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 September 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 October 31, 1998 Common Stock, No Par Value 330,728,209 shares 1 of 43
ENRON CORP. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Income Statement - Three Months Ended September 30, 1998 and 1997 and Nine Months Ended September 30, 1998 and 1997 3 Consolidated Balance Sheet - September 30, 1998 and December 31, 1997 4 Consolidated Statement of Cash Flows - Nine Months Ended September 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 13 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 42 ITEM 6. Exhibits and Reports on Form 8-K 42
<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 Nine Months Ended September 30, September 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Revenues $11,320 $5,806 $23,558 $14,401 Costs and Expenses Cost of gas, electricity and other products 10,017 4,927 20,103 12,270 Operating expenses 614 418 1,621 999 Oil and gas exploration expenses 34 22 94 68 Depreciation, depletion and amortization 215 169 587 418 Taxes, other than income taxes 50 45 153 114 Contract restructuring charge - - - 675 10,930 5,581 22,558 14,544 Operating Income (Loss) 390 225 1,000 (143) Other Income and Deductions Equity in earnings of unconsolidated subsidiaries 8 57 161 138 Gains (losses) on sales of assets and investments (1) (34) 3 122 Other income, net 8 63 57 75 Income (Loss) Before Interest, Minority Interests and Income Taxes 405 311 1,221 192 Interest and Related Charges, net 134 122 398 271 Dividends on Company-Obligated Preferred Securities of Subsidiaries 19 19 58 50 Minority Interests 16 22 60 58 Income Tax Expense (Benefit) 68 14 178 (123) Net Income (Loss) 168 134 527 (64) Preferred Stock Dividends 4 5 13 13 Earnings (Loss) on Common Stock $ 164 $ 129 $ 514 $ (77) Earnings (Loss) Per Share of Common Stock Basic $ 0.50 $ 0.44 $ 1.62 $(0.29) Diluted $ 0.47 $ 0.42 $ 1.53 $(0.29) Average Number of Common Shares Used in Computation Basic 329 294 318 268 Diluted 356 317 344 268 <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> September 30, December 31, 1998 1997 ASSETS <S> <C> <C> Current Assets Cash and cash equivalents $ 383 $ 170 Trade receivables 2,661 1,697 Other receivables 752 454 Assets from price risk management activities 1,787 1,577 Other 966 771 Total Current Assets 6,549 4,669 Investments and Other Assets Investments in and advances to unconsolidated subsidiaries 4,382 2,656 Assets from price risk management activities 2,306 1,352 Goodwill 1,976 1,910 Other 4,509 3,665 Total Investments and Other Assets 13,173 9,583 Property, Plant and Equipment, at cost 15,064 13,742 Less accumulated depreciation, depletion and amortization 5,037 4,572 Net Property, Plant and Equipment 10,027 9,170 Total Assets $29,749 $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> September 30, December 31, 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> Current Liabilities Accounts payable $ 2,898 $ 2,119 Liabilities from price risk management activities 1,907 1,476 Short-term debt 1,102 - Other 1,208 817 Total Current Liabilities 7,115 4,412 Long-Term Debt 8,475 6,254 Deferred Credits and Other Liabilities Deferred income taxes 2,040 2,039 Liabilities from price risk management activities 1,465 1,190 Other 1,568 1,769 Total 5,073 4,998 Minority Interests 1,142 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 5,110 4,224 Retained earnings 2,138 1,852 Cumulative foreign currency translation adjustment (170) (148) Common stock held in treasury (202) (269) Other (including Flexible Equity Trust) (57) (175) Total 6,951 5,618 Total Liabilities and Shareholders' Equity $29,749 $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> Nine Months Ended September 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) $ 527 $ (64) Depreciation, depletion and amortization 587 418 Oil and gas exploration expenses 94 68 Deferred income taxes 109 (193) Gains on sales of assets and investments (31) (129) Changes in components of working capital (372) (427) Net assets from price risk management activities (458) (198) Amortization of production payment transaction (32) (32) Other, net (107) (31) Net Cash Provided by (Used in) Operating Activities 317 (588) Cash Flows From Investing Activities Proceeds from sales of assets and investments 59 441 Capital expenditures (1,231) (953) Equity investments (1,498) (692) Merchant banking investments (487) - Acquisition of subsidiary stock (180) - Business acquisitions, net of cash acquired (87) (77) Other, net (93) (215) Net Cash Used in Investing Activities (3,517) (1,496) Cash Flows From Financing Activities Net increase in short-term borrowings 1,997 723 Issuance of long-term debt 1,253 2,059 Repayment of long-term debt (388) (419) Issuance of company-obligated preferred securities of subsidiaries - 372 Issuance of common stock 867 - Dividends paid (307) (255) Net (acquisition) disposition of treasury stock 6 (396) Other, net (15) (62) Net Cash Provided by Financing Activities 3,413 2,022 Increase (Decrease) in Cash and Cash Equivalents 213 (62) Cash and Cash Equivalents, Beginning of Period 170 256 Cash and Cash Equivalents, End of Period $ 383 $ 194 Changes in Components of Working Capital Receivables $(1,317) $ (95) Payables 860 (124) Other 85 (208) Total $ (372) $ (427) <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 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. The acquisition was consummated in late August. On July 24, 1998 Enron announced a cash offer for all outstanding 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 was unanimously recommended by the board of directors of Wessex. On October 2, 1998, Enron announced that it had received valid acceptances of its offer for Wessex representing more than 90 percent of Wessex's issued ordinary share capital. On the same date, Enron Water (Europe) Plc made payment for 91.9 percent of Wessex's issued ordinary share capital. Further, on October 2, 1998, Enron issued notices to those Wessex ordinary shareholders who had not already accepted the offer, informing them that it intended to exercise its rights under British law to acquire compulsorily all the outstanding ordinary shares of Wessex. The compulsory share acquisition is expected to be consummated in November 1998. The Elektro and Wessex acquisitions were initially financed by short-term indebtedness and bridge loans totaling approximately $3 billion and by approximately $.6 billion of non-recourse debt incurred by Wessex. Although Enron currently has a greater than 50 percent interest in the subsidiary which acquired Elektro, the subsidiary is being presented under the equity method. As a part of the permanent financing structure, which is expected to be in place prior to year-end, management is actively pursuing a sale of 50 percent of the subsidiary. Enron intends to restructure the Wessex financing in a similar manner. On October 30, 1998, Enron, through a wholly-owned subsidiary, announced that it had reached a definitive agreement with Cogen Technologies to acquire its interests in three power plants located in New Jersey, which have an aggregate generating capacity of 1,037 megawatts, for $1.1 billion (including $1.0 billion of non-recourse debt already committed by financial institutions and $130 million of capital to be contributed by the purchasers) and the assumption of approximately $350 million in non-recourse debt. The parties anticipate closing the transaction in early 1999. Enron anticipates making the acquisition with another party and expects to own a 50 percent interest. 