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, 1999 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, 1999 Common Stock, No Par Value 356,916,343 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 June 30, 1999 and 1998 and Six Months Ended June 30, 1999 and 1998 3 Consolidated Balance Sheet - June 30, 1999 and December 31, 1998 4 Consolidated Statement of Cash Flows - Six Months Ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 41 ITEM 4. Submission of Matters to a Vote of Security Holders 41 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 Six Months Ended June 30, June 30, 1999 1998 1999 1998 <S> <C> <C> <C> <C> Revenues $9,672 $6,557 $17,304 $12,239 Costs and Expenses Cost of gas, electricity and other products 8,347 5,528 14,647 10,087 Operating expenses 780 570 1,425 1,007 Oil and gas exploration expenses 20 26 45 60 Depreciation, depletion and amortization 236 190 451 372 Taxes, other than income taxes 56 45 118 103 9,439 6,359 16,686 11,629 Operating Income 233 198 618 610 Other Income and Deductions Equity in earnings of unconsolidated affiliates 163 109 231 153 Gains on sales of assets and investments - 4 12 4 Other income, net 73 34 141 49 Income Before Interest, Minority Interests and Income Taxes 469 345 1,002 816 Interest and Related Charges, net 175 131 350 264 Dividends on Company-Obligated Preferred Securities of Subsidiaries 19 20 38 39 Minority Interests 23 19 56 44 Income Tax 30 30 83 110 Net Income Before Cumulative Effect of Accounting Changes 222 145 475 359 Cumulative Effect of Accounting Changes, net of tax - - (131) - Net Income 222 145 344 359 Preferred Stock Dividends 19 5 23 9 Earnings on Common Stock $ 203 $ 140 $ 321 $ 350 Earnings Per Share of Common Stock Basic Before Cumulative Effect of Accounting Changes $ 0.57 $ 0.44 $ 1.30 $ 1.12 Cumulative Effect of Accounting Changes - - (0.38) - Basic Earnings per Share $ 0.57 $ 0.44 $ 0.92 $ 1.12 Diluted Before Cumulative Effect of Accounting Changes $ 0.54 $ 0.42 $ 1.22 $ 1.06 Cumulative Effect of Accounting Changes - - (0.35) - Diluted Earnings per Share $ 0.54 $ 0.42 $ 0.87 $ 1.06 Average Number of Common Shares Used in Computation Basic 354 319 348 312 Diluted 386 346 379 338 <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, 1999 1998 ASSETS <S> <C> <C> Current Assets Cash and cash equivalents $ 286 $ 111 Trade receivables 2,730 2,060 Other receivables 792 833 Assets from price risk management activities 1,756 1,904 Inventories 557 514 Other 772 511 Total Current Assets 6,893 5,933 Investments and Other Assets Investments in and advances to unconsolidated affiliates 4,779 4,433 Assets from price risk management activities 2,364 1,941 Goodwill 2,696 1,949 Other 5,599 4,437 Total Investments and Other Assets 15,438 12,760 Property, Plant and Equipment, at cost 17,507 15,792 Less accumulated depreciation, depletion and amortization 5,691 5,135 Net Property, Plant and Equipment 11,816 10,657 Total Assets $34,147 $29,350 <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, 1999 1998 LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> Current Liabilities Accounts payable $ 2,603 $ 2,380 Liabilities from price risk management activities 2,386 2,511 Other 1,457 1,216 Total Current Liabilities 6,446 6,107 Long-Term Debt 8,979 7,357 Deferred Credits and Other Liabilities Deferred income taxes 2,352 2,357 Liabilities from price risk management activities 2,068 1,421 Other 1,620 1,916 Total 6,040 5,694 Minority Interests 2,475 2,143 Company-Obligated Preferred Securities of Subsidiaries 1,001 1,001 Shareholders' Equity Second preferred stock, cumulative, no par value 131 132 Series A Junior Voting Convertible Preferred Stock, no par value 1,000 - Common stock, no par value 6,588 5,117 Retained earnings 2,369 2,226 Accumulated other comprehensive income (760) (162) Common stock held in treasury (1) (195) Other (121) (70) Total 9,206 7,048 Total Liabilities and Shareholders' Equity $34,147 $29,350 <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, 1999 1998 <S> <C> <C> Cash Flows From Operating Activities Reconciliation of net income to net cash provided by (used in) operating activities Net income $ 344 $ 359 Cumulative effect of accounting changes 131 - Depreciation, depletion and amortization 451 372 Oil and gas exploration expenses 45 60 Deferred income taxes (11) 60 Gains on sales of assets and investments (65) (32) Changes in components of working capital (909) (660) Net assets from price risk management activities 247 (253) Merchant assets and investments: Realized gains on sales (161) (252) Proceeds from sales 561 629 Additions (490) (282) Other operating activities (181) (252) Net Cash Used in Operating Activities (38) (251) Cash Flows From Investing Activities Capital expenditures (969) (585) Equity investments (648) (151) Proceeds from sales of investments and other assets 138 58 Acquisition of subsidiary stock - (180) Business acquisitions, net of cash acquired (40) (25) Other investing activities (340) (254) Net Cash Used in Investing Activities (1,859) (1,137) Cash Flows From Financing Activities Issuance of long-term debt 1,301 305 Repayment of long-term debt (645) (341) Net increase in short-term borrowings 128 769 Issuance of common stock 889 844 Issuance of subsidiary equity 513 - Dividends paid (227) (204) Net disposition of treasury stock 181 7 Other, net (68) 13 Net Cash Provided by Financing Activities 2,072 1,393 Increase in Cash and Cash Equivalents 175 5 Cash and Cash Equivalents, Beginning of Period 111 170 Cash and Cash Equivalents, End of Period $ 286 $ 175 Changes in Components of Working Capital Receivables $ (644) $(1,345) Inventories (37) (155) Payables 120 691 Other (348) 149 Total $ (909) $ (660) <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, 1998 (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 1998 amounts to conform with the 1999 presentation. "Enron" is used from time to time herein as a collective reference to Enron Corp. and its subsidiaries and affiliates. In all material respects, the businesses of Enron are conducted by the subsidiaries and affiliates. 2. CUMULATIVE EFFECT OF ACCOUNTING CHANGES In the first quarter of 1999, Enron recorded an after-tax charge of $131 million to reflect the initial adoption (as of January 1, 1999) of two new accounting pronouncements. In 1998, the AICPA issued Statement of Position 98-5 (SOP 98- 5), "Reporting on the Costs of Start-Up Activities," which requires that costs for all start-up activities and organization costs be expensed as incurred and not capitalized in certain instances, as had previously been allowed. Also in 1998, the Emerging Issues Task Force reached consensus on Issue No. 98-10, "Accounting for Contracts involved in Energy Trading and Risk Management Activities," requiring energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. The first quarter 1999 charge was primarily related to the adoption of SOP 98-5. 