-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WXGxF+HtNtYqU95N0cxig+gmurfIPAztHzlZAVpZG/mhcyE+xMBUe0micbOmyf+b ZYpNJzOkLUvdjHJ+GZ0Uuw== 0001024401-98-000011.txt : 19980518 0001024401-98-000011.hdr.sgml : 19980518 ACCESSION NUMBER: 0001024401-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: CSX SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENRON CORP/OR/ CENTRAL INDEX KEY: 0001024401 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS) [5172] IRS NUMBER: 760511381 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13159 FILM NUMBER: 98622062 BUSINESS ADDRESS: STREET 1: 1400 SMITH ST CITY: HOUSTON STATE: TX ZIP: 77002-7369 BUSINESS PHONE: 7138536161 MAIL ADDRESS: STREET 1: 1400 SMITH ST CITY: HOUSTON STATE: TX ZIP: 75002-7369 FORMER COMPANY: FORMER CONFORMED NAME: ENRON OREGON CORP DATE OF NAME CHANGE: 19961008 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 April 30, 1998 Common Stock, No Par Value 311,611,708 shares 1 of 25 ENRON CORP. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Income Statement - Three Months Ended March 31, 1998 and 1997 3 Consolidated Balance Sheet - March 31, 1998 and December 31, 1997 4 Consolidated Statement of Cash Flows - Three Months Ended March 31, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 24 ITEM 6. Exhibits and Reports on Form 8-K 24 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENRON CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED INCOME STATEMENT (In Millions, Except Per Share Amounts) (Unaudited)
Three Months Ended March 31, 1998 1997 Revenues $5,682 $5,344 Costs and Expenses Cost of gas, electricity and other products 4,559 4,632 Operating expenses 437 273 Oil and gas exploration expenses 34 22 Depreciation, depletion and amortization 182 124 Taxes, other than income taxes 58 36 5,270 5,087 Operating Income 412 257 Other Income and Deductions Equity in earnings of unconsolidated subsidiaries 44 41 Gains on sales of assets and investments - 117 Other income, net 15 14 Income before Interest, Minority Interests and Income Taxes 471 429 Interest and Related Charges, net 133 70 Dividends on Company-Obligated Preferred Securities of Subsidiaries 19 15 Minority Interests 25 19 Income Taxes 80 103 Net Income 214 222 Preferred Stock Dividends 4 4 Earnings on Common Stock $ 210 $ 218 Earnings per Share of Common Stock Basic $ 0.69 $ 0.88 Diluted $ 0.65 $ 0.81 Average Number of Common Shares Used in Computation Basic 305 248 Diluted 330 273 The accompanying notes are an integral part of these consolidated financial statements.
PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Millions) (Unaudited)
March 31, December 31, 1998 1997 ASSETS Current Assets Cash and cash equivalents $ 173 $ 170 Trade receivables 1,636 1,697 Other receivables 569 454 Assets from price risk management activities 2,273 1,577 Other 737 771 Total Current Assets 5,388 4,669 Investments and Other Assets Investments in and advances to unconsolidated subsidiaries 2,649 2,656 Assets from price risk management activities 1,546 1,352 Goodwill 1,883 1,910 Other 4,007 3,665 Total Investments and Other Assets 10,085 9,583 Property, Plant and Equipment, at cost 13,942 13,742 Less accumulated depreciation, depletion and amortization 4,695 4,572 Net Property, Plant and Equipment 9,247 9,170 Total Assets $24,720 $23,422 The accompanying notes are an integral part of these consolidated financial statements.
PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Millions) (Unaudited)
March 31, December 31, 1998 1997 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 2,075 $ 2,119 Liabilities from price risk management activities 2,158 1,476 Other 669 817 Total Current Liabilities 4,902 4,412 Long-Term Debt 6,835 6,254 Deferred Credits and Other Liabilities Deferred income taxes 2,158 2,039 Liabilities from price risk management activities 1,149 1,190 Other 1,716 1,769 Total 5,023 4,998 Minority Interests 1,153 1,147 Company-Obligated Preferred Securities of Subsidiaries 993 993 Shareholders' Equity Second preferred stock, cumulative, no par value 133 134 Common stock, no par value 4,230 4,224 Retained earnings 1,989 1,852 Cumulative foreign currency translation adjustment (147) (148) Common stock held in treasury (256) (269) Other (including Flexible Equity Trust) (135) (175) Total 5,814 5,618 Total Liabilities and Shareholders' Equity $24,720 $23,422 The accompanying notes are an integral part of these consolidated financial statements.
PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Millions) (Unaudited)
Three Months Ended March 31, 1998 1997 Cash Flows From Operating Activities Reconciliation of net income to net cash provided by (used in) operating activities Net income $ 214 $ 222 Depreciation, depletion and amortization 182 124 Oil and gas exploration expenses 34 22 Deferred income taxes 54 54 Gains on sales of assets and investments (27) (107) Changes in components of working capital (158) (71) Net assets from price risk management activities (249) (228) Amortization of production payment transaction (11) (11) Other, net 113 (147) Net Cash Provided by (Used in) Operating Activities 152 (142) Cash Flows From Investing Activities Proceeds from sale of assets and investments 3 298 Capital expenditures (288) (214) Equity investments (59) (79) Other, net (250) (73) Net Cash Used in Investing Activities (594) (68) Cash Flows From Financing Activities Net increase in short-term borrowings 623 373 Issuance of long-term debt - 31 Repayment of long-term debt (42) (189) Issuance of company-obligated preferred securities of subsidiaries - 172 Issuance of common stock 2 - Dividends paid (99) (83) Net (acquisition) disposition of treasury stock 3 (32) Other, net (42) (63) Net Cash Provided by Financing Activities 445 209 Increase (Decrease) in Cash and Cash Equivalents 3 (1) Cash and Cash Equivalents, Beginning of Period 170 256 Cash and Cash Equivalents, End of Period $ 173 $ 255 Changes in Components of Working Capital Receivables $ (54) $ 453 Payables (44) (448) Other (60) (76) Total $(158) $ (71) The accompanying notes are an integral part of these consolidated financial statements.
PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements included herein have been prepared by Enron Corp. (Enron) without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these statements reflect all adjustments (consisting only of normal recurring entries) which are, in the opinion of management, necessary for a fair statement of the financial results for the interim periods. Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although Enron believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in Enron's Annual Report on Form 10-K for the year ended December 31, 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. In material respects, the businesses of Enron are conducted by the subsidiaries and affiliates whose operations are managed by their respective officers. 2. BUSINESS ACQUISITIONS Effective July 1, 1997, Enron merged with Portland General Corporation (PGC) in a stock-for-stock transaction and in November 1997, Enron acquired the minority interest in Enron Global Power & Pipelines L.L.C. (EPP) in a stock- for-stock transaction. Additionally, during 1997, Enron acquired renewable energy, telecommunications and energy management businesses for cash, Enron and subsidiary stock and notes. Enron has accounted for these acquisitions using the purchase method of accounting as of the effective date of each transaction. The allocation of purchase price related to the determination of reserves for certain contractual and legal contingencies for the PGC merger is preliminary pending completion of Enron's final studies and evaluations. Enron does not anticipate that the final evaluation of these issues will materially affect the allocation of the purchase price. The following summary presents unaudited pro forma consolidated results of operations for the three months ended March 31, 1997 as if the business acquisitions had occurred at the beginning of 1997. The pro forma results are for illustrative purposes only and are not necessarily indicative of the operating results that would have occurred had the business acquisitions been consummated at that date, nor are they necessarily indicative of future operating results (in millions, except per share amounts).