3. SUPPLEMENTAL CASH FLOW INFORMATION Net cash paid for income taxes for the first nine months of 1998 and 1997 was $51 million and $43 million, respectively. Cash paid for interest expense for the same periods, net of amounts capitalized, was $419 million and $282 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 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 has filed a petition for review with the Oregon Supreme Court. The OPUC has also filed such a petition for review. Also 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. 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. 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> Nine Months Ended Third Quarter September 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Numerator: Net income (loss) $ 168 $ 134 $ 527 $ (64) Preferred stock dividends (4) (5) (13) (13) Numerator for basic earnings per share - income available to common shareholders 164 129 514 (77) Effect of dilutive securities: Preferred stock dividends(a) 4 5 13 - Numerator for diluted earnings per share - income available to common shareholders after assumed conversions $ 168 $ 134 $ 527 $ (77) Denominator: Denominator for basic earnings per share - weighted-average shares 329 294 318 268 Effect of dilutive securities: Preferred stock(a) 18 18 18 - Employee stock options(a) 8 4 7 - Other puts and forwards(a) 1 1 1 - Dilutive potential common shares 27 23 26 - Denominator for diluted earnings per share - adjusted weighted- average shares and assumed conversions 356 317 344 268 Basic earnings (loss) per share $0.50 $0.44 $1.62 $(0.29) Diluted earnings (loss) per share $0.47 $0.42 $1.53 $(0.29) <FN> (a) For the nine months ended September 30, 1997, the dividends and conversion of preferred stock have been excluded from the computation because they are antidilutive. </TABLE> 6. COMPREHENSIVE INCOME Comprehensive income includes the following (in millions): <TABLE> <CAPTION> Nine Months Ended Third Quarter September 30, 1998 1997 1998 1997 <S> <C> <C> <C> <C> Earnings (loss) on common stock $ 164 $ 129 $ 514 $ (77) Other comprehensive income: Foreign currency translation adjustment (11) - (22) (2) Total comprehensive income (loss) $ 153 $ 129 $ 492 $ (79) </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 Third Quarter 1998 vs. Third 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 third quarter 1998 net income was $168 million compared to $134 million in the third 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. Items impacting comparability are discussed in the respective segment results. Net income (loss) includes the following (in millions): <TABLE> <CAPTION> Third Quarter 1998 1997 <S> <C> <C> After-tax results from: Core businesses $ 186 $ 163 Retail Energy Services (18) (16) 168 147 Items impacting comparability: J-Block contract restructuring charge - (13) Net income $ 168 $ 134 </TABLE> Basic and diluted earnings (loss) per share of common stock were as follows: <TABLE> <CAPTION> Third Quarter 1998 1997 <S> <C> <C> Basic earnings per share $ 0.50 $0.44 Diluted earnings (loss) per share: Results from core businesses $ 0.52 $ 0.51 Results from Retail Energy Services (0.05) (0.05) Items impacting comparability: J-Block contract restructuring charge - (0.04) Diluted earnings per share $ 0.47 $0.42 </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> Third Quarter 1998 1997 <S> <C> <C> Exploration and Production $ 25 $ 49 Transportation and Distribution: Gas Pipeline Group 69 71 Portland General 61 51 Wholesale Energy Operations and Services 277 173 Retail Energy Services (23) (25) Corporate and Other (4) (8) Income before interest, minority interests and taxes $ 405 $ 311 </TABLE> Exploration and Production Enron's exploration and production operations are conducted by Enron Oil & Gas Company (EOG). IBIT of Exploration and Production, which includes EOG's results and results of hedges placed by Enron on commodity positions not hedged by EOG, totaled $25 million and $49 million for the third quarter of 1998 and 1997, respectively. Wellhead volume and price statistics (including intercompany amounts) are as follows: <TABLE> <CAPTION> Third Quarter 1998 1997 <S> <C> <C> Natural gas volumes (MMcf/d)(a) North America 798 748 Trinidad 163 115 India 58 34 Total 1,019 897 Average natural gas prices ($/Mcf) North America $1.75 $1.91 Trinidad 1.03 1.04 India 2.34 2.93 Composite 1.67 1.84 Crude oil/condensate volumes (MBbl/d)(a) North America 19.4 14.8 Trinidad 3.1 3.4 India 5.1 2.4 Total 27.6 20.6 Average crude oil/condensate prices ($/Bbl) North America $12.39 $18.88 Trinidad 11.37 18.91 India 11.59 18.21 Composite 12.13 18.81 <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> Third Quarter 1998 1997 <S> <C> <C> Net revenues $199 $193 Operating expenses 40 38 Exploration expenses 34 22 Depreciation, depletion and amortization 84 72 Taxes, other than income taxes 14 13 Other income, net (2) 1 Income before interest, minority interests and taxes $ 25 $ 49 </TABLE> Net Revenues Exploration and Production's revenues, net of cost of gas sold in connection with natural gas marketing, increased $6 million in the third quarter of 1998 as compared to the same period in 1997, primarily due to increased production volumes of natural gas and crude oil and condensate, partially offset by lower wellhead natural gas and crude oil and condensate prices. Costs and Expenses Operating expenses, including taxes other than income taxes, depreciation, depletion and amortization and exploration expenses increased primarily due to increased production volumes and increased 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). Gas Pipeline Group. The following table summarizes total volumes transported for each of Enron's interstate natural gas pipelines. <TABLE> <CAPTION> Third Quarter 1998 1997 <S> <C> <C> Total Volumes Transported (Bbtu/d)(a) Northern Natural Gas 3,792 4,063 Transwestern Pipeline 1,615 1,453 Florida Gas Transmission 1,471 1,486 Northern Border Pipeline 1,723 1,740 <FN> (a) Reflects 100% of each entity's throughput volumes. </TABLE> Significant components of IBIT are as follows (in millions): <TABLE> <CAPTION> Third Quarter 1998 1997 <S> <C> <C> Net revenues $144 $143 Operating expenses 68 77 Depreciation and amortization 17 16 Equity in earnings 8 11 Other income, net 2 10 Income before interest and taxes $ 69 $ 71 </TABLE> Net Revenues Revenues, net of cost of sales, of Gas Pipeline Group (GPG) increased $1 million in the third quarter of 1998 as compared to the same period in 1997 despite a decrease in total volumes transported. The change in net revenues is primarily a result of increased average transport rates. Costs and Expenses Operating expenses decreased $9 million during the third quarter of 1998 as compared to the same period in 1997, primarily due to lower overhead costs. Other Income, net Other income, net