3. SUPPLEMENTAL CASH FLOW INFORMATION Net cash paid for income taxes for the first half of 1999 and 1998 was $39 million and $51 million, respectively. Cash paid for interest for the same periods, net of amounts capitalized, was $360 million and $295 million, respectively. Non-Cash Activity. Following the acquisition of an additional 53% interest in Elektro Eletricidade e Servicos S.A. (Elektro), Enron discontinued the use of temporary control in accounting for its interest in Jacare Electrical Distribution Trust (Jacare), the entity that holds Enron's investment in Elektro. As a result, Jacare has been consolidated effective January 1, 1999. Jacare's balance sheet at that date consisted of net assets of approximately $1,160 million, including goodwill of approximately $1,080 million, net property, plant and equipment of approximately $820 million and debt of approximately $900 million. In addition, as of January 1, 1999, Enron's investment in unconsolidated affiliates decreased by approximately $450 million and minority interests increased by approximately $720 million. In March 1999, a joint venture that holds 250,000 shares of Enron Series A Junior Convertible Preferred Stock was amended to allow, among other things, control to be shared equally between Enron and the third-party investor. Consequently, the joint venture's financial statements are no longer consolidated by Enron, resulting in an increase in Enron's investment in unconsolidated affiliates of approximately $500 million, an increase in preferred stock of $1,000 million and a decrease in minority interests of $500 million. During the first quarter of 1999, Enron issued approximately 3.8 million shares of common stock in connection with the acquisition, by an unconsolidated affiliate, of interests in three power plants in New Jersey. 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 material adverse impact on Enron's financial position or its results of operations. Litigation. In 1995, several parties (the Plaintiffs) filed suit in Harris County District Court in Houston, Texas, against Intratex Gas Company (Intratex), Houston Pipe Line Company and Panhandle Gas Company (collectively, the Enron Defendants), each of which is a wholly-owned subsidiary of Enron. The Plaintiffs were either sellers or royalty owners under numerous gas purchase contracts with Intratex, many of which have terminated. Early in 1996, the case was severed by the Court into two matters to be tried (or otherwise resolved) separately. In the first matter, the Plaintiffs alleged that the Enron Defendants committed fraud and negligent misrepresentation in connection with the "Panhandle program," a special marketing program established in the early 1980s. This case was tried in October 1996 and resulted in a verdict for the Enron Defendants. In the second matter, the Plaintiffs allege that the Enron Defendants violated state regulatory requirements and certain gas purchase contracts by failing to take the Plaintiffs' gas ratably with other producers' gas at certain times between 1978 and 1988. The trial court has certified a class action with respect to ratability claims. On April 30, 1999, the Texas Supreme Court granted Enron's petition for review and agreed to consider Enron's appeal of the class certification. The Enron Defendants deny the Plaintiffs' claims and have asserted various affirmative defenses, including the statute of limitations. The Enron Defendants believe that they have strong legal and factual defenses, and intend to vigorously contest the claims. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. On November 21, 1996, an explosion occurred in or around the Humberto Vidal Building in San Juan, Puerto Rico. The explosion resulted in fatalities, bodily injuries and damage to the building and surrounding property. San Juan Gas Company, Inc. (San Juan), an Enron subsidiary, operated a propane/air distribution system in the vicinity. Although San Juan did not provide service to the building, the National Transportation Safety Board (NTSB) concluded that the probable cause of the incident was propane leaking from San Juan's distribution system. San Juan and Enron strongly disagree. The NTSB found no path of migration of propane from San Juan's system to the building and no forensic evidence that propane fueled the explosion. Enron, San Juan, and four San Juan affiliates have been named, along with several third parties, as defendants in numerous lawsuits filed in U.S. District Court for the district of Puerto Rico and the Superior Court of Puerto Rico. These suits, which seek damages for wrongful death, personal injury, business interruption and property damage, allege that negligence of Enron, San Juan and its affiliates, among others, caused the explosion. Enron, San Juan and its affiliates are vigorously contesting the claims. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. Trojan Investment Recovery. In early 1993, Portland General Electric Company (PGE) ceased commercial operation of the Trojan Nuclear Plant (Trojan). 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 Commission'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. On April 29, 1999, the Oregon Supreme Court accepted the petitions for review of the Oregon Court of Appeals decision. On June 16, 1999, Oregon House Bill 3220 authorizing the OPUC to allow recovery of a return on the undepreciated investment in property retired from service was signed. One of the effects of the bill is to affirm retroactively the OPUC's authority to allow PGE's recovery of a return on its undepreciated investment in the Trojan generating facility. Relying on the new legislation, on July 2, 1999, PGE requested the Oregon Supreme Court to vacate the June 24, 1998 adverse ruling of the Oregon Court of Appeals, affirm the validity of the OPUC's order allowing PGE to recover a return on its undepreciated investment in Trojan and to reverse its decision accepting the Utility Reform Project's petition for review. The Utility Reform Project and the Citizens Utility Board, another party to the proceeding, opposed such request on the ground that an effort is underway to gather signatures to place on the November 2000 ballot a referendum to negate the new legislation. Enron cannot predict the outcome of these actions. Additionally, due to uncertainties in the regulatory process, management cannot predict, with certainty, what ultimate rate-making action the OPUC will take regarding PGE's recovery of a rate of return on its Trojan investment. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. Environmental Matters. Enron is subject to extensive federal, state and local environmental laws and regulations. These laws and regulations require expenditures in connection with the construction of new facilities, the operation of existing facilities and for remediation at various operating sites. The implementation of the Clean Air Act Amendments is expected to result in increased operating expenses. These increased operating expenses are not expected to have a material impact on Enron's financial position or results of operations. The Environmental Protection Agency (EPA) has informed Enron that it is a potentially responsible party at the Decorah Former Manufactured Gas Plant Site (the Decorah Site) in Decorah, Iowa, pursuant to the provisions of the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA, also commonly known as Superfund). The manufactured gas plant in Decorah ceased operations in 1951. A predecessor company of Enron purchased the Decorah Site in 1963. Enron's predecessor did not operate the gas plant and sold the Decorah Site in 1965. The EPA alleges that hazardous substances were released to the environment during the period in which Enron's predecessor owned the site, and that Enron's predecessor assumed the liabilities of the company that operated the plant. Enron contests these allegations. To date, the EPA has identified no other potentially responsible parties with respect to this site. Under the terms of administrative orders, Enron replaced affected topsoil and removed impacted subsurface soils in certain areas of the tract where the plant was formerly