000102 4401-01- 500028 [1] -----BEGIN PRIVACY-ENHANCED MESSAGE------ Proc-Type: 2001,MIC-CLEAR Originator-Name: webmasterc~www. sec. gov On gi nator-Key-Asymmetr-i C: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGj lWyK3XmZv3dTINen TWSM7vrzLADbmYQai onwg5sDw3P6oaMSD3tdezXMm7zlT+B+twIDAQAB MIC-Info: RSA-MD5, RSA, Gks3zCeMaiw+lGiRVDwP6j75RrPs3EeNilHInX9vl9EdwlQkC5Th7DrVTixdQkfd RflUOuGri oEaLY+SfQVGuQ== 0001024401-01-500028 .txt : 20010815 0001024401-01-500028 . hdr. sgml : 20010815 ACCESSION NUMBER: 0001024401-01-500028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL INDEX KEY: STANDARD INDUSTRIAL CLASSIFICATION: COMPANIES [6211] IRS NUMBER: STATE OF INCORPORATION: FISCAL YEAR END: FILING VALUES: FORM TYPE: SEC ACT: SEC FILE NUMBER: FILM NUMBER: BUSINESS ADDRESS: STREET 1: CITY: STATE: ZIP: BUSINESS PHONE: MAIL ADDRESS: STREET 1: CITY: STATE: ZIP: FORMER COMPANY: FORMER CONFORMED NAME: DATE OF NAME CHANGE: 1O-Q 1 enelO-q. txt FORM 1O-Q ENRON CORP/OR! 0001024401 SECURITY BROKERS, DEALERS & 470255140 OR 1231 10- Q 1934 Act 001-13159 1710615 1400 SMITH ST HOUSTON TX 77002- 7369 7138536161 1400 SMITH ST HOUSTON TX 77002- 7369 ENRON OREGON CORP 19961008 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 1O-Q Page 1 FLOTATION 0001024401-01-500028 [1] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 Commission File Number 1-13159 ENRON CORP. (Exact name of registrant as specified in its charter) Oregon (State or other jurisdiction of incorporation or organization) Enron Building 1400 Smith Street Houston, Texas (Address of principal executive offices) 47-025 5140 (I.R.S. Employer Identi fi cation Number) 77002 (zip Code) (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, 2001 Common Stock, No Par Value 749,857,388 shares 1 of 37 ENRON CORP. AND SUBSIDIARIES TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION Page 2 0001024401-01-500028 [1] ITEM 1. Financial Statements consolidated Income Statement - Three Months Ended June 30, 2001 and 2000 and Six Months Ended June 30, 2001 and 2000 Consolidated Balance Sheet - June 30, 2001 and December 31, 2000 Consolidated Statement of Cash Flows - Six Months Ended June 30, 2001 and 2000 Notes to consolidated Financial Statements ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of operations 3 4 6 7 18 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ITEM 4. Submission of Matters to a vote of Security Holders ITEM 6. Exhibits and Reports on Form 8-K 35 35 36 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENRON CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT (In Millions, Except Per Share Amounts) (Unaudi ted)
Three Months Ended June 30, 2001 2000 Six Months Ended June 30, 2001 2000 <5> Revenues $30,031 Costs and Expenses Cost of gas, electricity, metals and other products 27,212 Operating expenses 1,639 Depreciation, depletion and amortization 364 Taxes, other than income taxes 125 29,340 $50,060 $16,886 $100,189 48,173 15,324 1,027 240 78 892 192 59 49,518 16,467 96,332 2,020 453 166 98,971 Operating Income 691 Other Income and Deductions Equity in earnings of unconsolidated equity affiliates 319 Gains on sales of non-merchant assets 542 100 18 419 55 72 Page 3 1, 218 174 50 0001024401-01-500028 [1] 133 90 other income, net 133 Income Before Interest, Minority Interests and Income Taxes 1,233 Interest and Related Charges, net 357 Dividends on company-obligated Preferred Securities of subsidiaries 39 Minority Interests 74 Income Tax Expense 136 Net Income Before Cumulative Effect of Accounti ng Changes 627 cumulative Effect of Accounting changes, net of tax Net Income 627 Preferred Stock Dividends 41 Earnings on Common Stock 586 Earnings Per Share of Common Stock Basic Before Cumulative Effect of Accounting Changes 0.80 cumulative Effect of Accounting Changes Basic Earnings per Share 0.80 Diluted Before Cumulative Effect of Accounting Changes 73 Cumulative Effect of Accounting Changes Diluted Earnings per Share 793 215 18 30 126 404 404 21 $ 383 $ 0.51 $ 0.51 63 609 196 21 39 64 289 289 21 $ 268 146 1,588 416 36 70 256 810 $ 19 829 41 788 $ 0.37 $ 1.02 - 0.02 $ 0.37 $ 1.04 $ 0.45 $ 0.34 0. $ 0.45 $ 0.34 0.73 Average Number of Common Shares used in Computation Basic 757 733 728 Diluted 891 862 857 The accompanying notes are an integral part of these consolidated statements.
PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON CORP. AND SUBSIDIARIES Page 4 $ 0.92 0.02 $ 0.94 755 882 financial $ $ $ $ $ 0001024401-01- 500028 [1] CONSOLIDATED BALANCE SHEET (In Millions) (Unaudi ted)
June 30, December 31, 2001 2000 ASSETS <5> Current Assets Cash and cash equivalents $ 847 $ 1,374 Trade receivables (net of allowance for doubtful accounts of $453 and $133, respectively) 11,234 10,396 Other receivables 1,347 1,874 Assets from price risk management activities 8,815 12,018 Inventories 913 953 Deposits 2,412 2,433 Other 756 1,333 Total Current Assets 26,324 30,381 Investments and other Assets Investments in and advances to unconsolidated equity affiliates 5,934 5,294 Assets from price risk management activities 9,023 8,988 Goodwill 3,527 3,638 Other 7,843 5,459 Total Investments and Other Assets 26,327 23,379 Property, Plant and Equipment, at cost Natural gas transmission 6,287 6,916 Electric 9eneratiOn and distribution 3,784 4,766 Fiber-optic network and equipment 926 839 Construction in progress 809 682 Other 2,481 2,256 14,287 15,459 Less accumulated depreciation, depletion and amortization 3,546 3,716 Property, Plant and Equipment, net 10,741 11,743 Total Assets $63,392 $65,503 The accompanying notes are an integral part of these consolidated financial statements.
PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (continued) ENRON CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Millions) (Unaudi ted)
June 30, December 31, 2001 2000 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Page 5 0001024401-01- 500028 [1] Accounts payable $ 9,646 $ 9,777 Liabilities from price risk management activities 7,470 10,495 Short-term debt 3,457 1,679 Customers' deposits 1,820 4,277 Other 1,920 2,178 Total Current Liabilities 24,313 28,406 Long-Term Debt 9,355 8,550 Deferred Credits and Other Liabilities Deferred income taxes 1,758 1,644 Liabilities from price risk management activities 10,062 9,423 Other 2,866 2,692 Total Deferred Credits and Other Liabilities 14,686 13,759 Minority Interests 2,395 2,414 Company-Obligated Preferred Securities of Subsidiaries 903 904 Shareholders' Equity Second preferred stock, cumulative, no par value 116 124 Mandatorily Convertible Junior Preferred Stock, Series B, no par value 1,000 1,000 Common stock, no par value 9,416 8,348 Retained earnings 3,827 3,226 Accumulated other comprehensive income (1,606) (1,048) Common stock held in treasury (861) (32) Restricted stock and other (152) (148) Total Shareholders' Equity 11,740 11,470 Total Liabilities and Shareholders' Equity $63,392 $65,503 The accompanying notes are an integral part of these consolidated financial statements.
PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In Millions) (Unaudi ted)
Six Months Ended June 30, 2001 2000 <5> Cash Flows From Operating Activities Reconciliation of net income to net cash provided by (used in) operating activities Net income $ 829 $ 627 Cumulative effect of accounting changes, net of tax (19) Depreciation, depletion and amortization 453 364 Deferred income taxes 188 31 Gains on sales of non-merchant assets (50) (90) Changes in components of working capital: Page 6 0001024401-01-500028 [1] Net margin deposit activity (2,342) (350) other working capital (800) (174) Net assets from price risk management activities 782 (799) Merchant assets and investments: Realized (gains) losses on sales (64) 29 Proceeds from sales 479 553 Additions (175) (1,206) unrealized losses 21 111 Other, net (639) 357 Net Cash used in Operating Activities (1,337) (547) cash Flows From Investing Activities Capital expendi tures (1,200) (1,009) Equity investments (1,088) (390) Proceeds from sales of non-merchant assets 1,423 105 Acquisitions of subsidiary stock - (485) Business acquisitions, net of cash acquired (34) (358) Other investing activities (262) (117) Net cash used in Investing Activities (1,161) (2,254) cash Flows From Financing Activities Issuance of long-term debt 2,864 2,479 Repayment of long-term debt (1,782) (431) Net increase in short-term borrowings 1,169 1,301 Issuance of common stock 185 264 Issuance (redemption) of preferred securities of subsidiaries (95) Dividends paid (256) (265) Acquisition of treasury stock (209) (129) Other financing activities 107 Net Cash Provided by Financing Activities 1,971 3,231 Increase (Decrease) in Cash and Cash Equivalents (527) 430 Cash and Cash Equivalents, Beginning of Period 1,374 288 Cash and Cash Equivalents, End of Period $ 847 $ 718 changes in Components of Other working capital Receivables $ (937) $(2,615) Inventories (114) 36 Payables (139) 2,319 Other 390 86 Total $ (800) $ (174) 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 re9ulations of the Securities and Exchan9e 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 Page 7 000102 4401-01- 500028 [1] interim periods. Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although Enron believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in Enron's Annual Report on Form 10-K for the year ended December 31, 2000 (Form 10-K). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contin9ent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made in the 2000 amounts to conform with the 2001 presentation. "Enron" is used from time to time herein as a collective reference to Enron corp. and its subsidiaries and affiliates. The businesses of Enron are conducted by Enron Corp.'s subsidiaries and affiliates whose operations are managed by their respective officers. 2. SUPPLEMENTAL CASH FLOW INFORMATION Net cash paid for income taxes for the first half of 2001 and 2000 was $167 million and $33 million, respectively. Cash paid for interest for the same periods, net of amounts capitalized, was $426 million and $376 million, respectively. In 2000, Enron entered into an agreement with Azurix under which the holders of Azurix's approximately 39 million publicly traded shares would receive cash of $8.375 in exchange for each share. On March 16, 2001, Azurix shareholders approved the agreement whereby Enron paid approximately $330 million for an equivalent number of shares held by the public and all publicly traded shares of Azurix Corp were redeemed. Non-Cash Activity. In March 2001, Enron acquired the limited partner's interests in an unconsolidated equity affiliate, Joint Energy Development Investments Limited Partnership (JEDI), for $35 million. As a result of the acquisition, JEDI has been consolidated. JEDI's balance sheet as of the date of acquisition consisted of net assets of approximately $500 million, including an investment of 12 million shares of Enron common stock valued at approximately $785 million, merchant investments and other assets of approximately $670 million and third-party debt and debt owed to Enron of approximately $950 million. Enron repaid the third-party debt of approximately $620 million prior to March 31, 2001. Also see Note 8. 3. LITIGATION AND OTHER CONTINGENCIES Litigation Enron is a party to various claims and litigation, the significant Page 8 0001024401-01- 500028 [1] 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 resol ution of such items, individually or in the ag gregate, will not have a material adverse impact on Enron's financial position or results of operations. In 1995, several parties (the Plaintiffs) filed suit in Harris County District Court in Houston, Texas, against Intratex Gas Company (Intratex), Houston Pipe Line Company and Panhandle Gas Company (collectively, the Enron Defendants), each of which is a wholly-owned subsidiary of Enron. The Plaintiffs were either sellers or royalty owners under numerous gas purchase contracts with Intratex, many of which have terminated. Early in 1996, the case was severed by the Court into two matters to be tried (or otherwise resolved) separately. In the first matter, the Plaintiffs alleged that the Enron Defendants committed fraud and negligent misrepresentation in connection with the "Panhandle program," a special marketing program established in the early 1980s. This case was tried in October 1996 and resulted in a verdict for the Enron Defendants. In the second matter, the Plaintiffs allege that the Enron Defendants violated state regulatory requirements and certain gas purchase contracts by failing to take the Plaintiffs' gas ratably with other producers' gas at certain times between 1978 and 1988. The trial court certified a class action with respect to ratability claims. On March 9, 2000, the Texas Supreme Court ruled that the trial court's class certification was improper and remanded the case to the trial court. The Enron Defendants deny the Plaintiffs' claims and have asserted various affirmative defenses, including the statute of limitations. The Enron Defendants believe that they have strong legal and factual defenses, and intend to vigorous1y 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 the Humberto vidal Building in San Juan, Puerto Rico. The explosion resulted in fatalities, bodily injuries and damage to the building and surrounding property. San Juan Gas Company, Inc. (San Juan Gas), an Enron affiliate, operated a propane/air distribution system in the vicinity, but did not provide service to the building. Enron, San Juan Gas, four affiliates and their insurance carriers were named as defendants along with several third parties, including The Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Telephone Company, Heath Consultants Incorporated, Humberto Vidal, Inc. and their insurance carriers, in numerous lawsuits filed in U.S. District Court for the District of Puerto Rico and the Superior Court of Puerto Rico. These suits seek damages for wrongful death, personal injury, business interruption and property damage allegedly caused by the explosion. After nearly four years without determining the cause of the explosion, all parties agreed not to litigate further that issue, but to move these suits toward settlements or trials to determine whether each plaintiff was injured as a result of the explosion and, if so, the lawful damages attributable to such injury. The defendants a~ reed on a fund for settlements or final awards. Numerous claims have been settled and ten cases involving 19 plaintiffs are scheduled for trial in the united States District Court beginning on December 10, 2001. No cases have yet been scheduled for trial in the Superior Court. 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 Page 9 0001024401-01- 500028 [1] Electric (PGE) ceased commercial operation of the Trojan nuclear power generating facility. The Oregon Public Utility Commission (OPUC) granted PGE, through a general rate order, recovery of, and a return on, 87 percent of its remaining investment in Trojan. The oPuc2s general rate order related to Trojan has been subject to litigation in various state courts, including rulings by the Oregon Court of Appeals and petitions to the Oregon Supreme Court filed by parties opposed to the OPUC's order, including the Utility Reform Project(uRP) and the Citizens Utility Board (CUB). In August 2000, PGE entered into agreements with the CUB and the staff of the OPUC to settle the litigation related to PGE's recovery of its investment in the Trojan plant. Under the agreements, the CUB agreed to withdraw from the litigation and to support the settlement as the means to resolve the Trojan litigation. The OPUC approved the accounting and ratemaking elements of the settlement on September 29, 2000. As a result of these approvals, PGE's investment in Trojan is no longer included in rates charged to customers, either through a return on or a return of that investment. Collection of ongoing decommissioning costs at Trojan is not affected by the settlement agreements or the september 29, 2000 OPUC order. with the CUB'S withdrawal, the URP is the one remaining significant adverse party in the litigation. The URP has indicated that it plans to continue to challenge the settlement and the original OPUC order allowing PGE recovery of and a return on its investment in Trojan. Enron cannot predict the outcome of these actions. Although no assurances can be given, Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. Other Contingencies Environmental Matters. Enron is subject to extensive federal, state and local environmental laws and regulations. These laws and regulations require expenditures in connection with the construction of new facilities, the operation of existing facilities and for remediation at various operating sites. The implementation of the Clean Air Act Amendments is expected to result in increased operating expenses. These increased operating expenses are not expected to have a material impact on Enron's financial position or results of operations. Enron' s natural gas pipeline companies conduct soil and groundwater remediation on a number of their facilities. Enron does not expect to incur material expenditures in connection with soil and groundwater remedi ati on. Developments in the California Power Market. During 2000, prices for wholesale electricity in California significantly increased as a result of a combination of factors, including higher natural