Three Months Ended March 31,1997 Revenues $5,712 Income before interest, minority interests and income taxes 534 Net income 272 Earnings per share Basic $ 0.87 Diluted $ 0.81
3. SUPPLEMENTAL CASH FLOW INFORMATION Net cash paid for income taxes for the first quarter of 1998 and 1997 was $21 million and $9 million, respectively. Cash paid for interest expense for the same periods, net of amounts capitalized, was $130 million and $81 million, respectively. 4. LITIGATION AND OTHER CONTINGENCIES Enron is a party to various claims and litigation, the significant items of which are discussed below. Although no assurances can be given, Enron believes, based on its experience to date and after considering appropriate reserves that have been established, that the ultimate resolution of such items, individually or in the aggregate, will not have a materially adverse impact on Enron's financial position or its results of operations. Litigation. In 1995, several parties (the Plaintiffs) filed suit in Harris County District Court in Houston, Texas, against Intratex Gas Company (Intratex), Houston Pipe Line Company and Panhandle Gas Company (collectively, the Enron Defendants), each of which is a wholly-owned subsidiary of Enron. The Plaintiffs were either sellers or royalty owners under numerous gas purchase contracts with Intratex, many of which have terminated. Early in 1996, the case was severed by the Court into two matters to be tried (or otherwise resolved) separately. In the first matter, the Plaintiffs alleged that the Enron Defendants committed fraud and negligent misrepresentation in connection with the "Panhandle program," a special marketing program established in the early 1980s. This case was tried in October 1996 and resulted in a verdict for the Enron Defendants. In the second matter, the Plaintiffs allege that the Enron Defendants violated state regulatory requirements and certain gas purchase contracts by failing to take the Plaintiffs' gas ratably with other producers' gas at certain times between 1978 and 1988. The court has certified a class action with respect to ratability claims. The Court of Appeals has affirmed the trial court's order granting class certification. An appeal to the Texas Supreme Court has been filed. The Enron Defendants deny the Plaintiffs' claims and have asserted various affirmative defenses, including the statute of limitations. The Enron Defendants believe that they have strong legal and factual defenses, and intend to vigorously contest the claims. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a materially adverse effect on its financial position or results of operations. On November 21, 1996, an explosion occurred in or around the Humberto Vidal Building in San Juan, Puerto Rico. The explosion resulted in fatalities, bodily injuries and damage to the building and surrounding property. San Juan Gas Company, Inc. (San Juan), an Enron subsidiary, operates a propane gas/air distribution system in the vicinity. Although San Juan did not provide service to the building, the National Transportation Safety Board (NTSB) has concluded that the probable cause of the incident was gas leaking from San Juan's distribution system. San Juan and Enron strongly disagree with the NTSB findings. The NTSB investigation (i) found no path of migration of gas from San Juan's system to the building and (ii) discovered no forensic evidence that propane gas fueled the explosion. Enron and San Juan have been named as defendants in a number of 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 Utilities 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. Enron believes that the authorized recovery of and return on the Trojan investment and decommissioning costs will be upheld and that these legal challenges will not have a materially adverse impact 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. 5. EARNINGS PER SHARE The computation of basic and diluted earnings per share is as follows (in millions, except per share amounts):
Three Months Ended March 31, 1998 1997 Numerator: Net income $ 214 $ 222 Preferred stock dividends (4) (4) Numerator for basic earnings per share - income available to common shareholders 210 218 Effect of dilutive securities: Preferred stock dividends 4 4 Numerator for diluted earnings per share - income available to common shareholders after assumed conversions $ 214 $ 222 Denominator: Denominator for basic earnings per share - weighted-average shares 305 248 Effect of dilutive securities: Preferred stock 18 19 Stock options 7 6 Dilutive potential common shares 25 25 Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions 330 273 Basic earnings per share $0.69 $0.88 Diluted earnings per share $0.65 $0.81
On May 8, 1998, Enron sold 17.25 million shares of its common stock representing an increase of approximately 5.5% in the number of shares outstanding. Net proceeds of approximately $837 million were used to reduce debt and for general corporate purposes, including capital expenditures. 6. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130 - "Reporting Comprehensive Income." Enron had adopted this standard which establishes standards for reporting and displaying comprehensive income and its components. Comprehensive income includes the following (in millions):
First Quarter 1998 1997 Earnings on common stock $ 210 $ 218 Other comprehensive income: Foreign currency translation adjustment (1) (15) Total comprehensive income $ 209 $ 203
PART I. FINANCIAL INFORMATION - (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENRON CORP. AND SUBSIDIARIES RESULTS OF OPERATIONS First Quarter 1998 vs. First 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 first quarter 1998 net income was $214 million compared to $222 million in the first 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, Enron International and Enron Engineering & Construction). The results of Portland General have been included in Enron's Consolidated Financial Statements beginning July 1, 1997. See Note 2 to the Consolidated Financial Statements. Items impacting comparability are discussed in the respective segment results. Net income includes the following (in millions):
First Quarter 1998 1997 After-tax results from: Core businesses $ 233 $ 165 Retail Energy Services (19) (9) 214 156 Items impacting comparability(a) Gains on sales of liquids assets - 66 Reported net income $ 214 $ 222 (a) Tax affected at 35%.