located. Enron completed the final removal actions at the site in November 1998 and concluded all remaining site activities in the spring of 1999. Enron submitted a final report on the work conducted at the site to the EPA. Enron does not expect to incur material expenditures in connection with this site. Enron also received from the EPA an Order issued under CERCLA alleging that Enron and two other parties are responsible for the cost of demolition and proper disposal of two 110 foot towers that apparently had been used in the manufacture of carbon dioxide at a site called the "City Bumper Site" in Cincinnati, Ohio. The carbon dioxide plant, according to agency documents, was in operation from 1926 to 1966. Houston Natural Gas Corporation, a predecessor of Enron Corp., merged with Liquid Carbonic Industries (LCI) on January 31, 1969. Liquid Carbonic Corporation (LCC), a subsidiary of LCI, had title to the site. Twenty-eight days after the merger, on February 28, 1969, the site was sold to a third party. In 1984, LCC was sold to an unaffiliated party in a stock sale. Although Enron does not admit liability with respect to any costs at this site, it agreed to cooperate with the EPA and other potentially responsible parties to undertake the work contemplated by the EPA's Order. The tower demolition and removal activities were completed in October 1998, and a final project report has been submitted to the EPA. Enron does not expect to incur material expenditures in connection with this site. Enron's natural gas pipeline companies conduct soil and groundwater remediation on a number of their facilities. Enron does not expect to incur material expenditures in connection with soil and groundwater remediation. 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, 1999 1998 1999 1998 <S> <C> <C> <C> <C> Numerator: Basic Income before cumulative effect of accounting changes $ 222 $ 145 $ 475 $ 359 Preferred stock dividends: Second preferred stock (5) (5) (9) (9) Series A Junior Voting Convertible Preferred Stock (14) - (14) - Income available to common shareholders before cumulative effect of accounting changes 203 140 452 350 Cumulative effect of accounting changes - - (131) - Income available to common shareholders $ 203 $ 140 $ 321 $ 350 Diluted Income available to common shareholders before cumulative effect of accounting changes $ 203 $ 140 $ 452 $ 350 Effect of assumed conversion of dilutive securities: Second preferred stock 5 5 9 9 Series A Junior Voting Convertible Preferred Stock(a) - - - - Income before cumulative effect of accounting changes 208 145 461 359 Cumulative effect of accounting changes - - (131) - Income available to common shareholders after assumed conversions $ 208 $ 145 $ 330 $ 359 Denominator: Denominator for basic earnings per share - weighted-average shares 354 319 348 312 Effect of assumed conversion of dilutive securities: Second preferred stock 18 18 18 18 Stock options 14 9 13 8 Dilutive potential common shares 32 27 31 26 Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 386 346 379 338 Basic earnings per share: Before cumulative effect of accounting changes $0.57 $0.44 $1.30 $1.12 Cumulative effect of accounting changes - - (0.38) - Basic earnings per share $0.57 $0.44 $0.92 $1.12 Diluted earnings per share: Before cumulative effect of accounting changes $0.54 $0.42 $1.22 $1.06 Cumulative effect of accounting changes - - (0.35) - Diluted earnings per share $0.54 $0.42 $0.87 $1.06 <FN> (a) The Series A Junior Voting Convertible Preferred Stock was not included in the calculation of diluted earnings per share because conversion of these shares would be antidilutive. </TABLE> 6. COMPREHENSIVE INCOME Comprehensive income includes the following (in millions): <TABLE> <CAPTION> Six Months Ended Second Quarter June 30, 1999 1998 1999 1998 <S> <C> <C> <C> <C> Net income $ 222 $ 145 $ 344 $ 359 Other comprehensive income: Foreign currency translation adjustment (49) (12) (598) (11) Total comprehensive income (loss) $ 173 $ 133 $(254) $ 348 </TABLE> 7. BUSINESS SEGMENT INFORMATION Enron's business is divided into operating segments, defined as components of an enterprise about which financial information is available and evaluated regularly by the Executive Committee, which serves as the chief operating decision making group. <TABLE> <CAPTION> Wholesale Exploration Transportation Energy Retail Corporate and and Operations Energy and (In Millions) Production Distribution and Services Services Other(c) Total Three Months Ended June 30, 1999 <S> <C> <C> <C> <C> <C> <C> Unaffiliated revenues(a) $175 $417 $ 8,558 $301 $ 221 $ 9,672 Intersegment revenues(b) 29 7 136 39 (211) - Total revenues $204 $424 $ 8,694 $340 $ 10 $ 9,672 Income (loss) before interest, minority interests and income taxes $ 20 $128 $ 356 $(26) $ (9) $ 469 Six Months Ended June 30, 1999 Unaffiliated revenues(a) $324 $894 $15,074 $664 $ 348 $17,304 Intersegment revenues(b) 83 11 215 46 (355) - Total revenues $407 $905 $15,289 $710 $ (7) $17,304 Income (loss) before interest, minority interests and income taxes $ 32 $346 $ 676 $(57) $ 5 $ 1,002 </TABLE> <TABLE> <CAPTION> Wholesale Exploration Transportation Energy Retail Corporate and and Operations Energy and (In Millions) Production Distribution and Services Services Other(c) Total Three Months Ended June 30, 1998 <S> <C> <C> <C> <C> <C> <C> Unaffiliated revenues(a) $176 $410 $ 5,774 $154 $ 43 $ 6,557 Intersegment revenues(b) 27 4 121 (10) (142) - Total revenues $203 $414 $ 5,895 $ 144 $ (99) $ 6,557 Income (loss) before interest, minority interests and income taxes $ 29 $134 $ 241 $ (43) $ (16) $ 345 Six Months Ended June 30, 1998 Unaffiliated revenues(a) $374 $914 $10,512 $ 349 $ 90 $12,239 Intersegment revenues(b) 60 8 255 1 (324) - Total revenues $434 $922 $10,767 $ 350 $(234) $12,239 Income (loss) before interest, minority interests and income taxes $ 72 $339 $ 490 $ (70) $ (15) $ 816 <FN> (a) Unaffiliated revenues include sales to unconsolidated affiliates. (b) Intersegment sales are made at prices comparable to those received from unaffiliated customers and in some instances are affected by regulatory considerations. (c) Includes consolidating eliminations. </TABLE> Total assets by segment are as follows (in millions): <TABLE> <CAPTION> June 30, December 31, 1999 1998 <S> <C> <C> Exploration and Production $ 2,976 $ 3,001 Transportation and Distribution 8,059 7,616 Wholesale Energy Operations and Services 18,583 14,837 Retail Energy Services 744 747 Corporate and Other 3,785 3,149 Total Assets $34,147 $29,350 </TABLE> The increase in assets is primarily a result of the consolidation of Jacare, previously an unconsolidated affiliate (see Note 3), capital expenditures and investments in equity affiliates. 8. RELATED PARTY TRANSACTIONS In June 1999, Enron entered into a series of transactions involving a third party and LJM Cayman, L.P. (LJM). LJM is a private investment company which egnages in acquiring or investing primarily in energy related investments. A senior officer of Enron is managing member of LJM's general partner. The effect of the transactions was i) Enron amended with the third party certain forward contracts to purchase shares of Enron common stock, resulting in Enron having forward contracts to purchase 3.3 million Enron common shares at the market price on that day, ii) LJM received 3.4 million shares of Enron common stock subject to certain restrictions and iii) Enron received a note receivable and a put option related to an investment held by Enron. Enron recorded the assets received and equity issued at estimated fair value. In connection with the transactions, LJM agreed that the Enron officer would have no pecuniary interest in such Enron common shares and would be restricted from voting on matters related to such shares or to any future transactions with Enron. In the future, LJM may participate with Enron in investments or may acquire investments from Enron, although it is not obligated to do so. Management believes that the terms of the transactions were reasonable and no less favorable than the terms of similar arrangements with unrelated third parties. 