gas prices, reduction in available hydroelectric generation resources, increased demand, over-reliance on the spot market for electricity and limitations on supply. California's regulatory regime instituted in 1996 permitted wholesale price increases but froze retail prices below market levels. The resulting disparity between costs of supply and customer revenues caused two of California's public utilities, Pacific Gas & Electric Company (PG&E) and Southern California Edison Company (SCE), to accrue substantial unrecovered wholesale power costs and certain obligations related to the difference between third party power purchase costs and frozen rates charged to retail customers. PG&E and SCE have defaulted on or are chall enging payments owed for certain outstanding obligations, including wholesale power purchased Page 10 0001024401-01- 500028 [1] through the California Power Exchange (the Power Exchange), from the California Independent system Operator (the Independent System Operator), and from qualifying facilities. In addition, PG&E and the Power Exchange each have filed a voluntary petition for bankruptcy. various legislative, regulatory and legal remedies to the energy situation in California have been implemented or are being pursued, and may result in restructuring of markets in California and elsewhere. Additional initiatives are likely at the Federal, state and local level, but it is not possible to predict their outcome at this time. Enron has entered into a variety of transactions with California utilities, the Power Exchange, the Independent system operator, end users of energy in California, and other third parties, and is owed amounts by certain of these entities. Enron has established reserves related to such activities and believes that the combination of such reserves in accounts receivables and other credit offsets with such parties are adequate to cover its exposure to developments in the California power market. Due to the uncertainties involved, the ultimate outcome of the California power situation cannot be predicted, but Enron believes these matters will not have a material adverse impact on Enron's financial condition or results of operations. India. Enron indirectly owns 50% of the net voting interest in Dabhol Power Company (oabhol), which owns a 740 megawatt power plant and is constructing an additional 1,444 megawatt power plant together with an LNG regasification facility (collectively Phase II) in India. Enron accounts for its investment in Dabhol under the equity method and the debt of Dabhol is non-recourse to Enron. Dabhol has been in dispute with the Maharashtra State Electricity Board (MSEB), the purchaser of power from Dabhol, and the Government of Maharashtra (GOM) and the federal government of India (Gol), the guarantors of payments by the MSEB pursuant to the terms and conditions of the power purchase agreements (PPA) and the other project documents. The contract disputes relate principally to (a) the failure by the MSEB to pay certain capacity and energy payments under the PPA, and the failure of the GOM and GOI to satisfy certain guarantee obligations under the proiect documents and (b) MSEB's statements that MSEB has "rescinded' the PPA and MSEB is therefore no longer bound by the PPA. As a result of such disputes, the Phase II lenders have stopped funding the continued construction of Phase II and the construction contractors have terminated the construction contracts for non- payment. There is no assurance that Dabhol will be able to resolve such disputes to its favor and to successfully collect on and to enforce any judgment or settlement. However, Dabhol believes that the MSEB's actions are in clear violation of the terms of the PPA, and Dabhol intends to pursue all available legal remedies under the project documents. As a result of these disputes, the 740 megawatt power plant is not being dispatched by MSEB. Further, Dabhol has suspended construction activity on Phase II. Enron does not believe that any contract dispute related to Dabhol will have a material adverse impact on Enron's financial condition or results of operations. 4. EARNINGS PER SHARE The computation of basic and diluted earnings per share is as follows (in millions, except per share amounts):
Six Months Ended Page 11 0001024401-01- 500028 [1] second Quarter 2001 2000 <5> Numerator: Basic Income before cumulative effect of accounting chan9es Preferred stock dividends: Second preferred stock Series B Preferred Stock Income available to common shareholders before cumulative effect of accounting changes cumulative effect of accounting changes Income available to common sharehol ders Diluted Income available to common shareholders before cumulative effect of accounting changes Effect of assumed conversion of dilutive securities: Second preferred stock Series B Preferred Stock Income before cumulative effect ~ changes Income available to common shareholders after assumed conversions Denominator: Denominator for basic earnings per share - weighted-average shares Effect of assumed conversion of dilutive securities: Preferred Stock: Second Preferred Stock Series B Preferred Stock Stock options and other equity instruments Dilutive potential common shares Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions Basic earnings per share: Before cumulative effect of accounti ng changes cumulative effect of accounting changes Basic earnings per share Diluted earnings per share: Before cumulative effect of accounting changes cumulative effect of accounting changes Diluted earnings per share
$ 404 (4) (17) 383 $ 289 (4) (17) 268 June 30, 2001 2000 $ 810 $ 627 (8) (8) (33) (33) 769 586 - - 19 $383 $268 $788 $ 586 $383 $268 $769 $586 4 17 404 4 17 289 8 8 33 33 810 19 627 $404 $289 $829 $627 757 32 50 52 134 891 733 35 50 44 129 862 755 728 33 50 44 127 35 50 44 129 882 857 $0.51 $0.37 $1.02 - - 0.02 $0.51 $0.37 $1.04 $0.80 $0.80 $0.45 $0.34 $0.92 $0.73 - - 0.02 $0.45 $0.34 $0.94 $0.73 5. COMPREHENSIVE INCOME Comprehensive income includes the following Page 12 (i n 0001024401-01-500028 [1] millions):
Second Quarter 2001 2000 Six Months Ended June 30, 2001 2000 <5> Net income Other comprehensive income (net of tax): Foreign currency translation adi ustment Derivative instruments: cumulative effect of accounting changes Deferred loss on derivative instruments associated with hedges of future cash flows Recognition in earnings of previously deferred gains related to derivative instruments used as cash flow hedges change in value of available- for-sale investments Total comprehensive income (loss) $404 $289 $829 $ 627 (401) (99) (551)(a) (101) 25 - (26) - (34) 4 (9)(b) 10 (6) $ (9) $ 184 11 $ 271 (19) $ 507 (a) change primarily reflects the decline in value of the Brazilian real and the British Pound. (b) Includes an after-tax gain of $10 million related to the discontinuance of a cash flow hedge or a forecasted transaction that became probable of not occurring.
6. BUSINESS SEGMENT INFORMATION Enron's business is divided into reporting segments, defined as components of an enterprise about which financial information is available and evaluated regularly by the office of the chairman, which serves as the chief operating decision making group. Be9inning in 2001, the commodity-related risk management activities of Retail Energy Services' North American customer contracts were transferred to the wholesale Services segment, consolidating all energy commodity risk management activities within one segment. In 2001, Retail Energy Services' business includes origination of new commodity and energy asset management and services contracts, execution of energy asset management and services activity and management of customer relationships. Year 2000 results in the following table have been restated to reflect this change.
Transportati on corporate and Retail wholesale Energy B road band Page 13 and (In Millions) other(d) Total Three Months Ended June 30, 2001 <5> revenues (a) $ 50,060 revenues (b) Unaffi 1 i ated $ 211 Intersegment (183) - Total revenues $ 28 $ 50,060 Income (loss) before interest, minority interests and income taxes $(109) $ 793 0001024401-01-50002 8 [1] services(c) Services(c) $48,340 138 $48,478 $ 802 $ 559 (2) $ 557 $ 60 Services $ 15 1 $ 16 $(102) Di st ri buti on $ 935 46 $ 981 $ 142 Six Months Ended June 30, 2001 revenues (a) $100,189 revenues (b) unaffiliated $ 273 Intersegment (411) - Total revenues $(138) $100,189 Income (loss) before interest, minority interests and income taxes $(267) $ 1,588
Transportati on Corporate and (In Millions) Other(d) Total Three Months Ended June 30, 2000 <5> Unaffiliated $ 149 Intersegment (398) - Total revenues $(249) $ 16,886 Income (loss) before interest, minority interests and income taxes $ 17 $ 609 revenues $ 16,886 revenues Retail wholesale Servi ces(c) $15,632 335 $15,967 $ 415 Energy Services (c) $ 409 11 $ 420 $ 46 Broadband Servi ces $ 151 and Distribution $ 545 52 $ 151 $ (8) $ 597 $ 139 Six Months Ended June 30, 2000 unaffiliated $ 186 Intersegment (595) Total revenues revenues $ 30,031 revenues $27,794 502 $28,296 Page $96, 747 237 $96,984 $ 1,557 $1,201 49 $1,250 $ 100 $ 100 (1) $ 99 $(137) $1,868 126 $1,994 $ 335 $ 210 $ 697 37 $ 734 $1,144 14 $ 210 56 $1,200 0001024401-01- 500028 [1] $(409) $ 30,031 Income (loss) before interest, minority interests and income taxes $ 844 $ 52 $ (8) $ 372 $ (27) $ 1,233 (a) Enron recognized revenues from transactions with unconsolidated equity affiliates of approximately $1,111 million in the first half of 2001, including $125 million related to commodity contracts entered into in the second quarter. (b) Intersegment sales are made at prices comparable to those received from unaffiliated customers and in some instances are affected by regulatory considerations. (c) The 2000 amounts have been restated. Prior to the restatement, Retail Energy Services reported revenues and IBIT of $840 million and $24 million, respectively, for the second quarter of 2000. Restated full year 2000 revenues and IBIT were $1,766 million and $173 million, respectively. Operating results in 2001 include servicing charges from whol esale Services for management of Retail Service s' risk management activities. These servicing charges are reflective of the applicable level of risk management services provided and have been presented on a basis consistent with how such charges are reported internally. (d) Includes consolidating eliminations.