Basic and diluted earnings per share of common stock were as follows:
First Quarter 1998 1997 Reported basic earnings per share $0.69 $0.88 Diluted earnings per share: Results from core businesses $0.71 $0.60 Results from Retail Energy Services (0.06) (0.03) Items impacting comparability: Gains on sales of liquids and gathering assets - 0.24 Reported diluted earnings per share $0.65 $0.81
Income Before Interest, Minority Interests and Income Taxes The following table presents income before interest, minority interests and income taxes (IBIT) for each of Enron's operating segments (in millions):
First Quarter 1998 1997 Exploration and Production $ 43 $ 42 Transportation and Distribution: Gas Pipeline Group 126 237 Portland General 79 - Wholesale Energy Operations and Services 249 167 Retail Energy Services (27) (14) Corporate and Other 1 (3) Reported income before interest, minority interests and taxes $471 $429
Exploration and Production Enron's exploration and production operations are conducted by Enron Oil & Gas Company (EOG). IBIT of Exploration and Production totaled $43 million and $42 million for the first quarter of 1998 and 1997, respectively. Wellhead volume and price statistics (including intercompany amounts) are as follows:
First Quarter 1998 1997 Natural gas volumes (MMcf/d)(a) North America(b) 745 738 Trinidad 109 112 India 47 - Total 901 850 Average natural gas prices ($/Mcf) North America(c) 1.93 2.58 Trinidad 1.09 1.04 India 2.70 - Composite 1.86 2.38 Crude oil/condensate volumes (MBbl/d)(a) North America 15.3 13.1 Trinidad 2.8 3.7 India 4.2 2.8 Total 22.3 19.6 Average crude oil/condensate prices ($/Bbl) North America 14.55 21.55 Trinidad 14.03 21.56 India 15.33 22.99 Composite 14.64 21.76 (a) Million cubic feet per day or thousand barrels per day, as applicable. (b) Includes 48 MMcf/d for the three-month periods ended March 31, 1998 and 1997 delivered under the terms of a volumetric production payment agreement effective October 1, 1992, as amended. (c) Includes an average equivalent wellhead value of $1.62/Mcf and $2.47/Mcf for the three-month periods ended March 31, 1998 and 1997, respectively, for the volumes detailed in Note (b), net of transportation costs.
The following analyzes the significant changes in the various components of IBIT for Exploration and Production (in millions):
First Quarter 1998 1997 Net revenues $206 $180 Operating expenses 42 37 Exploration expenses 34 22 Depreciation, depletion and amortization 72 63 Taxes, other than income taxes 14 17 Operating income 44 41 Other income, net (1) 1 Reported income before interest, minority interests and taxes $ 43 $ 42
Net Revenues Exploration and Production's revenues, net of gas sold in connection with natural gas marketing, increased $26 million in the first quarter of 1998 as compared to the same period in 1997. Production volumes increased in the first quarter of 1998 as compared with the 1997 first quarter, although wellhead revenues declined due to lower prices. The colder winter in 1997 contributed to the higher prior year natural gas prices. Other marketing activities, including natural gas and crude oil hedging and trading transactions, resulted in net revenues of $2 million in the first quarter of 1998, an improvement from the prior year, which reflected a reduction of $46 million in net revenues. Gains on sales of reserves and related assets and other, net totaled $14 million in first three months of 1998 as compared to $1 million in the same period of 1997. Included in 1998 are $27 million in gains on sales of producing properties, partially offset by charges of $14 million associated with the costs of terminating certain physical natural gas contracts. Costs and Expenses Operating expenses, including taxes other than income taxes, depreciation, depletion and amortization and exploration expenses increased primarily due to increased production and exploration activities and overall market increases. Transportation and Distribution Transportation and Distribution consists of Gas Pipeline Group and Portland General. Gas Pipeline Group includes Enron's interstate natural gas pipelines, primarily Northern Natural Gas Company (Northern), Transwestern Pipeline Company (Transwestern) and Enron's 50% interest in Florida Gas Transmission Company (Florida Gas). Portland General primarily reflects the results of Portland General Electric Company (PGE) since the July 1, 1997 merger (see Note 2 to the Consolidated Financial Statements). Gas Pipeline Group. Significant components of IBIT are as follows (in millions):