9. SUBSEQUENT EVENT On July 20, 1999, Enron announced an agreement with its 54 percent owned exploration and production subsidiary, Enron Oil & Gas Company (EOG), whereby Enron will exchange approximately 75 percent of the EOG common stock it owns for all of the stock of EOG's subsidiary, EOGI - India, Inc., which holds EOG's India and China operations, and a $600 million cash contribution by EOG to EOGI - India, Inc. The completion of the Share Exchange Agreement (the Share Exchange) is subject to specific conditions and is expected to be finalized prior to August 31, 1999. Subsequent to the completion of the Share Exchange, EOG's concurrent offering of 27 million shares of its common stock and Enron's offering of 8.5 million shares of EOG common stock, Enron's ownership stake in EOG will be approximately 9.7 percent. On July 13, 1999, Enron announced a two-for-one common stock split that will be effective August 13, 1999, to shareholders of record July 23, 1999.
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 1999 vs. Second Quarter 1998 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 1999 net income was $222 million compared to $145 million in the second quarter of 1998. Enron's operating segments include Exploration and Production (Enron Oil & Gas Company), Transportation and Distribution (Gas Pipeline Group and Portland General), Wholesale Energy Operations and Services (Enron Capital & Trade Resources, Enron International and Enron Communications), Retail Energy Services (Enron Energy Services) and Corporate and Other, which includes certain other businesses. Basic and diluted earnings per share of common stock were as follows: <TABLE> <CAPTION> Second Quarter 1999 1998 <S> <C> <C> Basic earnings per share $ 0.57 $ 0.44 Diluted earnings per share $ 0.54 $ 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> Second Quarter 1999 1998 <S> <C> <C> Exploration and Production $ 20 $ 29 Transportation and Distribution: Gas Pipeline Group 72 72 Portland General 56 62 Wholesale Energy Operations and Services 356 241 Retail Energy Services (26) (43) Corporate and Other (9) (16) Income before interest, minority interests and taxes $ 469 $ 345 </TABLE> Exploration and Production Enron's exploration and production operations are conducted by Enron Oil & Gas Company (EOG). IBIT of Exploration and Production totaled $20 million and $29 million for the second quarter of 1999 and 1998, respectively. Wellhead volume and price statistics (including intercompany amounts) are as follows: <TABLE> <CAPTION> Second Quarter 1999 1998 <S> <C> <C> Natural gas volumes (MMcf/d)(a) North America 754 722 Trinidad 130 132 India 75 53 Total 959 907 Average natural gas prices ($/Mcf) North America $1.93 $1.96 Trinidad 1.07 1.08 India 1.95 2.57 Composite 1.82 1.87 Crude oil/condensate volumes (MBbl/d)(a) North America 15.8 14.7 Trinidad 2.3 2.9 India 6.4 4.8 Total 24.5 22.4 Average crude oil/condensate prices ($/Bbl) North America $16.10 $12.82 Trinidad 14.46 13.31 India 14.03 13.41 Composite 15.41 13.01 <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 1999 1998 <S> <C> <C> Net revenues $191 $179 Operating expenses 50 38 Exploration expenses 20 26 Depreciation, depletion and amortization 89 73 Taxes, other than income taxes 12 13 Income before interest, minority interests and taxes $ 20 $ 29 </TABLE> Net Revenues Exploration and Production's revenues, net of sales in connection with natural gas marketing, increased $12 million in the second quarter of 1999 as compared to the same period in 1998. The increase is primarily a result of increased production volumes of natural gas and crude oil and condensate and higher wellhead crude oil and condensate prices partially offset by decreased results from sales of reserves and related assets, net and lower wellhead natural gas prices. Net reserve and asset sales activity decreased net revenues by $6 million in the second quarter of 1999 as compared to an increase of $3 million in the same period of 1998. Costs and Expenses Operating expenses increased in the second quarter of 1999 compared to the same period in 1998 primarily as a result of non-recurring personnel expenses. Depreciation, depletion and amortization increased primarily as a result of a one-time charge related to offshore operations and increased production. Exploration expenses decreased primarily due to decreased exploratory drilling and other exploration activities. Subsequent Event On July 20, 1999, Enron entered into an agreement with EOG to exchange approximately 75% of the EOG common stock held by Enron for the stock of certain of its international subsidiaries (see Note 8 to the Consolidated Financial Statements). 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), Enron's 50% interest in Florida Gas Transmission Company (Florida Gas) and Enron's interest in Northern Border Pipeline. Gas Pipeline Group. The following table summarizes total volumes transported for each of Enron's interstate natural gas pipelines. <TABLE> <CAPTION> Second Quarter 1999 1998 <S> <C> <C> Total Volumes Transported (Bbtu/d)(a) Northern Natural Gas 3,553 3,879 Transwestern Pipeline 1,419 1,707 Florida Gas Transmission 1,546 1,328 Northern Border Pipeline 2,404 1,737 <FN> (a) Reflects 100% of each entity's throughput volumes. </TABLE> Significant components of IBIT are as follows (in millions): <TABLE> <CAPTION> Second Quarter 1999 1998 <S> <C> <C> Net revenues $124 $137 Operating expenses 65 68 Depreciation and amortization 17 17 Equity in earnings 8 9 Other income, net 22 11 Income before interest and taxes $ 72 $ 72 </TABLE> Operating Results Revenues, net of cost of sales, and operating expenses of Gas Pipeline Group (GPG) declined $13 million and $3 million, respectively, in the second quarter of 1999 as compared to the same period in 1998. The decreases are primarily due to the expiration, in October 1998, of certain transition cost recovery surcharges that caused a reduction in revenues and a corresponding decrease in expenses. Other income, net increased $11 million in the second quarter of 1999 as compared to the same period of 1998 primarily as a result of interest earned by GPG in connection with the financing of an acquisition by an unconsolidated affiliate. Portland General. Statistics for PGE for the second quarter of 1999 and 1998 are as follows: <TABLE> <CAPTION> Second Quarter 1999 1998 <S> <C> <C> Electricity Sales (Thousand MWh)(a) Residential 1,618 1,524 Commercial 1,746 1,587 Industrial 1,083 916 Total Retail 4,447 4,027 Wholesale 3,053 2,382 Total Electricity Sales 7,500 6,409 Average Billed Revenue (cents per kWh) Residential 6.08 6.40 Commercial 4.92 5.15 Industrial 3.63 3.18 Total Retail 5.03 5.17 Wholesale 2.03 1.72 Total Sales 3.81 3.89 Resource Mix Coal 12% 12% Combustion Turbine 6 6 Hydro 10 11 Total Generation 28 29 Firm Purchases 61 64 Secondary Purchases 11 7 Total Resources 100% 100% Average Variable Power Cost (Mills/kWh)(b) Generation 8.7 6.6 Firm Purchases 16.8 14.3 Secondary