Total assets by segment are as follows (in millions):
June 30, December 31, 2001 2000 <5> wholesale Services $49,314 $51,099 Retail Energy Services 1,353 1,205(a) Broadband Services 1,453 1,337 Transportation and Distribution 8,499 8,283 Corporate and Other 2,773 3,579 Total Assets $63,392 $65,503 (a) Retail Energy Services' total assets have been restated.
7. DERIVATIVE INSTRUMENTS On January 1, 2001, Enron recognized an after-tax non- cash gain of $19 million in earnings and deferred an after- tax non-cash gain of $25 million in "Accumulated Other Comprehensive Income" (OCI), a component of shareholders' equity, and reclassified $277 million from "Long-Term Debt" to "Other Liabilities" to reflect the initial adoption of Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 must be applied to all derivative instruments and requires that such instruments be recorded in the balance sheet either as an asset or a liability measured at its fair value through earnings, with special accounting permitted for certain qualifying hedges as described in the following paragraphs. Page 15 0001024401-01-500028 [1] In the ordinary course of business, Enron enters into derivative instruments, as defined in SFAS No. 133, as part of its normal risk management operations, which are subject to parameters established by Enron's Board of Directors. The adoption of SFAS No. 133 has no impact on the way Enron accounts for its risk management business activities. On a much more limited basis, Enron's other businesses enter into derivative instruments, such as forwards, swaps and other contracts, in order to hedge certain non-trading risks, including interest rate risk, commodity price risk and foreign currency exchange rate risk. Enron primarily uses cash flow hedges, for which Enron's objective is to provide protection against variability in cash flows due to an associated variable risk. Enron accounts for such hedging activity by initially deferring the gain or loss related to the fair value changes in derivative instruments in OCI. The deferred change in f air value is then reclassified into income concurrently with the recognition in income of the cash flow item hedged. The net after-tax amount expected to be reclassified from oci within the next 12 months is approximately $10 million. Enron recognized a loss of approximately $13 million related to ineffectiveness in cash flow hedges. Enron has also entered into a limited number of fair value hedges to protect the fair value of certain liabilities from variability caused by fluctuations in either interest rates or foreign currency exchange rates. Enron accounts for these hedges by recognizing the fair value of both the derivative instrument and the hedged item into income concurrently. There was no material ineffectiveness in fair value hedges during the first six months of 2001. Certain of Enron's unconsolidated affiliates entered into net investment hedges to protect against the foreign currency exposure related to foreign operations. Enron recorded an increase of approximately $9 million in ocr related to such hed9es in 2001. Enron also holds a limited number of derivative instruments in its non-risk management businesses, which do not meet the requirements of SEAS No. 133 for hedge accounti ng, but provide Enron with an economic hedge of an associated risk. The maximum amount of time over which cash flow exposure in forecasted transactions is hed9ed, excludin9 hedges of variable interest rate risk on existing financial instruments, is approximately 20 years. Derivative contracts are entered into with counterparties who are equivalent to investment grade. Accordingly, Enron does not anticipate any material impact to its financial position or results of operations as a result of nonperformance by the third parties on derivative instruments related to non-risk management business activities. 8. RELATED PARTY TRANSACTIONS During the second quarter of 2001, Enron did not recognize any material revenues or income from transactions with the limited partnerships discussed below. Additionally, the senior officer, who previously was the general partner of these partnerships, sold all of his financial interests as of July 31, 2001, and no longer has any management responsibilities for these entities. Accordingly, such partnerships are no longer related parties to Enron. All transactions with these partnerships (the Partnerships) Page 16 0001024401-01- 500028 [1] have been approved by Enron's senior risk officers as well as reviewed annually by the Board of Directors. Management believes that the terms of the transactions were reasonable compared to those which could have been negotiated with unrelated third parties. In the first quarter of 2001, Enron entered into transactions with the Partnerships, now unrelated, to hedge certain merchant investments and other assets. As part of these transactions, Enron has entered into agreements with entities formed in 2000 (the Entities), which included the obligation to deliver 12 million shares of Enron common stock in March 2005 (the Commitment) and entered into derivative instruments which eliminated the contingent nature of existing restricted forward contracts executed in 2000. The Commitment and the shares to be delivered under the derivative instruments are restricted through March 2005. In exchange, Enron received notes receivable from the Entities totaling approximately $827.6 million. In addition, Enron entered into share settled costless collar arrangements with the Entities on the 12 million shares of Enron common stock. such transactions will be accounted for as equity transactions when settled. Enron received a $6.5 million note receivable from the Entities to terminate share- settled options on 7.1 million shares of Enron common stock. The transactions resulted in non-cash increases to non- current assets and equity. In the first half of 2001, Enron recognized net revenues of approximately $241.1 million (of which $5.0 million related to the second quarter), primarily related to the change in the market value of derivatives instruments entered into with the Entities in 2000 to hedge certain merchant investments and other assets. Revenues recognized on the derivative instruments offset market value changes of certain merchant investments and price risk management activities. In addition, Enron and the Entities terminated certain derivative instruments (originally entered into in 2000) with a combined notional value of approximately $727.2 million. Enron received note receivables from the Entities for approximately $133.3 million related to such terminations. At June 30, 2001, cash in the Entities of $156 million was invested in Enron demand notes. Enron recognized $63 million and $10 million of interest income and interest expense, respectively, on notes receivable from and notes payable to the Entities. In the second quarter of 2001, Enron acquired investments from the Partnerships for approximately $36.6 million. In the first half of 2001, Enron received approximately $241.8 million from whitewing Associates, LP (whitewing), an unconsolidated equity affiliate, related to securitizations. In the second quarter of 2001, Enron acquired investments from whitewing for approximately $28.8 million. No gains were recorded by Enron in connection with these transactions. Management believes that these transactions are reasonable compared to those which could have been negotiated with third parties. PART I. FINANCIAL INFORMATION - (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF Page 17 0001024401-01- 500028 [1] FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENRON CORP. AND SUBSIDIARIES RESULTS OF OPERATIONS Second Quarter 2001 vs. Second Quarter 2000 The followin9 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 2001 net income was $404 million compared to $289 million in the second quarter of 2000. Enron's business is divided into five reporting segments including: wholesale Services. wholesale Services includes Enron's wholesale businesses around the world. wholesale Services operates in developed markets such as North America and Europe, as well as developing or newly deregulating markets including South America and Japan. Retail Energy Services. Retail Energy Services (Energy Services) is extending Enron's energy expertise and capabilities to end-use retail customers in the industrial and commercial business sectors to manage their energy requirements and reduce their total energy costs. Broadband Services. Enron's broadband services business (Broadband Services) provides customers with broadband services, including network services intermediation and the delivery of premium content. Transportation and Distribution. Transportation and Distribution consists of Enron Transportation Services (Transportation Services) and Portland General (PGE). Transportation Services includes Enron's interstate natural gas pipelines, primarily Northern Natural Gas Company (Northern), Transwestern Pipeline company (Transwestern), Enron's 50% interest in Florida Gas Transmission Company (Florida Gas) and Enron's interests in Northern Border Partners, L.P. and EOTT Energy Partners, L.P. (EOTT). Corporate and Other. Corporate and Other includes Enron's investment in Azurix Corp. (Azurix), which provides water and wastewater services, results of Enron Renewable Energy corp., which develops and constructs wind-generated power projects, and the operations of Enron's methanol and MTBE plants as well as overall corporate activities of Enron. Basic and diluted earnings per share of common stock were as follows:
Page 18 000102 4401-01- 500028 [1] second Quarter 2001 2000 <5> Basic earnings per share $0.51 $0.37 Diluted earnings per share $0.45 $0.34 Income Before Interest, Minority Interests and Income Taxes The followin9 table presents income (loss) before interest, minority interests and income taxes (IBIT) for each of Enron's reporting segments (in millions):
second Quarter 2001 2000 Wholesale Services $ 802 $ 415 Retail Energy Services 60 46 Broadband Services (102) (8) Transportation and Distribution: Transportation Services 77 77 Portland General 65 62 Corporate and Other (109) 17 Income before interest, minority interests and taxes $ 793 $ 609