First Quarter 1998 1997 Net revenues $192 $206 Operating expenses 69 73 Depreciation and amortization 16 18 Equity in earnings 11 10 Other income, net 8 10 IBIT before items impacting comparability 126 135 Gains on sales of liquids and gathering assets - 102 Reported income before interest and taxes $126 $237
Net Revenues Revenues, net of cost of sales, of Gas Pipeline Group (GPG) declined $14 million (7%) in the first quarter 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 the first three months of 1998. Costs and Expenses Operating expenses and depreciation and amortization decreased $4 million (5%) and $2 million (11%), respectively, during the first quarter of 1998 as compared to the same period in 1997. The decline is primarily due to reduced expenses related to the sale of natural gas liquids assets in the first quarter of 1997. Items Impacting Comparability During the first quarter of 1997, gains of $102 million were recognized related to the sales of liquids assets, including processing plants and Enron's interest in the Enron Liquids Pipeline L.P. Portland General. Results for Portland General have been included in Enron's Consolidated Financial Statements beginning July 1, 1997. For the first quarter of 1998, Portland General realized IBIT of $79 million, as follows (in millions):
First Quarter 1998 Revenues $320 Purchased power and fuel 124 Operating expenses 76 Depreciation and amortization 44 Other income, net 3 Reported income before interest and taxes $ 79
The results for the first three months of 1998 include the impact of the warmer than normal winter and costs of damages resulting from the January 1998 ice storm in Portland General's customer service area. Statistics for PGE for the first quarter of 1998 and 1997 (including amounts for 1997 for comparative purposes only) are as follows:
First Quarter 1998 1997 Electricity Sales (Thousand MWh)(a) Residential 2,076 2,142 Commercial 1,660 1,711 Industrial 990 983 Total Retail 4,726 4,836 Wholesale 3,575 6,419 Total Electricity Sales 8,301 11,255 Average Rate (Thousand MWh)(a) Residential 5.91 5.45 Commercial 5.06 5.07 Industrial 3.09 3.36 Total Retail 5.02 4.89 Wholesale 1.82 1.81 Total Sales 3.64 3.13 Resource Mix Coal 15% 5% Combustion Turbine 7 - Hydro 9 9 Total Generation 31 14 Firm Purchases 65 80 Secondary Purchases 4 6 Total Resources 100% 100% Average Variable Power Cost (Mills/KWh)(b) Generation 7.0 4.3 Firm Purchases 16.3 16.3 Secondary Purchases 14.2 12.2 Total Average Variable Power Cost 14.4 15.0 Retail Customers (end of period, thousands) 688 672 (a) Thousand megawatt-hours. (b) Mills (1/10 cent) per kilowatt-hour.
Wholesale Energy Operations and Services Enron's Wholesale Energy Operations and Services businesses are conducted primarily by Enron Capital & Trade Resources (ECT) and Enron International (EI). These businesses provide integrated energy-related products and services to wholesale customers worldwide, including the development, construction and operation of power plants, natural gas pipelines and other energy-related assets, energy commodity sales and services, risk management products and financial services. Wholesale Energy Operations and Services (Wholesale) can be categorized into four business lines: Asset Development and Construction, Cash and Physical, Risk Management and Finance and Investing. The following table reflects IBIT for each business line (in millions):
First Quarter 1998 1997 Asset Development and Construction $ 15 $ 9 Cash and Physical 153 136 Risk Management 31 34 Finance and Investing 80 16 Unallocated expenses (30) (28) Reported income before interest, minority interests and taxes $249 $167
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 $15 million in the first quarter of 1998 from $9 million in the same period of 1997, primarily as a result of higher construction earnings on projects in the U.K. 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. Wholesale markets, transports and provides energy commodities as reflected in the following table (including intercompany amounts):
First Quarter 1998 1997 Physical Volumes (BBtue/d)(a)(b) Gas: United States 7,276 8,611 Canada 2,876 2,107 Europe 1,125 460 11,277 11,178 Transport Volumes 450 207 Total Gas Volumes 11,727 11,385 Oil 1,756 663 Liquids 654 1,248 Electricity(c) 8,262 3,699 Total 22,399 16,995 Electricity Volumes Marketed (Thousand MWh) United States 74,272 33,242 Europe 82 50 Total 74,354 33,292 Financial Settlements (Notional) (BBtue/d) 69,918 39,916 (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.
