale's business offers price risk management services primarily related to commodities associated with the energy sector (natural gas, crude oil, natural gas liquids and electricity). 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. 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, 1997. In late June and early July 1998, a combination of warmer weather and lack of power generation capacity caused significant price swings in power markets in the Eastern United States. As a result, Enron's value at risk for commodity price risk for the Enron Wholesale business at June 30, 1998 increased to $44 million as compared to $25 million at December 31, 1997. However, since that time, the value at risk for commodity price risk has declined to levels comparable to year-end 1997. This decline was due to numerous factors, including lower power prices and volatility as well as changes in Enron's risk positions. Enron's value at risk for its non-trading commodity price risk includes only the risk related to the financial instruments that serve as hedges and does not include the related underlying hedged production. During the second quarter of 1998, Enron evaluated and began managing its price risk exposure related to EOG production as production estimates became more determinable for the remainder of 1998 and 1999. As a result, the value at risk for Enron's non- trading commodity price risk has increased approximately 50% as compared to the value at risk at December 31, 1997. CAPITALIZATION Total capitalization at June 30, 1998 was $15.9 billion. Debt as a percentage of total capitalization decreased to 44.1% at June 30, 1998 as compared to 44.6% at December 31, 1997 and 46.8% at June 30, 1997. The decrease primarily reflects the issuance during 1997 of approximately 62.0 million shares of common stock in connection with the acquisitions of PGC and the minority interest in EPP (see Note 2 to the Consolidated Financial Statements) and the issuance, in May 1998, of 17.25 million shares of common stock, partially offset by increased debt. As described in Note 2 to the Consolidated Financial Statements, in July 1998, Enron announced two proposed acquisitions totaling $3.5 billion. Enron plans to finance these acquisitions prior to year-end with a combination of permanent financing, the addition of third-party investors and the sale of selected assets. After the restructuring, Enron's total capital structure is not expected to be materially different from that at June 30, 1998. INFORMATION REGARDING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although Enron believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward looking statements herein include political developments in foreign countries, ability to penetrate new retail natural gas and electricity markets in the United States and Europe, the timing and extent of changes in commodity prices for crude oil, natural gas, electricity and interest rates, the extent of EOG's success in acquiring oil and gas properties and in discovering, developing, producing and marketing reserves, the timing and success of Enron's efforts to develop international power, pipeline and other infrastructure projects and conditions of the capital markets and equity markets during the periods covered by the forward looking statements.
PART II. OTHER INFORMATION ENRON CORP. AND SUBSIDIARIES ITEM 1. Legal Proceedings See Part I. Item 1, Note 4 to Consolidated Financial Statements entitled "Litigation and Other Contingencies," which is incorporated herein by reference. ITEM 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of Enron Corp. was held on May 5, 1998 in Houston, Texas, for the purpose of electing a board of directors and the appointment of auditors. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's nominees. (a) All of management's nominees for directors as listed in the proxy statement were elected with the following vote: <TABLE> <CAPTION> Nominee Shares FOR Shares WITHHELD <S> <C> <C> Robert A. Belfer 269,617,479 2,958,316 Norman P. Blake, Jr. 270,017,054 2,558,741 Ronnie C. Chan 268,477,840 4,097,955 John H. Duncan 269,870,197 2,705,598 Joe H. Foy 269,849,722 2,726,073 Wendy L. Gramm 269,891,769 2,684,026 Ken L. Harrison 270,073,072 2,502,723 Robert K. Jaedicke 269,811,724 2,764,071 Kenneth L. Lay 269,827,805 2,747,990 Charles A. LeMaistre 269,714,549 2,861,246 Jerome J. Meyer 269,919,823 2,655,972 Jeffrey K. Skilling 269,980,191 2,595,604 John A. Urquhart 269,922,780 2,653,015 John Wakeham 269,913,491 2,662,304 Charls E. Walker 269,738,460 2,837,335 Bruce G. Willison 270,070,586 2,505,209 Herbert S. Winokur, Jr. 270,065,730 2,510,065 </TABLE> (b) The appointment of Arthur Andersen LLP as independent auditor was approved by the following vote: <TABLE> <CAPTION> Shares FOR Shares AGAINST Shares ABSTAINING <C> <C> <C> 270,054,055 1,481,009 1,040,731 </TABLE> 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 None.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENRON CORP. (Registrant) Date: August 13, 1998 By: /s/ Richard A. Causey Richard A. Causey Senior Vice President and Chief Accounting, Information and Administrative Officer (Principal Accounting Officer)