Purchases 18.5 12.4 Total Average Variable Power Cost 15.5 13.2 Retail Customers (end of period, thousands) 711 694 <FN> (a) Thousand megawatt-hours. (b) Mills (1/10 cent) per kilowatt-hour. </TABLE> Portland General realized IBIT of $56 million and $62 million for the second quarter of 1999 and 1998, respectively. Significant components of IBIT are as follows (in millions): <TABLE> <CAPTION> Second Quarter 1999 1998 <S> <C> <C> Revenues $296 $269 Purchased power and fuel 119 94 Operating expenses 79 78 Depreciation and amortization 48 45 Other income, net 6 10 Income before interest and taxes $ 56 $ 62 </TABLE> Operating Results Revenues and purchased power and fuel costs increased $27 million and $25 million, respectively, in the second quarter of 1999 as compared to the second quarter of 1998, primarily as a result of an increase in the number of customers served by PGE. Higher power costs partially offset the revenue increase resulting from the higher customer count. Wholesale Energy Operations and Services Enron's wholesale energy operations and services business (Enron Wholesale) operates in North America, Europe and other countries. Activities are conducted primarily by Enron Capital & Trade Resources, Enron International and Enron Communications. Enron Wholesale is categorized into two business lines: (a) Commodity Sales and Services and (b) Energy Assets and Investments. Integrated products and services related to these business lines are offered to wholesale energy and communications customers in each of Enron Wholesale's markets. Enron Wholesale manages its commodity and asset portfolios in order to maximize value, minimize the associated risks and provide overall liquidity. In this process, Enron Wholesale utilizes portfolio and risk management disciplines including certain hedging transactions to manage portions of its 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 business line (in millions): <TABLE> <CAPTION> Second Quarter 1999 1998 <S> <C> <C> Commodity Sales and Services $ 81 $ 23 Energy Assets and Investments 325 258 Unallocated expenses (50) (40) Income before interest, minority interests and taxes $356 $241 </TABLE> The following discussion analyzes the contributions to IBIT for each business line. Commodity Sales and Services. Enron Wholesale provides reliable delivery of energy commodities at predictable prices. The commodity sales and services operations includes the purchase, sale, marketing and delivery of natural gas, electricity, liquids and other commodities, the restructuring of existing long-term contracts and the management of Enron Wholesale's commodity contract portfolios. In addition, Enron Wholesale provides risk management products and services to energy customers that hedge movements in price and location-based price differentials. Enron Wholesale's risk management products and services are designed to provide stability to customers in markets impacted by commodity price volatility. Also included in this business is the management of certain operating assets that directly relate to this business, including domestic intrastate pipelines and storage facilities. Enron Wholesale markets and transports a substantial quantity of energy commodities as reflected in the following table (including intercompany amounts): <TABLE> <CAPTION> Second Quarter 1999 1998 <S> <C> <C> Physical Volumes (BBtue/d)(a)(b) Gas: United States 8,038 6,696 Canada 4,475 3,295 Europe 1,198 1,062 Other 26 9 13,737 11,062 Transport Volumes 513 630 Total Gas Volumes 14,250 11,692 Oil 8,068 2,534 Liquids 754 550 Electricity(c) 10,638 9,463 Total 33,710 24,239 Electricity Volumes Marketed (Thousand MWh) United States 94,966 86,075 Europe and Other 1,837 40 Total 96,803 86,115 Financial Settlements (Notional) (BBtue/d) 82,699 67,411 <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 utilizing the input method. </TABLE> The earnings from commodity sales and services increased to $81 million in the second quarter of 1999 as compared to $23 million in the same period of 1998 primarily due to increased earnings from long-term contracts, partially offset by lower earnings from marketing activities. Energy Assets and Investments. Enron Wholesale's energy assets and investments activities include investments in debt and equity securities related to natural gas, electricity and communications. Additionally, Enron Wholesale develops, constructs, operates and manages a large portfolio of energy investments such as power plants and natural gas pipelines. Earnings primarily result from changes in the market value of merchant investments held during the period, equity earnings and gains on sales or restructurings of energy investments. Earnings from energy assets and investments increased to $325 million in the second quarter of 1999 as compared to $258 million in the same period of 1998 primarily as a result of the increased market value of Enron Wholesale's communications investments, partially offset by reductions in the market value of certain energy investments, lower earnings from sales of interests in power plants and costs associated with developing the communications business. Unallocated Expenses. Net unallocated expenses such as rent, systems expenses and other support group costs increased in 1999 due to continued expansion into new markets and system upgrades. 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 industrial customers. In the second quarter of 1999, Energy Services continued to make significant progress in expanding its customer base and contracting activities by executing several significant commodity and services contracts with new customers. Energy Services reported an operating loss before interest, minority interest and taxes of $26 million in the second quarter of 1999 compared to a loss of $43 million in the second quarter of 1998. The results primarily reflect the costs associated with developing the commodity, capital and services capability to deliver on contracts signed to date by Energy Services, partially offset by increased earnings from energy management services. Corporate and Other Corporate and Other includes results of Azurix Corp., which provides water and wastewater services, Enron Renewable Energy Corp. (EREC) and the operations of Enron's methanol and MTBE plants. Corporate and Other realized a loss before interest, minority interests and taxes of $9 million in the second quarter of 1999 compared to $16 million for the same period in 1998. The second quarter 1999 results includes earnings from EREC related to the completion and sale of certain projects and gains related to the Azurix stock offering, partially offset by higher expenses. Interest and Related Charges, net Interest and related charges, net is reported net of interest capitalized of $16 million and $9 million for the second quarter of 1999 and 1998, respectively. The net expense increased $44 million in the second quarter of 1999 as compared to the same period of 1998, primarily due to an increase in debt of approximately $900 million resulting from the consolidation of Jacare Electrical Distribution Trust (see Note 3 to the Consolidated Financial Statements) and issuances of debt subsequent to June 30, 1998. Minority Interests Minority interests increased $4 million to $23 million in the second quarter of 1999 compared to the same period in 1998, primarily due to the minority owner's share of the results of Jacare prior to the purchase of additional shares of Elektro (see Note 3 to the Consolidated Financial Statements) and the limited partner's