The earnings from cash and physical increased 13% in the first quarter of 1998 as compared to the same period of 1997 primarily due to the strong performance of Enron's international operating assets and increased profits from power marketing where volumes showed continued strength in the growing deregulated market, partially offset by lower gas marketing margins resulting from warmer weather and low price volatility during the first quarter of 1998. Risk Management. 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 9% in the first quarter of 1998 as compared to the first quarter of 1997 primarily due to lower originations in the European market partially offset by higher North American originations. Finance and Investing. The finance and investing operations provides a variety of capital products to its worldwide customers, including volumetric production payments, loans and equity investments. These products are offered directly or through joint ventures. Additionally, the finance and investing business includes the management of 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. Enron's current balance of financings and investments approximated $1 billion at March 31, 1998. Earnings from the finance and investing operations increased to $80 million in the first quarter of 1998 as compared to $16 million in the same period of 1997 as a result of continued originations in the North American and European markets and increased earnings associated with Enron's energy investments. Unallocated Expenses. Net unallocated expenses such as rent, systems expenses and other support group costs increased in 1998 due to continued expansion into new markets and system upgrades. Retail Energy Services Enron Energy Services (EES) 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. In the first quarter of 1998, EES continued to make significant progress in expanding its customer base and contracting activities by executing several significant commodity and services contracts with new customers. EES reported an operating loss before interest, minority interest and taxes of $27 million in the first quarter of 1998 compared to a loss of $14 million in the first quarter of 1997. These results primarily reflect the costs associated with developing the commodity, capital and services capability to deliver on contracts signed to date by EES, as well as income from investments in related businesses. 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 IBIT of $1 million in the first quarter of 1998 compared to a loss of $3 million for the same period in 1997. Interest and Related Charges, net Interest and related charges, net, is reported net of interest capitalized of $6 million and $4 million for the first three months of 1998 and 1997, respectively. The net expense increased $63 million in the first quarter of 1998 as compared to the same period of 1997, primarily due to higher debt levels, including $1.5 billion of debt issued by Enron in the second half of 1997 and $1.1 billion of debt assumed in connection with the merger with PGC. Dividends on Company-Obligated Preferred Securities of Subsidiaries Dividends on company-obligated preferred securities of subsidiaries increased from $15 million in the first quarter of 1997 to $19 million in the first quarter of 1998, primarily due to the issuance of approximately $200 million of additional preferred securities by an Enron subsidiary during in the second quarter of 1997. Minority Interests Minority interests increased $6 million to $25 million in the first quarter of 1998 compared to the same period in 1997, primarily due to the minority owner's share of dividends on preferred stock issued in connection with the formation of an Enron-controlled joint venture in late 1997, partially offset by Enron's acquisition of the Enron Global Power & Pipelines, L.L.C. minority interest in November 1997. Income Tax Expense Income taxes decreased during the first quarter of 1998 as compared to the first quarter of 1997 primarily as a result of lower pretax earnings and differences between the book and tax basis of certain asset and stock sales. NEW ACCOUNTING PRONOUNCEMENTS On April 3, 1998, the AICPA issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities," which generally requires that costs for start- up activities and organization costs should be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after 1998 and initial adoption is required to be reflected as a cumulative effect of accounting change. Enron is evaluating the impact of SOP 98- 5 and is currently unable to estimate the impact of adopting this accounting pronouncement. FINANCIAL CONDITION Cash Flows