decreased $8 million in the third quarter of 1998 as compared to the third quarter of 1997, primarily as a result of the resolution in 1997 of certain liabilities previously reserved. Portland General. For the third quarter of 1998, Portland General realized IBIT of $61 million as compared to $51 million in the same period in 1997, as follows (in millions): <TABLE> <CAPTION> Third Quarter 1998 1997 <S> <C> <C> Revenues $280 $386 Purchased power and fuel 104 221 Operating expenses 76 69 Depreciation and amortization 47 45 Other income, net 8 - Income before interest and taxes $ 61 $51 </TABLE> Revenues Revenues of Portland General declined $106 million in the third quarter of 1998 as compared to the same period in 1997, primarily due to the transition of the majority of its electricity wholesale business to the Wholesale Energy Operations and Services segment beginning January 1, 1998, partially offset by an $8 million reduction in 1997 revenues resulting from an Oregon excise tax refund that was returned by PGE to its customers that resulted in a corresponding decrease in tax expense. Costs and Expenses Costs and expenses decreased $108 million in the third quarter of 1998 as compared to the third quarter of 1997, primarily as a result of the transition of its electricity wholesale business to the Wholesale Energy Operations and Services segment. Other income, net Other income, net increased $8 million in the third quarter of 1998 as compared to the same period of 1997, primarily due to Portland General's equity in earnings of a telecommunications joint venture created in 1998. Statistics for PGE for the third quarter of 1998 and 1997 are as follows: <TABLE> <CAPTION> Third Quarter 1998 1997 <S> <C> <C> Electricity Sales (Thousand MWh)(a) Residential 1,454 1,391 Commercial 1,861 1,831 Industrial 1,074 1,093 Total Retail 4,389 4,315 Wholesale(c) 2,675 8,556 Total Electricity Sales 7,064 12,871 Average Billed Revenue (cents per kWh) Residential 6.43 5.71 Commercial 5.07 5.01 Industrial 3.37 3.45 Total Retail 4.47 4.84 Wholesale 2.61 2.10 Total Sales 3.88 3.02 Resource Mix Coal 19% 7% Combustion Turbine 17 5 Hydro 7 4 Total Generation 43 16 Firm Purchases 47 77 Secondary Purchases 10 7 Total Resources 100% 100% Average Variable Power Cost (Mills/kWh)(b) Generation 9.6 8.8 Firm Purchases 18.8 19.2 Secondary Purchases 32.1 13.0 Total Average Variable Power Cost 17.3 17.6 Retail Customers (end of period, thousands) 698 681 <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> 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 as well as a leader in the development, construction 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> Third Quarter 1998 1997 <S> <C> <C> Asset Development and Construction $ 51 $ 14 Cash and Physical 137 4 Risk Management 44 68 Finance and Investing 81 126 Unallocated expenses (36) (39) Income before interest, minority interests and taxes $277 $173 </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 $51 million in the third quarter of 1998 from $14 million in the same period of 1997 primarily as a result of earnings related to the sale of an interest in a project in the construction phase, 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> Third Quarter 1998 1997 <S> <C> <C> Physical Volumes (BBtue/d)(a)(b) Gas: United States 7,749 7,321 Canada 3,656 2,353 Europe 1,176 748 Other 4 - 12,585 10,422 Transport Volumes 643 456 Total Gas Volumes 13,228 10,878 Oil 2,596 684 Liquids 652 858 Electricity(c) 17,684 7,854 Total 34,160 20,274 Electricity Volumes Marketed (Thousand MWh) United States 162,527 72,238 Europe 165 19 Total 162,692 72,257 Financial Settlements (Notional)(BBtue/d) 83,653 51,953 <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 to $137 million in the third quarter of 1998 as compared to $4 million in the same period of 1997 primarily due to earnings related to Enron's international assets and increased profits from both gas and power marketing. The volume of electricity marketed increased over 100% from the third quarter of 1997 while gas volumes marketed increased over 20% in the same period. 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 $24 million in the third quarter of 1998 as compared to the third quarter of 1997, primarily due to fewer originations in Europe, partially offset by increased North American originations. 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 decreased to $81 million in the third quarter of 1998 as compared to $126 million in the same period of 1997, primarily as a result of fewer originations and the decline in value of Enron's investments, net of hedging activities, caused by general market conditions, partially offset by gains on restructurings and sales of investments. Unallocated Expenses. Net unallocated expenses such as rent, systems expenses and other support group costs decreased in 1998 by $3 million. Investing Activity. Included in the Enron Wholesale business lines described above, for the third quarter of 1998, was approximately $200 million of gross margin (before certain direct and indirect expenses) resulting from the management of investments, as compared with approximately $150 million during the third 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 $200 million and $80 million for the quarter ended September 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 $23 million in the third quarter of 1998 compared to a loss of $25 million in the third quarter of 1997. These results primarily reflect the costs associated with securing new contracts and developing the commodity, capital and services capability to deliver on contracts signed to date by Energy Services. Corporate and Other Corporate and Other, which includes results of Enron Renewable Energy Corp., EOTT Energy Corp. (EOTT) and the operations of Enron's methanol and MTBE plants, realized a loss before interest, minority interests and income tax of $4 million in the third quarter of 1998 compared to a loss of $8 million for the same period in 1997. Interest and Related Charges, net Interest and related charges, net is reported net of interest capitalized of $17 million and $5 million for the third quarter of 1998 and 1997, respectively. The net expense increased $12 million in the third quarter of 1998 as compared to the same period of 1997, primarily due to higher debt levels, including approximately $1.5 billion of long-term debt issued between the fourth quarter of 1997 and the third quarter of 1998 and approximately $1.3 billion of short-term debt to fund the initial financing of the Elektro acquisition. See Note 2 to the Consolidated Financial Statements. Dividends on Company-Obligated Preferred Securities of Subsidiaries Dividends on company-obligated preferred securities of subsidiaries was $19 million in the third quarter of 1998 and 1997. Minority Interests Minority interests decreased $6 million in the third quarter of 1998 compared to the same period in 1997, primarily due to 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 third quarter of 1998, partially offset by 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. Income Tax Expense Income taxes increased during the third quarter of 1998 as compared to the third quarter of 1997 primarily as a result of increased earnings. 