share of earnings related to a partnership created in December 1998, partially offset by decreased net income from EOG in the second quarter of 1999. Income Tax Expense The projected effective tax rate for 1999 is lower than the statutory rate mainly due to equity earnings, consolidated foreign earnings and differences between the book and tax basis of certain assets and stock sales. RESULTS OF OPERATIONS Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998 RESULTS OF OPERATIONS Consolidated Net Income Excluding the cumulative effect of accounting changes reported in the first quarter, Enron reported net income of $475 million for the first six months of 1999 compared to $359 million during the same period in 1998. Basic and diluted earnings (loss) per share of common stock were as follows: <TABLE> <CAPTION> Six Months Ended June 30, 1999 1998 <S> <C> <C> Basic earnings per share: Before cumulative effect of accounting changes $ 1.30 $ 1.12 Cumulative effect of accounting changes (0.38) - Reported basic earnings per share $ 0.92 $ 1.12 Diluted earnings per share: Before cumulative effect of accounting changes $ 1.22 $ 1.06 Cumulative effect of accounting changes (0.35) - Reported diluted earnings per share $ 0.87 $ 1.06 </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, 1999 1998 <S> <C> <C> Exploration and Production $ 32 $ 72 Transportation and Distribution: Gas Pipeline Group 198 198 Portland General 148 141 Wholesale Energy Operations and Services 676 490 Retail Energy Services (57) (70) Corporate and Other 5 (15) Income before interest, minority interests and taxes $1,002 $816 </TABLE> Exploration and Production IBIT of Exploration and Production totaled $32 million for the first six months of 1999 as compared to $72 million for the same period in 1998. Wellhead volume and price statistics (including intercompany amounts) are as follows: <TABLE> <CAPTION> Six Months Ended June 30, 1999 1998 <S> <C> <C> Natural gas volumes (MMcf/d)(a) North America 767 733 Trinidad 141 121 India 74 50 Total 982 904 Average natural gas prices ($/Mcf) North America $1.76 $1.94 Trinidad 1.07 1.08 India 1.95 2.63 Composite 1.67 1.87 Crude oil/condensate volumes (MBbl/d)(a) North America 15.8 15.0 Trinidad 2.6 2.8 India 6.7 4.5 Total 25.1 22.3 Average crude oil/condensate prices ($/Bbl) North America $13.76 $13.70 Trinidad 11.83 13.66 India 11.80 14.31 Composite 13.04 13.82 <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, 1999 1998 <S> <C> <C> Net revenues $373 $385 Operating expenses 98 79 Exploration expenses 45 60 Depreciation, depletion and amortization 171 145 Taxes, other than income taxes 26 28 Other income (expense), net (1) (1) Income before interest, minority interests and taxes $ 32 $ 72 </TABLE> Net Revenues Exploration and Production's revenues, net of sales in connection with natural gas marketing, decreased $12 million in the first half of 1999 as compared to the same period in 1998. The decrease is primarily a result of lower wellhead prices for natural gas and crude oil and condensate, decreased gains on sales of reserves and related assets and decreased revenues from other marketing activities, partially offset by increased production volumes of natural gas and crude oil and condensate. In the first six months of 1999, activities related to sales of reserves and related assets and other, net reduced revenues by $4 million as compared to an increase of $17 million in 1998. Other marketing activities resulted in a net decrease in revenues of $11 million in the first half of 1999 compared to a decrease of less than $1 million in the same period in 1998. Costs and Expenses Operating expenses increased in the first half of 1999 compared to the same period in 1998 primarily as a result of expanded operations, settlement of certain commercial disputes with third parties and non-recurring personnel expenses. Depreciation, depletion and amortization increased primarily as a result of a one-time charge related to offshore operations and increased production. Exploration expenses decreased primarily due to decreased exploratory drilling and other exploration activities. 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, 1999 1998 <S> <C> <C> Total Volumes Transported (Bbtu/d)(a) Northern Natural Gas 4,046 4,176 Transwestern Pipeline 1,475 1,688 Florida Gas Transmission 1,386 1,255 Northern Border Pipeline 2,444 1,788 <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, 1999 1998 <S> <C> <C> Net revenues $305 $329 Operating expenses 126 137 Depreciation and amortization 34 33 Equity in earnings 16 20 Other income, net 37 19 Income before interest and taxes $198 $198 </TABLE> Operating Results Revenues, net of cost of sales, and operating expenses of Gas Pipeline Group (GPG) declined $24 million and $11 million, respectively, in the first half of 1999 as compared to the same period in 1998. The decreases are primarily due to the expiration, in October 1998, of certain transition cost recovery surcharges that caused a reduction in revenues and a corresponding decrease in expenses. Other income, net increased $18 million in the first half of 1999 as compared to the same period of 1998. The 1999 results include interest earned by GPG in connection with the financing of an acquisition by an unconsolidated affiliate. Portland General. Statistics for PGE for the first half of 1999 and 1998 are as follows: <TABLE> <CAPTION> Six Months Ended June 30, 1999 1998 <S> <C> <C> Electricity Sales (Thousand MWh)(a) Residential 3,960 3,600 Commercial 3,562 3,241 Industrial 2,103 1,807 Total Retail 9,625 8,648 Wholesale 4,391 5,957 Total Electricity Sales 14,016 14,605 Average Billed Revenue (cents per kWh) Residential 5.87 6.12 Commercial 4.92 5.11 Industrial 3.56 3.25 Total Retail 5.01 5.15 Wholesale 1.98 1.78 Total Sales 4.06 3.78 Resource Mix Coal 16% 13% Combustion Turbine 6 6 Hydro 11 10 Total Generation 33 29 Firm Purchases 53 65 Secondary Purchases 14 6 Total Resources 100% 100% Average Variable Power Cost (Mills/kWh)(b) Generation 8.4 6.8 Firm Purchases 16.8 15.4 Secondary Purchases 16.4 13.2 Total Average Variable Power Cost 15.2 13.9 Retail Customers (end of period, thousands) 711 694 <FN> (a) Thousand megawatt-hours. (b) Mills (1/10 cent) per kilowatt-hour. </TABLE> Significant components of IBIT are as follows (in millions): <TABLE> <CAPTION> Six Months Ended June 30, 1999 1998 <S> <C> <C> Revenues $595 $589 Purchased power and fuel 219 218 Operating expenses 149 154 Depreciation and amortization 94 89 Other income, net 15 13 Income before interest and taxes $148 $141 </TABLE> Operating Results Revenues and purchased power and fuel costs increased $6 million and $1 million, respectively, in the first six months of 1999 as compared to the same period in 1998. The increases were primarily the result of an increase in the number of customers served by PGE and colder weather during the first quarter of 1999, partially offset by higher power costs. 