Wholesale Services Enron builds its wholesale businesses through the creation of networks involving selective asset ownership, contractual access to third-part y assets and market-making activities. Each market in which wholesale Services operates utilizes these components in a slightly different manner and is at a different stage of development. This network strategy has enabled Wholesale Services to establish a leading position in its markets. wholesale Services1 activities are categorized into two business lines: (a) Commodity Sales and Services and (b) Assets and Investments. Activities may be integrated into a bundled product offering for Enron's customers. wholesale Services manages its portfolio of contracts and assets in order to maximize value, minimize the associated risks and provide overall liquidity. In doin9 so, wholesale Services uses portfolio and risk management disciplines, including offsetting or hedging transactions, to manage exposures to market price movements (commodities, interest rates, foreign currencies and equities). Additionally, Wholesale Services manages its liquidity and exposure to third- p arty credit risk through monetization of its contract portfolio or third-party insurance contracts. wholesale Services also sells interests in certain investments and other assets to improve liquidity and overall return, the timing of which is dependent on market conditions and management's expectations of the investment's value. The following table reflects IBIT for each of wholesale Services' business lines (in millions): Page 19 0001024401-01-500028 [1]
Second Quarter 2001 2000 <5> Commodity Sales and Services $762 $420 Assets and Investments 134 55 unallocated expenses (94) (60) Income before interest, minority interests and taxes $802 $415
The following discussion analyzes the contributions to IBIT for each business line. Commodity Sales and Services, wholesale Services provides reliable commodity delivery and predictable pricing to its customers through forwards and other contracts. Activity includes the purchase, sale, marketing and delivery of natural gas, electricity, liquids and other commodities, as well as the management of wholesale Services own portfolio of contracts. Contracts associated with this activity are accounted for using the mark-to-market method of accounting. wholesale Services' market-making activity is facilitated through a network of capabilities including selective asset ownership. Accordingly, certain assets involved in the delivery of these services are included in this business (such as intrastate natural gas pipelines, gas storage facilities and certain electric generation assets). wholesale Services markets, transports and provides energy commodities as reflected in the following table (including intercompany amounts):
Second Quarter 2001 2000 Physical volumes (BBtue/d)(a) Gas: North America 25,614 22,438 Europe and Other 7,290 3,593 32,904 26,031 Transport volumes 319 595 Total Gas Volumes 33,223 26,626 Crude Oil and Liquids 10,054 5,048 El ectri ci ty(b) 31,500 15,056 Total 74,777 46,730 Electricity volumes Marketed (Thousand MWh)(c) North America 213,948 124,089 Europe and Other 72,704 12,912 Total 286,652 137,001 Financial Settlements (Notional) (BBtue/d) 258,443 152,627 (a) Billion British thermal units equivalent per day. (b) Represents electricity volumes, converted to BBtue/d. Page 20 000102 4401-01- 500028 [1] (c) Thousand megawatt-hours.
Earnings from commodity sales and services increased $342 million in the second quarter of 2001 as compared to the same period in 2000. The quarter over quarter increase was primarily due to increased earnings from North American and European power marketing and certain other marketing operations, partially offset by decreased North American gas marketing results. Profits from North American power marketing operations, which increased significantly, included the sale of three peaking power plants. with increased liquidity in the market, Enron can now use power purchase contracts as an alternative to the peaking plants to directly support contracts to sell power. Earnings from other wholesale marketing operations, including coal, steel and forest products, also contributed to the earnings growth of Enron's commodity sales and services business, volumes cj rowth, which increased 60 percent in the second quarter of 2001 as compared to the second quarter of 2000, and price volatility in the power markets were the key contributors to increased profits in the power intermediation businesses. Assets and Investments. Enron's wholesale businesses make investments in various energy and certain related assets as a p art of its network strategy. wholesale Services either purchases the asset from a third party or develops and constructs the asset. In most cases, wholesale Services operates and manages such assets. Earnings princi p ally result from operations of the assets or sales of ownership interests. Additionally, wholesale Services invests in debt and equity securities of energy-related businesses, which may also utilize wholesale Services' products and services. with these merchant investments, Enron's influence is much more limited relative to assets Enron develops or constructs. Earnings from these activities, which are accounted for on a f air value basis and are included in revenues, result from changes in the market value of the securities, wholesale Services uses risk management disciplines, including hedging transactions, to manage the impact of market price movements on its merchant i nvestments. Earnings from assets and investments increased $79 million in the second quarter of 2001 as compared to the same period in 2000 as a result of increased valuations of wholesale Services' merchant investments, sales of interests in international energy assets and improved results from international asset operations. unallocated Expenses. Net unallocated expenses such as systems expenses and performance-related costs increased in 2001 due to increased profitability and the growth of wholesale Services' businesses. Retail Energy Services Energy Services sells or manages the delivery of natural gas, electricity, liquids and other commodities to industrial and commercial customers located in North America and Europe. Energy Services also provides full energy management services. This integrated product includes the Page 21 0001024401-01- 500028 [1] management of commodity delivery, energy information and energy assets, and price risk management activities. Significant components of Energy Services' results are as follows (in millions):
second Quarter 2001 2000(a) <5> Revenues $557 $420 Cost of sales 328 295 Operating expenses 168 83 Depreciation and amortization 10 8 Equity losses (13) (18) Other, net 22 30 Income before interest, minority interests and taxes $ 60 $ 46 (a) Amounts for the second quarter of 2000 have been restated. See Note 6 to the Consolidated Financial Statements.
Revenues and gross margin increased $137 million and $104 million, respectively, in the second quarter of 2001 compared to the second quarter of 2000, primarily as a result of long-term energy contracts originated in 2001 and the growth of Energy Services European operations. operating expenses increased primarily as a result of higher employee-related costs. Equity losses for both periods reflect Energy Services' portion of losses of The New Power Company. other, net in both the second quarter of 2001 and 2000 consisted primarily of gains associated with securitizations related to The New Power Company. Broadband Servi ces Enron is extending its market-making and risk management skills to develop the network services intermediation business that allows customers to manage unexpected fluctuation in the rice, supply and demand of network-related requirements, including ~andwi dth and storage. The Enron Intelligent Network (the EIN), a nationwide fiber optic network, which connects 25 pooling points in North America, Europe and Japan, provides the infrastructure for Broadband Services' products. The EIN also gives Enron a bandwidth- on-demand platform that allows the delivery of high- bandwidth media-rich content. Broadband Services sells interests in certain investments and other assets to improve liquidity and overall return, the timing of which is dependent on market conditions and management's expectations of the investment's value. Enron is significantly modifying the cost structure of Broadband Services to correspond to slower market development and the associated lower revenue outlook. Enron will focus on the intermediation business while providing content and network services in a cost effective manner. Enron expects losses to continue through at least 2001 in the Broadband Services segment. Future profitability is dependent on the recovery of the broadband and communications sectors. Page 22 0001024401-01- 500028 [1] Significant cornponents of Broadband Services' results are as follows (in millions):
second Quarter 2001 2000 Gross margin $ (6) $76 Operating expenses (including depreciation) 93 85 other, net (3) Loss before interest, minority interests and taxes $(102) $ (8)
Gross margin decreased $82 million in the second quarter of 2001 compared to the second quarter of 2000. weak market conditions in the broadband and communications sectors negatively impacted the 2001 gross margin, second quarter 2000 gross margin included earnings from sales of excess dark fiber. operating expenses (including depreciation) increased as a result of depreciation on fiber-optic related equipment placed into service in late 2000. General and administrative expenses in the second quarter of 2001 were comparable to the prior period. Transportation and Distribution Transportation Services. The following table summarizes total vol umes transported for each of Enron s interstate natural gas pipelines.
second Quarter 2001 2000 <5> Total volumes Transported (BBtu/d)(a) Northern Natural Gas 2,908 3,237 Transwestern Pipeline 1,973 1,606 Florida Gas Transmission 1,574 1,591 Northern Border Pipeline 2,303 2,429 (a) Billion British thermal units per day. Reflects 100% of each entity's throughput volumes. Florida Gas and Northern Border Pipeline are unconsolidated equity affiliates.