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 Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997 RESULTS OF OPERATIONS Consolidated Net Income Enron reported net income of $527 million for the first nine months of 1998 compared to a loss of $64 million during the same period in 1997. Net income (loss) includes the following (in millions): <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 <S> <C> <C> After-tax results from: Core businesses $593 $ 448 Retail Energy Services (66) (41) 527 407 Items impacting comparability(a): Gains on sales of liquids assets - 66 J-Block contract restructuring charge - (463) Charge to reflect depressed MTBE margin on committed production - (74) Net income (loss) $527 $ (64) <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> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Basic earnings (loss) per share $ 1.62 $(0.29) Diluted earnings (loss) per share: Results from core businesses $ 1.72 $ 1.56 Results from Retail Energy Services (0.19) (0.14) Items impacting comparability: Gains on sales of liquids assets - 0.23 J-Block contract restructuring charge - (1.61) Charge to reflect depressed MTBE margins on committed production - (0.26) Effect of anti-dilution(a) - (0.07) Diluted earnings (loss) per share $ 1.53 $(0.29) <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 $0.07 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> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Exploration and Production $ 97 $ 121 Transportation and Distribution: Gas Pipeline Group 267 381 Portland General 202 51 Wholesale Energy Operations and Services 767 470 Retail Energy Services (93) (64) Corporate and Other (19) (767) Income (loss) before interest, minority interests and taxes $1,221 $ 192 </TABLE> Exploration and Production EOG reported IBIT of $97 million in the first nine months of 1998 compared to $121 million for the same period in 1997. The 1998 results includes EOG's results and hedges placed by Enron on commodity positions not hedged by EOG. Wellhead volume and price statistics (including intercompany amounts) are as follows: <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Natural gas volumes (MMcf/d)(a) North America 755 756 Trinidad 135 114 India 53 11 Total 943 881 Average natural gas prices ($/Mcf) North America $1.87 $2.09 Trinidad 1.06 1.04 India 2.52 2.93 Composite 1.79 1.96 Crude oil/condensate volumes (MBbl/d)(a) North America 16.5 13.8 Trinidad 2.9 3.5 India 4.7 1.8 Total 24.1 19.1 Average crude oil/condensate prices ($/Bbl) North America $13.18 $19.72 Trinidad 12.85 18.88 India 13.31 20.78 Composite 13.17 19.66 <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> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Net revenues $584 $545 Operating expenses 119 112 Exploration expenses 94 68 Depreciation, depletion and amortization 229 204 Taxes, other than income taxes 42 43 Other income (expense), net (3) 3 Income before interest, minority interests and taxes $ 97 $121 </TABLE> Net Revenues Exploration and Production's revenues, net of cost of gas sold in connection with natural gas marketing, increased $39 million in the first nine months of 1998 as compared to the same period in 1997. Total production volumes increased in the first nine months of 1998 as compared with the first nine months 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 approximately $1 million in the first nine months of 1998, an improvement from the prior year, which reflected a reduction of $55 million in net revenues. Costs and Expenses Operating expenses, depreciation, depletion and amortization and exploration expenses increased primarily due to increased production volumes, increased 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> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Total Volumes Transported (Bbtu/d)(a) Northern Natural Gas 4,053 4,316 Transwestern Pipeline 1,649 1,399 Florida Gas Transmission 1,323 1,389 Northern Border Pipeline 1,766 1,800 <FN> (a) Reflects 100% of each entity's throughput volumes. </TABLE> Significant components of IBIT are as follows (in millions): <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Net revenues $473 $488 Operating expenses 205 226 Depreciation and amortization 50 50 Equity in earnings 28 29 Other income, net 21 38 IBIT before items impacting comparability 267 279 Gains on sales of liquids assets - 102 Income before interest and taxes $267 $381 </TABLE> Net Revenues Revenues, net of cost of sales, of GPG declined $15 million in the first nine months 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 $21 million during the first nine months of 1998 as compared to the same period in 1997. The decline is primarily due to reduced expenses following the sale of natural gas liquids assets in the first half of 1997 and to lower overhead costs. Other Income, net Other income, net decreased $17 million during the first nine months of 1998 as compared to the same period in 1997. The decrease was primarily due to income recognized in 1997 related to liquids assets sold in 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 nine months of 1998, Portland General realized IBIT of $202 million, compared with $51 million for the three month period from July 1, 1997 to September 30, 1997, as follows (in millions): <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Revenues $869 $386 Purchased power and fuel 322 221 Operating expenses 230 69 Depreciation and amortization 136 45 Other income, net 21 - Income before interest and taxes $202 $ 51 </TABLE> The results for the first nine months of 1998 include the impact of the warmer than normal winter, increased operating expenses related to the January 1998 ice storm in PGE's customer service area and the transfer of the majority of its electricity wholesale business to the Enron Wholesale segment. Other income of $21 million in 1998 includes the equity in earnings of a telecommunications joint venture. Statistics for PGE for the first nine months of 1998 and 1997 (including amounts for the first six months of 1997 for comparative purposes only) are as follows: <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Electricity Sales (Thousand MWh)(a) Residential 5,054 5,011 Commercial 5,134 5,186 Industrial 3,170 3,173 Total Retail 13,358 13,370 Wholesale (c) 8,632 22,043 Total Electricity Sales 21,990 35,413 Average Billed Revenue (cents per kWh) Residential 6.21 5.59 Commercial 5.07 5.07 Industrial 3.03 3.43 Total Retail 4.86 4.87 Wholesale 2.04 1.80 Total Sales 3.86 3.01 Resource Mix Coal 15% 6% Combustion Turbine 9 2 Hydro 9 6 Total Generation 33 14 Firm Purchases 60 79 Secondary Purchases 7 7 Total Resources 100% 100% Average Variable Power Cost (Mills/kWh)(b) Generation 8.0 5.3 Firm Purchases 16.3 16.0 Secondary Purchases 21.8 11.9 Total Average Variable Power Cost 15.0 15.0 Retail Customers (end of period, thousands) 698 681 <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> Wholesale Energy Operations and Services The following table reflects IBIT for each of Enron Wholesale's business lines (in millions): <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Asset Development and Construction $ 113 $ 53 Cash and Physical 391 222 Risk