First Quarter (In Millions) 1998 1997 Cash provided by (used in): Operating activities $ 152 $(142) Investing activities (594) (68) Financing activities 445 209
Cash provided by operating activities totaled $152 million during the first three months of 1998 as compared to cash used of $142 in the same period last year. The change in cash from operating activities in the first quarter of 1998 reflects increased earnings from Enron's core businesses, partially offset by the increase in net assets of risk management activities. Cash used in investing activities totaled $594 million during the first quarter of 1998 as compared to $68 million during the same period in 1997. The increase primarily reflects increased cash usage for capital expenditures and other investments and a decrease in proceeds received from asset sales, primarily related to the 1997 sale of the liquids assets. Capital expenditures in the first quarter of 1998 were $288 million, including $118 million by EOG, $72 million by Wholesale and $65 million by Transportation and Distribution. Other investments totaled $250 million in the first three months of 1998 primarily as a result of additional investments made by Enron to complement existing businesses and activities by Wholesale in connection with its finance and investing line of business. Cash provided by financing activities totaled $445 million during the first quarter of 1998 as compared to $209 million during the same period in 1997. In the first three months of 1998, net issuances of short- and long-term debt totaled $581 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. Capitalization Total capitalization at March 31, 1998 was $14.8 billion. Debt as a percentage of total capitalization increased to 46.2% at March 31, 1998 as compared to 39.6% at March 31, 1997. The increase primarily reflects increased debt, partially offset by the issuance during 1997 of approximately 62.0 million shares of common stock in connection with the acquisitions of PGC and the minority interest in EPP (see Note 2 to the Consolidated Financial Statements). On May 8, 1998, Enron sold 17.25 million shares of its common stock, resulting in net proceeds of approximately $837 million. Giving effect to the sale of common stock and 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 39.4% at March 31, 1998. INFORMATION REGARDING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although Enron believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward looking statements herein include political developments in foreign countries, ability to penetrate new retail natural gas and electricity markets in the United States and Europe, the timing and extent of changes in commodity prices for crude oil, natural gas, electricity and interest rates, the extent of EOG's success in acquiring oil and gas properties and in discovering, developing and producing reserves, the timing and success of Enron's efforts to develop international power, pipeline and other infrastructure projects and conditions of the capital markets and equity markets during the periods covered by the forward looking statements. PART II. OTHER INFORMATION ENRON CORP. AND SUBSIDIARIES ITEM 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 March 19, 1998, containing Enron Corp. Consolidated Financial Statements for the year ended December 31, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENRON CORP. (Registrant) Date: May 14, 1998 By: Richard A. Causey Richard A. Causey Senior Vice President and Chief Accounting and Information Officer (Principal Accounting Officer) EX-12 2 STATEMENT RE COMPUTATION OF RATIOS Exhibit 12 ENRON CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) (Unaudited)
Three Months Ended Year Ended December 31, 3/31/98 1997 1996 1995 1994 1993 Earnings available for fixed charges Net income $214 $105 $ 584 $ 520 $ 453 $333 Less: Undistributed earnings and losses of less than 50% owned affiliates (19) (89) (39) (14) (9) (20) Capitalized interest of nonregulated companies (9) (16) (10) (8) (9) (26) Add: Fixed charges (1) 174 674 454 436 487 471 Minority interest 26 80 75 27 30 28 Income tax expense 84 (65) 297 310 190 148 Total $470 $689 $1,361 $1,271 $1,142 $934 Fixed Charges Interest expense (1) $157 $624 $ 404 $ 386 $ 445 $436 Rental expense representative of interest factor 17 50 50 50 42 35 Total $174 $674 $ 454 $ 436 $ 487 $471 Ratio of earnings to fixed charges 2.70 1.02 3.00 2.92 2.34 1.98 (1) Amounts exclude costs incurred on sales of accounts receivables.
EX-27 3 ARTICLE 5 FDS FOR FIRST QUARTER 10-Q
5 1,000,000 3-MOS DEC-31-1998 MAR-31-1998 173 0 2,123 0 163 5,388 13,942 4,695 24,720 4,902 6,835 0 133 4,230 1,451 24,720 4,555 5,682 4,559 5,270 (59) 0 133 294 80 214 0 0 0 214 0.69 0.65
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