significant components of IBIT are as follows (in millions):
second Quarter 2001 2000 <5> Net revenues $121 $148 operating expenses 54 76 Depreciation and amortization 17 17 Page 23 0001024401-01-500028 [1] Equity in earnings 16 10 Other, net 11 12 Income before interest and taxes $ 77 $ 77
Revenues, net of cost of sales (net revenues) of Transportation Services decreased $27 million in the second quarter of 2001 as compared to the second quarter of 2000 primarily due to lower sales of gas storage inventory by Northern, partially offset by increased storage revenues received by Northern and increased revenues generated by Transwestern from transportation and operational gas sales. Operating Expenses decreased $22 million primarily as a result of decreased overhead costs and the timing of other pipeline expenses. Equity in earnings increased $6 million in the second quarter of 2001 as compared to the same period in 2000 primarily due to improved operating results from EOTT and Florida Gas. Portland General. Statistics for PGE for the second quarter of 2001 and 2000 are as follows:
Second Quarter 2001 2000 <5> Electricity Sales (Thousand MWh) Residential 1,548 1,480 Commercial 1,785 1,769 industrial 1,139 1,235 Total Retail 4,472 4,484 Wholesale 3,035 4,909 Total Electricity Sales 7,507 9,393 Average Billed Revenue (cents per kwh) 10.95 4.51 Resource Mix Coal 12% 7% Combustion Turbine 17 6 Hydro 7 7 Total Generation 36 20 Firm Purchases 58 74 Secondary Purchases 6 6 Total Resources 100% 100% Average Variable Power Cost (Mills/kWh)(a) 83.6 26.9 Retail Customers (end of period, thousands) 730 726 (a) Mills (1/10 cent) per kilowatt-hour.
Significant components of IBIT are as follows (in millions):
Second Quarter 2001 2000 Page 24 0001024401-01-500028 [1] <5> Revenues $831 $431 Purchased power and fuel 624 252 Operating expenses 94 76 Depreciation and amortization 55 46 other, net 7 5 Income before interest and taxes $ 65 $ 62
Revenues, net of purchased power and fuel costs, increased $28 million in the second quarter of 2001 as compared to the second quarter of 2000. The increase was due to higher profits from wholesale power sales, partially offset by increased power costs resulting from general market conditions, including lower hydroelectric generation. Operating expenses increased primarily as a result of higher maintenance costs and increased regulatory and overhead expenses. Depreciation and amortization increased in 2091 primarily as a result of increased regulatory amortization. Corporate and Other Corporate and other realized a loss before interest, minority interests and taxes of $109 million in the second quarter of 2001 while reporting IBIT of $17 million in the second quarter of 2000. Second quarter 2001 results include higher unallocated corporate-wide expenses and decreased earnings from non-core businesses, including Azurix. Interest and Related charges, net Interest and related char9es, net, is reported net of interest capitalized of $9 million and $13 million for the second quarter of 2001 and 2000, respectively. Net expense increased $19 million in the second quarter of 2001 as compared to the same period of 2000, primarily due to increased debt levels. Minority Interests Minority interests decreased $9 million to $30 million in the second quarter of 2001 compared to the same period in 2000, primarily due to lower earnin9s from south American operations and the impact of lower interest rates on certain majority-owned limited partnershi PS. Income Tax Expense Income taxes increased during the second quarter of 2001 as compared to the second quarter of 2000 primarily as a result of increased pretax earnings. The projected effective tax rate for 2001 is lower than the statutory rate mainly due to equity earnings, foreign tax rate differential and differences between the book and tax basis of certain assets and stock sales. RESULTS OF OPERATIONS Six Months Ended June 30, 2001 vs. Six Months Ended June 30, 2000 RESULTS OF OPERATIONS Consolidated Net Income Enron reported net income of $810 million (excluding a Page 25 0001024401-01- 500028 [1] gain of $19 million related to the cumulative effect of accounting changes) for the first six months of 2001 compared to $627 million during the same period in 2000. Basic and diluted earnings per share of as follows:
<5> Basic earnings per share: Before cumulative effect of accounting changes Cumulative effect of accounting changes Reported basic earnings per share Diluted earnings per share: Before cumulative effect of accounting changes Cumulative effect of accounting changes Reported diluted earnings per share
common stock were Six Months Ended June 30, 2001 2000 $1.02 0.02 $1.04 $0.92 0.02 $0.94 $0.80 $0.80 $0.73 $0.73 Income Before Interest, Minority Interests and Income Taxes The following table presents IBIT for each of Enron's reporting segments (in millions):
Six Months Ended June 30, 2001 2000 <5> wholesale Services Retail Energy Services Broadband Services Transportation and Distribution: Transportation Services Portland General Corporate and Other Income before interest, minority interests and taxes
$1,557 100 (137) $ 210 125 (267) 844 52 (8) 205 167 (27) $1,588 $1,233 wholesale Services The following table reflects IBIT for each of Services' business lines (in millions):
wholesale Six Months Ended June 30, 2001 2000 <5> Commodity Sales and Services Assets and Investments Unallocated expenses $1, 547 193 (183) Page 26 $ 676 275 (107) 0001024401-01- 500028 [1] Income before interest, minority interests and taxes $1,557 $ 844
The following discussion analyzes the contributions to IBIT for each of the business lines. Commodity sales and Services. wholesale Services markets, transports and provides energy commodities as reflected in the following table (including intercompany amounts):
Six Months Ended June 30, 2001 2000 <5> Physical Volumes (BBtue/d)(a) Gas: North America 26,430 21,523 Europe and Other 7,991 3,031 34,421 24,554 Transport Volumes 412 526 Total Gas volumes 34,833 25,080 Crude Oil and Liquids 8,454 5,591 El ectri ci ty(b) 28,677 13,613 Total 71,964 44,284 Electricity Volumes Marketed (Thousand MWh)(c) North America 410,012 226,992 Europe and Other 109,042 20,756 Total 519,054 247,748 Financial Settlements (Notional) (BBtue/d) 280,447 147,247 (a) Billion British thermal units equivalent per day. (b) Represents electricity volumes, converted to BBtue/d. (c) Thousand megawatt-hours.
Earnings from commodity sales and services increased $871 million in the first half of 2001 as compared to the same period in 2000. The increase was primarily due to significantly higher earnings from North American power marketing operations and increased earnings from North American gas marketing and European power marketing. Profits from North American power marketing operations included the sale of five peaking power plants. Earnings from other wholesale marketing operations, including coal, steel, weather and forest products, also contributed to the earnings growth of Enron' s commodity sales and services business, volumes growth, which increased 63 percent in the first half of 2001 as compared to the first half of 2000, and p rice volatility in both the power and gas markets were the key contributors to increased profits in the power and gas intermediation businesses. Assets and Investments. Earnings from assets and investments decreased $82 million in the second quarter of 2001 as compared to the same period in 2000 primarily as a Page 27 0001024401-01- 500028 [1] result of a decrease in the value of wholesale Services' merchant investments. Earnings from international asset operations were comparable to 2000 levels. unallocated Expenses. Net unallocated expenses such as systems expenses and performance-related costs increased in 2001 due to increased profitability and the growth of Wholesale Services' businesses. Retail Energy Services Significant components of Energy Services' results are as follows (in millions):
Six Months Ended June 30, 2001 2000(a) <5> Revenues $1,250 $734 Cost of sales 823 529 operating expenses 332 169 Depreciation and amortization 19 17 Equity loss (28) (17) other, net 52 50 Income before interest, minority interests and taxes $ 100 $ 52 (a) Amounts for 2000 have been restated. See Note 6 to the Consolidated Financial Statements.
Revenues and gross margin increased $516 million and $222 million, respectively, in the first half of 2001 compared to the first half of 2000, primarily as a result of long-term energy contracts originated in 2001 and the growth of Energy Services' European operations. Operating expenses increased primarily as a result of higher employee-related costs. Equity losses for both periods refi ect Energy Services' portion of losses of The New Power Company. Other, net in 2001 and 2000 consisted primarily of gains associated with securitizations related to The New Power Company. Broadband Services
Six Months Ended June 30, 2001 2000 Gross margin $ 48 $127 operating expenses (including depreciation) 185 137 Other, net 2 Loss before interest, minority interests and taxes $(137) $ (8)
Gross margin decreased $79 million in the first half of 2001 compared to the same period of 2000. weak market Page 28 0001024401-01- 500028 [1] conditions in the broadband and communications sectors negatively impacted the 2001 gross margin. Gross margin for 2001 included the realized appreciation associated with a portion of Enron's broadband content delivery platform while gross margin for the first half of 2000 primarily reflects earnings from sales of excess dark fiber and an increase in the market value of Broadband Services' merchant investments. Operating expenses increased due to higher employee-related costs and depreciation on fiber-optic related equipment placed into service in late 2000. Transportation and Distribution Transportation Services. The following table summarizes total vol umes transported for each of Enron's interstate natural gas pipelines.