Management 83 113 Finance and Investing 286 180 Unallocated expenses (106) (98) Income before interest, minority interests and taxes $ 767 $470 </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 $113 million in the first nine months of 1998 from $53 million in the same period of 1997, primarily as a result of earnings related to the sale of an interest in a project in the construction phase, 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> Nine Months Ended September 30, 1998 1997 <S> <C> <C> Physical Volumes (BBtue/d)(a)(b) Gas: United States 7,242 7,749 Canada 3,279 2,195 Europe 1,121 594 Other 3 - 11,645 10,538 Transport Volumes 575 451 Total Gas Volumes 12,220 10,989 Oil 2,298 600 Liquids 619 1,061 Electricity(c) 11,838 5,264 Total 26,975 17,914 Electricity Volumes Marketed (Thousand MWh) United States 322,874 143,621 Europe 287 87 Total 323,161 143,708 Financial Settlements (Notional)(BBtue/d) 73,711 45,883 <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 $169 million in the first nine months of 1998 as compared to the same period of 1997 primarily due to earnings related to Enron's domestic and international assets and increased profits from power marketing where volumes increased over 100% in 1998, partially offset by increased expenses. Risk Management. Earnings from risk management decreased 27% in the first nine months of 1998 as compared to the first nine months of 1997 primarily due to fewer originations in Europe, partially offset by increased North American originations. Finance and Investing. Earnings from the finance and investing operations increased to $286 million in the first nine months of 1998 as compared to $180 million in the same period of 1997 as a result of increased originations in the North American and European markets and increased earnings associated with Enron energy investments net of hedging activities. 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 nine months ended September 30, 1998, was approximately $520 million of gross margin (before certain direct and indirect expenses) resulting from the management of investments, as compared with approximately $220 million during the nine months ended September 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 $700 million and $180 million for the nine months ended September 30, 1998 and 1997, respectively. Retail Energy Services Energy Services reported an operating loss before interest, minority interest and taxes of $93 million in the first nine months of 1998 compared to a loss of $64 million for the same period of 1997. These results primarily reflect the costs associated with securing new contracts and 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 $19 million in the first nine months of 1998 compared to a loss of $767 million for the same period in 1997. Significant components of IBIT are as follows: <TABLE> <CAPTION> Nine Months Ended September 30, 1998 1997 <S> <C> <C> IBIT before items impacting comparability $ (19) $ 8 Items impacting comparability: J-Block gas contract restructuring charge - (675) Charge to reflect depressed MTBE margins on committed production - (100) IBIT $ (19) $(767) </TABLE> Interest and Related Charges, net Interest and related charges, net, is reported net of interest capitalized of $33 million and $13 million for the first nine months of 1998 and 1997, respectively. The net expense increased $127 million in the first nine months 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, $1.1 billion of debt assumed in connection with the merger with PGC, the issuance of $1.5 billion of debt by Enron between the end of 1997 and the end of the third quarter of 1998 and the increase in short-term borrowing mainly related to the initial financing of the Elektro acquisition. Dividends on Company-Obligated Preferred Securities of Subsidiaries Dividends on company-obligated preferred securities of subsidiaries increased from $50 million in the first nine months of 1997 to $58 million in the first nine months 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 to $60 million in the first nine months 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 nine months of 1998. Income Tax Expense Income taxes increased during the first nine 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 for governments of countries around the world where Enron does business. State of Readiness Enron's Board of Directors have been briefed about the Year 2000 problems generally and as it may affect Enron. The Board has adopted a Year 2000 plan (the "Plan") covering all of Enron's business units. The aim of the Plan is to take reasonable steps to prevent Enron's mission-critical functions from being impaired due to the Year 2000 problem. "Mission-critical" functions are those critical functions whose loss would cause an immediate stoppage of or significant impairment to major business areas (a major business area is one of material importance to Enron's business). 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. As part of the overall Plan, each business unit in turn has developed, and is implementing, a Year 2000 plan specific to it. Enron also has engaged outside consultants, technicians and other external resources to aid in formulating and implementing the Plan. Enron is implementing the Plan, which will be modified as events warrant. Under the Plan, Enron will continue to inventory its mission-critical computer hardware and software systems and embedded chips (computer chips with date-related functions, contained in a wide variety of devices); assess the effects of Year 2000 problems on the mission-critical functions of Enron's business units; remedy systems, software and embedded chips in an effort to avoid material disruptions or other material adverse effects on mission-critical functions, processes and systems; verify and test the mission-critical systems to which remediation efforts have been applied; and attempt to mitigate those mission-critical aspects of the Year 2000 problem that are not remediated by January 1, 2000, including the development of contingency plans to cope with the mission-critical consequences of Year 2000 problems that have not been identified or remediated by that date. The Plan recognizes that the computer, telecommunications, and other systems ("Outside Systems") of outside entities ("Outside Entities") have the potential for major, mission-critical, adverse effects on 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 identifying and contacting Outside Entities whose systems, in Enron's judgment, have or may have a substantial effect on Enron's ability to continue to conduct the mission-critical aspects of its 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." Enron will attempt reasonably to coordinate with these Outside Entities in an ongoing effort to obtain assurance that the Outside Systems that are mission-critical to Enron 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, analyze, convert (where necessary), test, and develop contingency plans for Enron's connections to these mission-critical Outside Systems and to ascertain the extent to which they are, or can be made to be, Year 2000 ready and compatible with Enron's mission- critical systems. It is