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, 1999 1998 <S> <C> <C> Commodity Sales and Services $305 $152 Energy Assets and Investments 461 409 Unallocated expenses (90) (71) Income before interest, minority interests and taxes $676 $490 </TABLE> The following discussion analyzes the contributions to IBIT for each of the business lines. Commodity Sales and Services. Enron Wholesale markets and transports a substantial quantity of energy commodities as reflected in the following table (including intercompany amounts): <TABLE> <CAPTION> Six Months Ended June 30, 1999 1998 <S> <C> <C> Physical Volumes (BBtue/d)(a)(b) Gas: United States 8,560 6,984 Canada 4,216 3,087 Europe 1,493 1,093 Other 17 5 14,286 11,169 Transport Volumes 534 540 Total Gas Volumes 14,820 11,709 Oil 5,898 2,147 Liquids 667 602 Electricity(c) 10,119 8,866 Total 31,504 23,324 Electricity Volumes Marketed (Thousand MWh) United States 180,928 160,347 Europe and Other 2,221 122 Total 183,149 160,469 Financial Settlements (Notional) (BBtue/d) 88,803 68,658 <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 using the input method. </TABLE> The earnings from Commodity Sales and Services increased in the first half of 1999 as compared to the same period of 1998 primarily due to increased earnings from long- term contracts and increased profits from gas and power marketing where volumes showed continued strength in the growing deregulated market, partially offset by higher expenses. Energy Assets and Investments. Earnings from Energy Assets and Investments increased to $461 million in the first half of 1999 as compared to $409 million in the same period of 1998 as a result of the increased market value of Enron Wholesale's communications investments and increased construction profits, partially offset by reductions in the market value of certain energy investments, lower earnings from sales of interests in power plants and costs associated with developing the communications business. Unallocated Expenses. Net unallocated expenses such as rent, systems expenses and other support group costs increased in 1999 due to continued expansion into new markets and system upgrades. Retail Energy Services Energy Services reported an operating loss before interest, minority interest and taxes of $57 million in the first half of 1999 compared to a loss of $70 million for the same period of 1998. The results primarily reflect the costs associated with developing the commodity, capital and services capability to deliver on contracts signed to date by Energy Services, partially offset by increased earings from energy management services. Corporate and Other Corporate and Other realized IBIT of $5 million in the first half of 1999 compared to a loss of $15 million for the same period in 1998. The 1999 results include earnings from EREC related to the completion and sale of certain projects and gains related to the Azurix stock offering, partially offset by higher expenses. Interest and Related Charges, net Interest and related charges, net, is reported net of interest capitalized of $29 million and $15 million for the first half of 1999 and 1998, respectively. The net expense increased $86 million in the first half of 1999 as compared to the same period of 1998, primarily due to an increase in debt of approximately $900 million resulting from the consolidation of Jacare Electrical Distribution Trust (see Note 3 to the Consolidated Financial Statements) and issuances of debt subsequent to June 30, 1998. Minority Interests Minority interests increased $12 million to $56 million in the first half of 1999 compared to the same period in 1998, primarily due to the minority owner's share of the results of Jacare prior to the purchase of additional shares of Elektro (see Note 3 to the Consolidated Financial Statements) and the limited partner's share of earnings related to a partnership created in December 1998, partially offset by decreased net income from EOG in the first half of 1999. Income Tax Expense The projected effective tax rate for 1999 is lower than the statutory rate mainly due to equity earnings, consolidated foreign earnings and differences between the book and tax basis of certain assets and stock sales. 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 has been briefed about the Year 2000 problems generally and as they 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 an Executive 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 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. Enron's Year 2000 Plan calls for most business units to have completed initial rounds of inventory, assessment, remediation and validation testing of its mission critical internal items by June 30, 1999. At Enron, that deadline has been met in all material respects. (However, as explained elsewhere in this statement, that does not insure that these systems do not continue to contain hidden Year 2000 defects in computer code or in embedded devices.) Remaining mission critical items are expected to be completed for purposes of initial remediation and validation testing prior to September 30, 1999. As of July 31, 1999, Enron and all its business units were 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 of Outside Entities. Any notation of "complete" conveys the fact only that the initial iteration of this phase has been substantially completed. <TABLE> Year 2000 Plan Readiness by Enron Business Unit (Mission-Critical Internal Items) <CAPTION> Contingency Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan <S> <C> <C> <C> <C> <C> <C> <C> Exploration and Production C C C C IP IP IP Transportation and Distribution: Gas Pipeline Group C C C C C IP C Portland General C C C C IP IP C Wholesale: Domestic C C C C C IP IP Europe C C C C IP IP IP Other International C C C IP IP IP C Retail Energy Services C C C C IP IP C Corporate and Other C C C C IP IP C </TABLE> <TABLE> Year 2000 Plan Readiness by Enron Business Unit (Mission-Critical Outside Entities) <CAPTION> Contingency Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan <S> <C> <C> <C> <C> <C> <C> <C> Exploration and Production C C C IP IP IP IP Transportation and Distribution: Gas Pipeline Group C C C C C C C Portland General C C C C C C C Wholesale: Domestic C C C C IP IP IP Europe C C C IP IP IP IP Other International C C C IP IP IP C Retail Energy Services C C C C C IP IP Corporate and Other C C C C IP IP C 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 of Outside Entities. <TABLE> Year 2000 Plan Completion Dates by Enron Business Unit (Mission-Critical Internal Items)(a) <CAPTION> Contingency Inventory Assessment Analysis Conversion Testing Y2K-Ready Plan <S> <C> <C> <C> <C> <C> <C> <C> Exploration and Production 12/98 3/99 3/99 6/99 9/99 9/99 9/99 Transportation and Distribution: Gas Pipeline Group 12/98 1/99 4/99 6/99 7/99 8/99 6/99 Portland General 12/97 10/98 10/98 6/99 8/99 9/99 6/99 Wholesale: Domestic 6/98 8/98 12/98 6/99 7/99 8/99 8/99 Europe 7/98 8/98 8/98 4/99 8/99 9/99 8/99 Other International 3/99 3/99 4/99 8/99 9/99 9/99 6/99 Retail Energy Services 1/99 2/99 3/99 4/99 8/99 9/99 7/99 Corporate and Other 2/99 2/99 3/99 6/99 8/99 8/99 6/99 </TABLE> <TABLE> Year 2000 Plan Completion Dates by Enron Business Unit (Mission-Critical Outside Entities) <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 3/99 5/99 7/99 9/99 9/99 9/99 Europe 6/98 7/98 3/99 8/99 8/99 8/99 8/99 Other International 2/99 2/99 4/99 8/99 8/99 8/99 6/99 Retail Energy Services 1/99 1/99 3/99 4/99 5/99 8/99 8/99 Corporate and Other 10/98 3/99 3/99 6/99 8/99 8/99 6/99 <FN> (a) Substantially all items with a completion date of 6/30/99 have been finalized. </TABLE> Because Enron's Year 2000 Plan treats Year 2000 effort as an iterative process, Enron will commence additional cycles of inventory, assessment, remediation and validation testing, which will be conducted in parallel with and in coordination with Enron's Year 2000 contingency planning. Enron continues to focus on hidden defects in computer code, including re-coding errors in remediated code; sabotage of remediated code; embedded devices with Year 2000 defects; and the potential failure of mission-critical external entities, both domestic and international and including foreign governments. Enron is developing reasonable contingency plans to prepare to the extent practicable to avoid substantial Year 2000-related disruptions that may have a material adverse effect on Enron and its business. Because of the imponderable nature of potential Year 2000 deficiencies, their impact cannot be quantified. None of these problems is unique to Enron. 