Six Months Ended June 30, 2001 2000 <5> Total volumes Transported (BBtu/d)(a) Northern Natural Gas 3,327 3,691 Transwestern Pipeline 1,859 1,584 Florida Gas Transmission 1,404 1,571 Northern Border Pipeline 2,396 2,447 (a) Billion British thermal units per day. Reflects 100% of each entity's throughput volumes. Florida Gas and Northern Border Pipeline are unconsolidated equity affiliates.
significant components of IBIT are as follows (in millions):
Six Months Ended June 30, 2001 2000 <5> Net revenues $364 $349 operating expenses 161 141 Depreciation and amortization 34 33 Equity in earnings 30 17 Other, net 11 13 Income before interest and taxes $210 $205
Revenues, net of cost of sales (net revenues) of Transportation Services increased $15 million in the first half of 2001 as compared to the first half of 2000 primarily due to increased revenues generated by Transwestern from transportation and operational gas sales and increased storage revenues received by Northern, partially offset by lower sales of gas stora9e inventory by Northern. Operating Expenses increased $20 million primarily as a result of higher gas prices and other costs associated with the Page 29 0001024401-01-500028 [1] volumes transported by Transwestern and other pipeline expenses. Equity in earnings increased $13 million in the first half of 2001 as compared to the same period in 2000 primarily due to improved operating results from EOTT and Florida Gas. Portland General. Statistics for PGE for the first half of 2001 and 2000 are as follows:
Six Months Ended June 30, 2001 2000 Electricity Sales (Thousand MWh)(a) Residential 3,719 3,841 Commercial 3,605 3,641 industrial 2,339 2,404 Total Retail 9,663 9,886 Wholesale 5,774 9,190 Total Electricity Sales 15,437 19,076 Average Billed Revenue (cents per kwh) 10.22 4.25 Resource Mix Coal 14% 10% Combustion Turbine 17 8 Hydro 6 8 Total Generation 37 26 Firm Purchases 56 68 Secondary Purchases 7 6 Total Resources 100% 100% Average variable Power Cost (Mills/kwh)(b) 77.6 23.8 Retail Customers (end of period, thousands) 730 726 (a) Thousand megawatt-hours. (b) Mills (1/10 cent) per kilowatt-hour.
Significant components of IBIT are as follows (in millions):
Six Months Ended June 30, 2001 2000 <5> Revenues $1,598 $828 Purchased power and fuel 1,206 454 operating expenses 161 154 Depreciation and amortization 106 92 Other, net 39 Income before interest and taxes $ 125 $167
Revenues, net of purchased power and fuel costs, Page 30 0001024401-01- 500028 [1] increased $18 million in the first six months of 2001 as cornpared to the same period of 2000. The increase was due to higher wholesale power sales, partially offset by increased power costs resulting from general market conditions, including lower hydroelectric generation and higher gas prices. operating expenses increased primarily as a result of higher maintenance costs and increased regulatory expenses. Depreciation and amortization increased in 2001 primarily as a result of increased regulatory amortization. Other, net in 2000 was favorably impacted by certain regulatory events. Corporate and other Corporate and Other realized a loss before interest, minority interests and taxes of $267 million in the first six months of 2001 compared to a loss of $27 million in the first six months of 2000. The 2001 results include higher unallocated corporate-wide expenses and decreased earnings from non-core businesses, md uding Azurix. Interest and Related charges, net Interest and related charges, net, is reported net of interest capitalized of $24 million and $26 million for the first half of 2001 and 2000, respectively. Net expense increased $59 million in the first half of 2001 as compared to the same period of 2000, primarily due to increased debt levels. Income Tax Expense Income taxes increased during the first half of 2001 as compared to the first half of 2000 primarily as a result of increased pretax earnings. The projected effective tax rate for 2001 is lower than the statutory rate mainly due to equity earnings, foreign tax rate differential and differences between the book and tax basis of certain assets and stock sales. Enron recorded tax benefits in shareholders' equity related to stock options exercised by employees of approximately $162 million in the first half of 2001. CUMULATIVE EFFECT OF ACCOUNTING CHANGES On January 1, 2001, Enron recognized an after-tax non- cash gain of $19 million in earnings and deferred an after- tax non-cash gain of $25 million in "Accumulated Other Comprehensive Income," a component of shareholders' equity and reclassified $277 million from "Long-Term Debt" to "Other Liabilities" to reflect the initial adoption of Statement of Financial Accounting Standard No. 133, "Accountinw for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 must be applied to all derivative instruments and requires that such instruments be recorded in the balance sheet either as an asset or a liability measured at its fair value through earnings, with special accounting permitted for certain qualifying hedges. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets." Page 31 0001024401-01- 500028 [1] SFAS No. 142, which must be applied to fiscal years beginning after December 15, 2001, modifies the accounting and reporting of goodwill and intangible assets. The pronouncement requires entities to discontinue the amortization of goodwill, reallocate all existing goodwill among its reporting segments based on criteria set by SEAS No. 142 and perform initial impairment tests by applying a fair-value-based analysis on t e goodwill in each reporting segment. Any impairment at the initial adoption date shall be recognized as the effect of a change in accounting principle. subsequent to the initial adoption, goodwill shall be tested for impairment annually or more frequently if circumstances indicate a possible impairment. Under SEAS No. 142, entities are required to determine the useful life of other intangible assets and amortize the value over the useful life. If the useful life is determined to be indefinite no amortization will be recorded. For intangible assets recognized prior to the adoption of SEAS No. 142, the useful life should be reassessed. other intangible assets are required to be tested for impairment in a manner similar to goodwill. At June 30, 2001, Enron's goodwill related to consolidated entities was approximately $3.5 bill ion. Estimated annual amortization of such goodwill is approximately $100 million. Enron is in the process of evaluating the application of SEAS No. 142. FINANCIAL CONDITION Cash Flows
Six Months Ended June 30, (In Millions) 2001 2000 <5> Cash provided by (used in): Operating activities: Operating activities excluding net margin deposit activity $ 1,005 $ (197) Net margin deposit activity (2,342) (350) Operating activities $(1,337) $ (547) Investing activities $(1,161) $(2,254) Financing activities 1,971 3,231
Cash used in operating activities totaled $1,337 million in the first half of 2001 as compared to $547 million in the same period last year. Cash used in operating activities in the first half of 2001 reflects cash provided by operations and price risk management activities, offset by net cash used related to margin deposit activity. Excluding net margin deposit activity, cash provided by operating activity was $1,005 million. Enron received significant cash deposits as credit collateral during the fourth quarter of 2000 resulting from volatility in the power and gas markets. During the first six months of 2001, net deposits of $2,342 million were returned as volatility in the commodity prices have declined. Net cash used in operating activities in the first half of 2000 primarily reflects net cash used in acquiring merchant assets and investments Page 32 0001024401-01- 500028 [1] and working capital requirements. Management anticipates cash from operating activities in the second half of 2001 to be positively impacted by reduced working capital requirements and overall operating activities. Cash used in investing activities totaled $1,161 million in the first six months of 2001 as compared to $2,254 million in the same period of 2000. Cash used in the first six months of 2001 reflects investments in unconsolidated equity affiliates and capital expenditures. Investments in unconsolidated equity affiliates in 2001 include the acquisition of a company whose assets include a newsprint mill and related assets, a power generation related entity and the purchase of all publicly traded shares of Azurix Corp. Capital expenditures in 2001 related to wholesale Services' energy network. Cash provided by financing activities totaled $1,971 million in the first half of 2001 as compared to $3,231 million during the same period of 2000. The first half of 2001 includes the net issuances of short- and long-term debt of $2,251, partially offset by payments of dividends. Enron is able to fund its normal working capital requirements mainly through operations or, when necessary, through the utilization of credit facilities and its ability to sell commercial paper and accounts receivable. Enron has classified as short term, approximately $1.25 billion of notes payable that