important to recognize that the processes of inventorying, assessing, analyzing, converting (where necessary), testing, and developing contingency plans for mission-critical items in anticipation of the Year 2000 event are necessarily iterative processes. That is, the steps are repeated as Enron learns more about the Year 2000 problem and its effects on Enron's internal systems and on Outside Systems, and about the effects that embedded chips may have on Enron's systems and Outside Systems. As the steps are repeated, it is likely that new problems will be identified and addressed. Enron anticipates that it will continue with these processes through January 1, 2000 and, if necessary based on experience, into the Year 2000 in order to assess and remediate problems that reasonably can be identified only after the start of the new century. As of November 1998, Enron and all its business units are at various stages in implementation of the Plan, as shown in the following tables. The first table deals with the Enron business units' mission-critical internal systems (including embedded chips) and the second deals with the business units' mission-critical Outside Systems. Any notation of "complete" conveys the fact only that the initial iteration of this phase has been substantially completed. Year 2000 Plan Readiness by Enron Business Unit (Mission-Critical Internal Items) <TABLE> <CAPTION> Contingency Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan <S> <C> <C> <C> <C> <C> <C> <C> Exploration and Production IP IP IP IP IP IP IP Transportation and Distribution: Gas Pipeline Group IP IP IP IP IP IP IP Portland General C C C IP IP IP IP Wholesale: Domestic C C IP IP IP IP TBI Europe C C C IP IP IP IP Other Intl. IP IP IP IP IP IP IP Retail Energy Services C C C IP IP IP IP Corporate and Other C C IP IP IP IP IP <FN> Legend: C = Complete IP = In Process TBI = To Be Initiated </TABLE> Year 2000 Plan Readiness by Enron Business Unit (Mission-Critical Outside Entities) <TABLE> <CAPTION> Contingency Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan <S> <C> <C> <C> <C> <C> <C> <C> Exploration and Production IP IP IP IP IP IP IP Transportation and Distribution: Gas Pipeline Group C IP IP IP IP IP IP Portland General C IP IP IP TBI IP TBI Wholesale: Domestic C IP TBI TBI TBI IP TBI Europe C C IP TBI TBI IP TBI Other Intl. IP IP IP IP IP IP IP Retail Energy Services IP IP IP IP IP IP IP Corporate and Other C IP IP IP IP IP TBI <FN> Legend: C = Complete IP = In Process TBI = To Be Initiated </TABLE> The following tables show, by business unit, historical and estimated completion dates, as applicable, for the initial iteration of various stages of the Plan. The first table deals with the Enron business units' mission- critical internal systems (including embedded chips) and the second deals with the business units' mission-critical Outside Systems. Year 2000 Plan Completion Dates by Enron Business Unit (Mission-Critical Internal Items) <TABLE> <CAPTION> Contingency Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan <S> <C> <C> <C> <C> <C> <C> <C> Exploration and Production 12/98 12/98 3/99 6/99 9/99 9/99 9/99 Transportation and Distribution: Gas Pipeline Group 12/98 2/99 4/99 6/99 7/99 8/99 6/99 Portland General 12/97 10/98 10/98 6/99 9/99 9/99 12/98 Wholesale: Domestic 6/98 8/98 12/98 6/99 6/99 6/99 9/99 Europe 7/98 8/98 8/98 4/99 4/99 7/99 7/99 Other Intl. 3/99 3/99 4/99 6/99 7/99 8/99 6/99 Retail Energy Services 6/98 7/98 8/98 11/98 3/99 6/99 6/99 Corporate and Other 9/98 10/98 1/99 2/99 3/99 6/99 6/99 </TABLE> Year 2000 Plan Completion Dates by Enron Business Unit (Mission-Critical Outside Entities) <TABLE> <CAPTION> Contingency Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan <S> <C> <C> <C> <C> <C> <C> <C> Exploration and Production 3/99 6/99 6/99 9/99 9/99 9/99 9/99 Transportation and Distribution: Gas Pipeline Group 11/98 1/99 4/99 5/99 5/99 6/99 6/99 Portland General 10/98 11/98 11/98 6/99 6/99 6/99 6/99 Wholesale: Domestic 7/98 12/98 3/99 6/99 9/99 9/99 9/99 Europe 6/98 7/98 12/98 8/99 8/99 8/99 8/99 Other Intl. 2/99 2/99 4/99 6/99 7/99 8/99 6/99 Retail Energy Services 1/99 1/99 1/99 1/99 4/99 6/99 6/99 Corporate and Other 10/98 3/99 3/99 6/99 6/99 6/99 12/98 </TABLE> Enron will continue to closely monitor work under the Plan and to revise estimated completion dates for the initial iteration of each listed process. Costs to Address Year 2000 Issues Under the Plan and otherwise, Enron has not incurred material historical costs for Year 2000 awareness, inventory, assessment, analysis, conversion, testing, or contingency planning. Further, Enron anticipates that its future costs for these purposes, including those for implementing its Year 2000 contingency plans, will not be material. Although management believes that its estimates are reasonable, there can be no assurance, for the reasons stated in the "Summary" section below, that the actual costs of implementing the Plan will not differ materially from the estimated costs or that Enron will not be materially adversely affected by Year 2000 issues. Year 2000 Risk Factors Regulatory requirements. Certain of Enron's business units operate in industries that are regulated by governmental authorities. Enron expects to satisfy these regulatory authorities' requirements for achieving Year 2000 readiness. If Enron's reasonable expectations in this regard are in error, and if a regulatory authority should order the temporary cessation of Enron's operations in one or more of these areas, the adverse effect on Enron could be material. Outside Entities could face similar problems that materially adversely affect Enron. Shortage of resources. Between now and Year 2000 there will be increased competition for people with in the technical and managerial skills necessary to deal with the Year 2000 problem. While Enron is taking substantial precautions to recruit and retain sufficient people skilled in dealing with the Year 2000 problem and has hired consultants who bring additional skilled people to deal with the Year 2000 problem as it affects Enron, Enron could face shortages of skilled personnel or other resources, such as Year 2000 ready computer chips, and these shortages might delay or otherwise impair Enron's progress toward making its mission-critical systems Year 2000 ready. Outside Entities could face similar problems that materially adversely affect Enron. Enron believes that the possible impact of the shortage of skilled people is not, and will not be, unique to Enron. Potential shortcoming. Enron estimates that its mission- critical systems, domestic and international, will be Year 2000-ready substantially before January 1, 2000. However, there is no assurance that the Plan will succeed in accomplishing its purposes or that unforeseen circumstances will not arise during implementation of the Plan that would materially and adversely affect Enron. Cascading effect. Enron and its business units are taking reasonable steps to identify, assess, and, where appropriate, replace devices that contain embedded chips. Despite these reasonable efforts, Enron anticipates that it will not be able to find and remediate all embedded chips in systems in Enron's business units. Further, Enron anticipates