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. 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. U.S. Y2K Act. Enron may face additional risk as a result of the uncertainties, and probable additional litigation, resulting from the enactment of the U.S. federal "Y2K Act." Because experience with this recently enacted legislation is very limited, Enron cannot at this time quantify the financial impact or potential business disruption that may result from this legislation. However, the adverse impact on Enron's business might be material. 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. 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. Additionally, there may be sustained interruption of the capital markets. 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 minimizing 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, or that may be subject to re- coding errors or sabotage; 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, while Enron's Year 2000 costs are not expected to be material, such 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 In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. In June 1999, the FASB issued SFAS No. 137 which deferred the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. A company may implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance, however, the statement cannot be applied retroactively. Enron 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 or physical base contracts. FINANCIAL CONDITION <TABLE> Cash Flows <CAPTION> Six Months Ended June 30, (In Millions) 1999 1998 <S> <C> <C> Cash provided by (used in): Operating activities $ (38) $ (251) Investing activities (1,859) (1,137) Financing activities 2,072 1,393 </TABLE> Cash used in operating activities totaled $38 million in the first half of 1999 as compared to $251 million in the same period last year. The change in cash from operating activities in 1999 reflects increased cash from net assets from price risk management activities, partially offset by higher working capital requirements. Cash used in investing activities totaled $1,859 million in the first six months of 1999 as compared to $1,137 million in the same period of 1998. The 1999 amount reflects increased cash used for capital expenditures, primarily related to North America power plant construction and the construction of Enron Communication's fiber optic network, and equity investments, primarily in South Korea, India and Panama. Cash provided by financing activities totaled $2,072 million in the first half of 1999 as compared to $1,393 million during the same period of 1998. The first half of 1999 includes net proceeds of approximately $839 million from the public offering of 13.8 million shares of Enron common stock, net issuances of short- and long-term debt of $784 million and proceeds from the issuance of equity by subsidiaries. Proceeds were primarily used to fund investment activities. Following the acquisition of an additional 53% interest in Elektro, Enron discontinued the use of temporary control in accounting for Jacare. In addition, a joint venture was amended, causing the joint venture's financial statements to be deconsolidated. These changes resulted in non-cash activity to certain balance sheet lines. See Note 3 to the Consolidated Financial Statements. 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. Because of the potential interruption to the capital markets due to Year 2000 problems, Enron's liquidity could be impacted. See "Year 2000" for a discussion of the potential problems and Enron's Year 2000 Plan. Enron has expanded its borrowing capacity which should provide adequate liquidity in the event of any short-term market disruptions. CAPITALIZATION Total capitalization at June 30, 1999 was $21.7 billion. Debt as a percentage of total capitalization decreased to 41.5% at June 30, 1999 as compared to 41.9% at December 31, 1998. The decrease primarily reflects the issuance in February 1999 of approximately 13.8 million shares of common stock, partially offset by increased debt levels. On July 13, 1999, Enron announced a two-for-one common stock split that will be effective August 13, 1999 to shareholders of record as of July 23, 1999. 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, 1998. Enron's value at risk for commodity price risk for its trading business increased to $36 million at June 30, 1999 as compared to $20 million at December 31, 1998. The increase is attributable to seasonal dynamics in the U.S. power markets where summer prices and associated price volatility has increased estimated market risk. Subsequent to June 30, 1999, the value at risk for commodity price risk has declined, but remains somewhat higher than year-end 1998 levels. Enron's value at risk for its non-trading commodity price risk increased to $17 million at June 30, 1999 as compared to $10 million at December 31, 1998, primarily as a result of increased hedging activity. The non-trading market risk includes only the risk related to the financial instruments that serve as hedges and does not include the related underlying hedged item. 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 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 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of Enron Corp. was held on May 4, 1999 in Houston, Texas, for the purpose of electing a board of directors, the appointment of auditors and voting on certain proposals described below. 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 312,007,483 4,086,235 Norman P. Blake, Jr. 313,136,343 2,957,375 Ronnie C. Chan 313,107,802 2,985,916 John H. Duncan 312,916,899 3,176,819 Joe H. Foy 310,848,876 5,244,842 Wendy L. Gramm 313,053,255 3,040,463 Ken L. Harrison 312,244,651 3,849,067 Robert K. Jaedicke 312,924,106 3,169,612 Kenneth L. Lay 312,140,912 3,952,806 Charles A. LeMaistre 312,809,080 3,284,638 John Mendelsohn 313,126,768 2,966,950 Jerome J. Meyer 313,164,685 2,929,033 Jeffrey K. Skilling 312,215,239 3,878,479 John A. Urquhart 311,885,176 4,208,542 John Wakeham 312,007,183 4,086,535 Herbert S. Winokur, Jr. 313,179,479 2,914,239 </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> 313,586,813 873,475 1,633,430 </TABLE> (c) The Enron Corp. Annual Incentive Plan was approved by the following vote: <TABLE> <CAPTION> Shares FOR Shares AGAINST Shares ABSTAINING <C> <C> <C> 293,617,022 19,921,983 2,554,713 </TABLE> (d) The Amended and Restated Enron Corp. 1991 Stock Plan was approved by the following vote: <TABLE> <CAPTION> Shares FOR Shares AGAINST Shares ABSTAINING <C> <C> <C> 238,827,491 74,716,916 2,549,311 </TABLE> (e) The amendment to Enron's Amended and Restated Articles of Incorporation to increase the total number of authorized shares of Common Stock from 600,000,000 to 1,200,000,000 was approved by the following vote: <TABLE> <CAPTION> Shares FOR Shares AGAINST Shares ABSTAINING <C> <C> <C> 309,750,986 4,738,094 1,604,638 </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, 1999 By: RICHARD A. CAUSEY Richard A. Causey Executive Vice President and Chief Accounting Officer (Principal Accounting Officer)