is convertible at the option of the notehol der into Enron Corp common stock. Proceeds, the amount which is based on the market price of Enron common stock for any conversion, may be paid either in cash or in Enron common stock, depending on Enron's stock price at the date of conversion. Based on current conditions, management does not anticipate any of the notes to be converted. CAPITALIZATION Total capitalization at June 30, 2001 was $27.9 billion. Debt as a percentage of total capitalization increased to 46.0% at June 30, 2001 as compared to 40.9% at December 31, 2000. The increase in the ratio reflects increased debt levels, including the issuance in January 2001 of $1.25 billion of notes payable and increased net short-term borrowings in 2001, and the impact of the decline in value of certain foreign currencies, partially offset by earnings. FINANCIAL RISK MANAGEMENT Enron Wholesale's business offers price risk management services primarily related to commodities associated with the energy sector (natural gas, electricity, crude oil and natural gas liquids). Broadband Services also offers p rice risk management services to its customers. Enron's other businesses also enter into forwards, swaps and other contracts primarily for the purpose of hedging the impact of market fluctuations on assets, liabilities, production and other contractual commitments. Enron utilizes value at risk measures that assume a one-day holding period and a 95% confidence level. For a compl ete discussion of the types of financial risk management products used by Enron, the types of market risks associated with Enron's portfolio of Page 33 0001024401-01- 500028 [1] transactions, and the methods used by Enron to manage market risks, see Enron's Annual Report on Form 10-K for the year ended December 31, 2000. Enron's value at risk for trading commodity price risk increased to $79 million at June 30, 2001 as compared to $66 million at December 31, 2000. This increase is attributable to increased price volatility both in the gas and power markets combined with increased activity in anticipation of the peak summer season. Enron's value at risk for trading equity declined $11 million in the first six months of 2001 primarily as a result of sales of merchant investments and decreased volatility. In addition, value at risk for non-tradin9 interest rate risk increased by $11 million in the first six months of 2001. This increase is a result of contracts to hedge interest rate risks associated with yen-denominated notes issued by Enron during the second quarter of 2001. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Report and the Form 10-K include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in these documents are forward- looking statements. Forward-looking statements include, but are not limited to, statements relating to expansion opportunities for the Transportation Services, extension of Enron's business model to new markets and industries, demand in the market for broadband services and high bandwidth applications, transaction volumes in the U.S. power market, commencement of commercial operations of new power plants and pipeline projects, completion of the sale of certain assets and growth in the demand for retail energy outsourcing solutions. when used in this document, the words "anticipate," "believe," "estimate," "expects, "intend," "may," "project," "plan," "should" and similar expressions are intended to be among the statements that identify forward-looking statements. Although Enron believes that its expectations reflected in these forward- looking statements are based on reasonable assumptions, such statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include success in marketing natural gas and power to wholesale customers; the ability of Enron to penetrate new retail natural gas and electricity markets (includin9 energy outsourcing markets) in the united States and foreign jurisdictions; development of Enron's broadband network and customer demand for intermediation and content services; the timing, extent and market effects of deregulation of energy markets in the united States, including the current energy market conditions in california, and in foreign jurisdictions; other regulatory developments in the United States and in foreign countries, including tax legislation and regulations; political developments in foreign countries; the extent of efforts by governments to privatize natural Page 34 0001024401-01- 500028 [1] 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, producin~ and marketing reserves; the timing and success of Enron 5 efforts to develop international power, pipeline and other infrastructure prolects; the effectiveness of Enron's risk management activities; the ability of counterparties to financial risk management instruments and other contracts with Enron to meet their financial commitments to Enron; and Enron's ability to access the capital markets and equity markets during the periods covered by the forward-looking statements, which will depend on general market conditions and Enron's ability to maintain the credit ratings for its unsecured senior long-term debt obligations. PART II. OTHER INFORMATION ENRON CORP. AND SUBSIDIARIES ITEM 1. Legal Proceedings See Part I. Item 1, Note 3 to Consolidated Financial Statements entitled "Litigation and other Contingencies," which is incorporated herein by reference. ITEM 4. Submission of Matters to a Vote of Security Holders The Annual Meetin9 of shareholders of Enron Corp. was held on May 1, 2001 in Houston, Texas, for the purposes of electing a board of directors; approving a proposed amendment to Enron's Amended and Restated Articles of Incorporation to increase the total number of authorized shares of Common Stock from 1,200,000,000 to 2,400,000,000, contingent upon certain conditions; a p proving the Amended and Restated Enron Corp. 1991 Stock Plan (as amended and restated effective May 1, 2001); the appointment of auditors and voting on certain shareholder 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:
Nominee Shares FOR Shares WITHHELD <5> Robert A. Belfer 639,538,731 6,982,509 Norman P. Blake, Jr. 640,117,095 6,404,145 Ronnie C. Chan 546,486,640 100,034,600 John H. Duncan 639,626,643 6,894,597 Wendy L. Gramm 631,721,679 14,799,561 Robert K. Jaedicke 639,767,551 6,753,689 Kenneth L. Lay 640,098,009 6,423,231 Charles A. LeMaistre 639,416,086 7,105,154 John Mendelsohn 639,844,439 6,676,801 Paulo V. Ferraz Pereira 640,071,804 6,449,436 Page 35 Frank Savage Jeffrey K. Skilling John wakeham Herbert S. winokur,
Jr. 0001024401-01-500028 [1] 639,970,208 6,551,032 640,118,885 6,402,355 633,943,112 12,578,128 640,043,939 6,477,301 (b) The proposal, contingent upon Enron declaring a stock split of at least 2-for-i on or before May 1, 2003, to amend Enron's Amended and Restated Articles of Incorporation to increase the total number of authorized shares of Common Stock from 1,200,000,000 to 2,400,000,000 was approved by the following vote: Shares FOR 634,485,158 Shares AGAINST 8,355,896 Shares ABSTAINING 3,680,186 (c) The Amended and Restated Enron Corp. 1991 Stock Plan (as amended and restated effective May 1, 2001) was approved by the following vote: Shares FOR 572,910, 613 Shares AGAINST 68,211,644 Shares ABSTAINING 5,398,983 (d) The appointment of Arthur Andersen LLP as independent auditor was approved by the following vote: Shares FOR 639,400,879 Shares AGAINST 3,661,979 Shares ABSTAINING 3,458,382 (e) The votes cast for the proposals from Brent Blackwelder, Dianne Burnham, Hi 1 degarde Hannum, and Eleanor MacCracken (collectively, "Friends of the Earth"); General Board of Pension and Health Benefits of The united Methodist Church; Solidago Foundation; Agape Foundation; and Domini Social Investments were as follows: Shares FOR 38,976,823 Shares AGAINST 457,230,799 Shares ABSTAINING 39,138,546 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. (Regi strant) Page 36 0001024401-01- 500028 [1] Date: August 14, 2001 By: RICHARD A. CAUSEY Richard A. Causey Executive Vice President and chief Accounting Officer (Principal Accounting Officer) EX- 12 3 exl2 .txt STATEMENT REGARDING COMPUTATION OF RATIOS Exhibit 12 ENRON CORP. AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) (Unaudited) Six Months Ended 6/30/01 2000 Year Ended December 31, 1999 1998 1997 <5> Earnings available for fixed charges Net income 584 Less: Undistributed earnings and losses of less than 50% owned affiliates (39) Capitalized interest of nonregul ated companies (10) Add: Fixed charges(a) 454 75 Minority interest Income tax expense 297 Total $1, 361 $ 810 $ 979 $1,024 $ 703 $105 $ (22) (25) 20 (12) (44) 582 1,184 70 154 282 478 (61) 948 135 137 (44) (89) (66) (16) 809 674 77 80 204 (65) $1,697 $2,771 $2,171 $1,683 $689 Fixed Charges Interest expense(a) 404 Rental expense representative of interest factor 50 Total $ 552 $1,136 $ 900 $ 760 $624 $ 30 $ 582 Page 37 48 $1,184 48 49 50 $948 $ 809 $674 $
1996 0001024401-01- 500028 [1] 454 Ratio of earnings to fixed charges 2.92 2.34 2.29 3 .00 (1) Amounts exclude costs incurred on sales of accounts receivables.
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