that Outside Entities on which Enron depends also will not be able to find and remediate all embedded chips in their systems. Some of the embedded chips that fail to operate or that produce anomalous results may create system disruptions or failures. Some of these disruptions or failures may spread from the systems in which they are located to other systems in a cascade. These cascading failures may have adverse effects upon Enron's ability to maintain safe operations and may also have adverse effects upon Enron's ability to serve its customers and otherwise to fulfill certain contractual and other legal obligations. The embedded chip problem is widely recognized as one of the more difficult aspects of the Year 2000 problem across industries and throughout the world. Enron believes that the possible adverse impact of the embedded chip problem is not, and will not be, unique to Enron. Third parties. Enron cannot assure that suppliers upon which it depends for essential goods and services will convert and test their mission-critical systems and processes in a timely and effective manner. Failure or delay to do so by all or some of these entities, including U.S. federal, state or local governments and foreign governments, could create substantial disruptions having a material adverse affect on Enron's business. Contingency Plans As part of the Plan, Enron is developing contingency plans that deal with two aspects of the Year 2000 problem: (1) that Enron, despite its good-faith, reasonable efforts, may not have satisfactorily remediated all of its internal mission-critical systems; and (2) that Outside Systems may not be Year 2000 ready, despite Enron's good-faith, reasonable efforts to work with Outside Entities. Enron's contingency plans are being designed to minimize the disruptions or other adverse effects resulting from Year 2000 incompatibilities regarding these mission-critical functions or systems, and to facilitate the early identification and remediation of mission-critical Year 2000 problems that first manifest themselves after January 1, 2000. Enron's contingency plans will contemplate an assessment of all its mission-critical internal information technology systems and its internal operational systems that use computer-based controls. This process will commence in the early minutes of January 1, 2000, and continue for hours, days, or weeks as circumstances require. Further, Enron will in that time frame assess any mission-critical disruptions due to Year 2000-related failures that are external to Enron. The assessment process will cover, for example, loss of electrical power from utilities; telecommunications services from carriers; or building access, security, or elevator service in facilities occupied by Enron. Enron's contingency plans include the creation of teams that will be standing by on the evening of December 31, 1999, prepared to respond rapidly and otherwise as necessary to mission-critical Year 2000-related problems as soon as they become known. The composition of teams that are assigned to deal with Year 2000 problems will vary according to the nature, mission-criticality, and location of the problem. Because Enron operates internationally, some of its Year 2000 contingency teams will be stationed at Enron's mission-critical facilities overseas. Worst Case Scenario The Securities and Exchange Commission requires that public companies forecast the most reasonably likely worst case Year 2000 scenario. In doing so, Enron is assuming that the company's Year 2000 plan will not be effective. Analysis of the most reasonably likely worst case Year 2000 scenarios Enron may face leads to contemplation of the following possibilities which, though unlikely in some or many cases, must be included in any consideration of worst cases: widespread failure of electrical, gas, and similar supplies by utilities serving Enron domestically and internationally; widespread disruption of the services of communications common carriers domestically and internationally; similar disruption to means and modes of transportation for Enron and its employees, contractors, suppliers, and customers; significant disruption to Enron's ability to gain access to, and remain working in, office buildings and other facilities; the failure of substantial numbers of Enron's mission-critical information (computer) hardware and software systems, including both internal business systems and systems (such as those with embedded chips) controlling operational facilities such as electrical generation, transmission, and distribution systems and oil and gas plants and pipelines, domestically and internationally; and the failure, domestically and internationally, of Outside Systems, the effects of which would have a cumulative material adverse impact on Enron's mission-critical systems. Among other things, Enron could face substantial claims by customers or loss of revenues due to service interruptions, inability to fulfill contractual obligations, inability to account for certain revenues or obligations or to bill customers accurately and on a timely basis, and increased expenses associated with litigation, stabilization of operations following mission-critical failures, and the execution of contingency plans. Enron could also experience an inability by customers, traders, and others to pay, on a timely basis or at all, obligations owed to Enron. Under these circumstances, the adverse effect on Enron, and the diminution of Enron's revenues, would be material, although not quantifiable at this time. Further in this scenario, the cumulative effect of these failures could have a substantial adverse effect on the economy, domestically and internationally. The adverse effect on Enron, and the diminution of Enron's revenues, from a domestic or global recession or depression also is likely to be material, although not quantifiable at this time. Enron will continue to monitor business conditions with the aim of assessing and quantifying material adverse effects, if any, that result or may result from the Year 2000 problem. Summary Enron has a Plan to deal with the Year 2000 challenge and believes that it will be able to achieve substantial Year 2000 readiness with respect to the mission critical systems that it controls. However, 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 these are: the difficulty of locating "embedded" chips that may be in a great variety of mission-critical hardware used for process or flow control, environmental, transportation, access, communications and other systems; the difficulty of inventorying, assessing, remediating, verifying and testing Outside Systems; the difficulty in locating all mission- critical software (computer code) internal to Enron that is not Year 2000 compatible; 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 mission-critical Enron systems or Outside Systems. Accordingly, there can be no assurance that all of Enron's Systems and 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 reasonable efforts under its Year 2000 Plan, there are mission-critical Year 2000-related failures that create substantial disruptions to Enron's business, the adverse impact on Enron's business could be material. Additionally, 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. Moreover, the estimated costs 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 requires that costs for start-up activities and organization costs be expensed as incurred and not capitalized as had previously been allowed. 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 adopting SOP 98-5, and it expects to recognize an after-tax charge of approximately $100 million in the first quarter of 1999. This charge will be reflected net of tax as a separate line item above net income. 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 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 or physical base contracts. FINANCIAL CONDITION <TABLE> Cash Flows <CAPTION> Nine Months Ended September 30, (In Millions) 1998 1997 <S> <C> <C> Cash provided by (used in): Operating activities $ 317 $ (588) Investing activities (3,517) (1,496) Financing activities 3,413 2,022 </TABLE> Cash provided by operating activities totaled $317 million in the first nine months of 1998 as compared to $588 million used 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 an increase in net assets from price risk management activities. Cash used in investing activities totaled $3,517 million in the first nine months of 1998 as compared to $1,496 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), capital expenditures, equity investments (primarily Elektro) 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 $3,413 million in the first nine months of 1998 as compared to $2,022 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 $2,862 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. To ensure sufficient liquidity, Enron has increased its available credit lines by approximately $2 billion to over $5 billion. CAPITALIZATION Total capitalization at September 30, 1998 was $18.7 billion. Debt as a percentage of total capitalization increased to 51.3% at September 30, 1998 as compared to 44.6% at December 31, 1997 and 50.5% at September 30, 1997. The increase primarily reflects an increase of $3.3 billion of debt in 1998, primarily resulting from new merchant investments made by the Wholesale segment, increased capital expenditures and the acquisition of Elektro (see Note 2 to the Consolidated Financial Statements), partially offset by the issuance, in May 1998, of 17.25 million shares of common stock. In connection with the Elektro transaction, Enron incurred approximately $1.3 billion of short-term indebtedness. Assuming the conversion in late 1998 of 10.5 million Exchangeable Notes into EOG shares held by Enron, the pro forma debt to capitalization percentage would be approximately 50.5% at September 30, 1998. Enron reclassifies short-term borrowings 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. Enron is a party to certain financial contracts which contain provisions for early settlement in the event of a significant market price decline in which Enron's common stock falls below certain levels (prices ranging from $15 to $22.50 per share) or if the credit ratings for Enron's unsecured, senior long-term debt obligations fall below investment grade. The impact of this early settlement could include the issuance of additional shares of Enron common stock. Enron's senior unsecured long-term debt is currently rated BBB+ by Standard & Poor's Corporation and Baa2 by Moody's Investor Services. Enron's continued investment grade status is critical to the success of its wholesale businesses as well as its ability to maintain adequate liquidity. Enron's management believes it will be able to maintain or improve its credit rating. Subsequent event and outlook. In early October, to purchase the outstanding shares of Wessex (see Note 2 to the Consolidated Financial Statements), Enron incurred approximately $700 million of short-term indebtedness and borrowed approximately $1.1 billion under a bridge loan facility. Management is actively pursuing permanent financing for both the Elektro and Wessex acquisitions and anticipates completion prior to year-end. The permanent financing will result in a decrease in Enron's interest in the respective subsidiaries to 50 percent. Proceeds from the issuances will be used to repay advances made by Enron of approximately $2 billion. Management anticipates that the permanent financings for the Elektro and Wessex acquisitions will involve commitments to issue additional common stock in certain events, with the number of shares issuable determined based on future common stock prices. Such events include, among other things,Enron's credit ratings falling below specified levels. Additionally, Enron is in the process of monetizing certain of its portfolio of energy contracts and merchant investments, which would result in proceeds to Enron in excess of $1.5 billion which will be used to reduce debt. 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. 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 and third quarters 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 to $18 million as compared to value at risk of $9 million at December 31, 1997. INFORMATION REGARDING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although Enron believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward looking statements herein include political developments in foreign countries; the ability of Enron to penetrate new retail natural gas and electricity markets in the United States and Europe; the timing and extent of deregulation of energy markets in the United States and in foreign jurisdictions; other regulatory developments in the United States and in foreign countries, including tax legislation and regulations; the extent of efforts by governments to privatize natural gas and electric utilities and other industries; the timing and extent of changes in commodity prices for crude oil, natural gas, electricity, foreign currency and interest rates; the extent of 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, water and other infrastructure projects; the ability of counterparties to financial risk management instruments and other contracts with Enron to meet their financial commitments to Enron; Enron's success in implementing its Year 2000 Plan, the effectiveness of Enron's Year 2000 Plan, and the Year 2000 readiness of Outside Entities; and Enron's ability to access the capital markets and equity markets during the periods covered by the forward looking statements, which will depend on general market conditions and Enron's ability to maintain or increase the credit ratings for its unsecured senior long- term debt obligations.
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 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 October 16, 1998 to report the acquisition of Wessex Water Plc. Current Report on Form 8-K/A filed November 6, 1998 to include financial statements of Wessex Water Plc as of March 31, 1998 and 1997 and pro forma financial statements for the acquisition of Wessex Water Plc as of December 31, 1997 and June 30, 1998.
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: November 13, 1998 By: RICHARD A. CAUSEY Richard A. Causey Senior Vice President and Chief Accounting, Information and Administrative Officer (Principal Accounting Officer)