.9 ti .9 U' S.,,,. ewe ewe o was ~~a~asn Er. C V en -n a a a a - - uimg 36W Enron Annual Report / E0aa002648538 a GOVERNMENT EXHIBIT 4592 CriniNo H 04-0025 ECaaOO2648539 Enron manages efficient, flexible networks to reliably deliver physical products at predictable prices. In 2000 Enron used its networks to deliver a record amount of physical natural gas, electricity, bandwidth capacity and other products. With our networks, we can significantly expand our existing businesses while extending our services to new markets with enormous potential for growth. FINANCIAL HIGHLIGHTS LETTER TO SHAREHOLDERS ENRON WHOLESALE SERVICES ENRON ENERGY SERVICES ENRON BROADBAND SERVICES ENRON TRANSPORTATION SERVICES FINANCIAL REVIEW 2 OIJR VALUES $4 BOARD OF DIRECTORS $~i ENRON CORPORATE POLICY COMMITTEE SL~ SHAREHOLDER INFORMATION FINANCIAL HIGHLIGHTS (Unaudited: in million,, except per share data) 2000 1999 1998 1997 $100,789 $40,112 $31,260 $20273 $13,289 Net income: Operating results Items impacting comparability Total Earnings per diluted conunon share: Operating results Items impacting comparability Total Dividends paid per conimon share Total assets $ 1.286 (287) $ 979 £ 1.47 (0.35) ~ 1.12 S 0.50 $ 65.503 957 (64) 893 - 118 (0.08) 1.10 698 515 5 (410) 703 105 1.00 0.01 1.01 0 87 (0.71) 0.16 0.50 0.48 0.46 0.43 33,381 29,350 22,552 Cash from operating activities (excluding working capital) Capital expenditures and equity investments $ 3,010 $ 3.314 2.228 3.085 1,873 3,564 275 742 2,092 1.483 NYSE price range High 1.0w Close December 31 40 1 31 3 203 p.. 97 98 99 (Sin billions) REVENUES 100.3 00 $ 90'.4, 447. 297. 417. 287. 19'An 83~4 447. 28"As iii .11 U.. 99 00 Earnings Pm -5- Ii, dollars) 1,415% If 99 00 I- Is in rmIlin~ O9ERA11NG RESULIS (9%) SW 500 One Year 89% 129% Enroot S&P 500 Five Years CUMLEAliVE TOTAL RETURN (though December 31,2000) 350% 383% p.. Enrot, Sap 500 ten Years Enroot ECaaOO264854O Revenues 1996 493 91 584 0.91 0.17 1.08 16,137 23 'A 17 ~4. 21 'A. 22 Vs 17 'A 20 "A, L TO OUR SHAREHOLDERS o 00 b y u is o edo outdistdnce the competition a; YJ solidify (11ff leadership) iii eat/i ot (10! roaftiT biJSIIiOSSQ&. (tI 0(11 largest business, wholesale services, we experienced an enormous increase of 59 percent in physical energy deliveries. Our retail energy binness achieved irs highest level ever of total con tract va/Lie. Our newest bushess, broadband services, significantly accelerated trari.sacflori activity and our oldest business, the interstate pipelines, registered increaser.] c.Yarnings. 7/in company & net income reached a record $ 1.3 tnlliofl IPi 2000. Enron has built unique and strong businesses that have tremendous opportunities for growth. These businesses - wholesale services, retail energy services, broadband services and transportation services - can be significantly expanded within their very large existing markets and extended to new markets with enormous growth potential. At a minimum, we see our market opportunities company-wide tripling over the next five years. Enron is laser-focused on earnings per share, and we expect to continue strong earnings per- formance. We will leverage our extensive business networks, market knowledge and logistical exper- tise to produce high-value bundled products for an increasing number of global customers. Competitive Advantages Our targeted markets are very large and are undergoing fundamental changes. Energy deregu- lation and liberalization continue, and customers are driving demand for reliable delivery of energy at predictable prices. Many markets are experienc- ing tighter supply, higher prices and increased volatility, and there is increasing interdependence within regions and across commodities. Similarly, the broadband industry faces issues of overcapacity and capital constraint even as demand increases for faster, flexible and more reliable connectivity. Enron is in a unique position to provide the products and services needed in these environments. Our size, experience and skills give us enormous competitive advantages. We have: * Robust networks of strategic assets that we own or have contractual access to, which give us greater flexibility and speed to reliably deliver widespread logistical solutions. * Unparalleled liquidity and market-making abilities that result in price and service advantages. * Risk management skills that enable us to offer reliable prices as well as reliable delivery. * Innovative technology such as EnronOnline to deliver products and services easily at the lowest possible cost. These capabilities enable us to provide high- value products and services other wholesale service providers cannot. We can take the physical compo- nents and repackage them to suit the specific needs of customers. We treat term, price and delivery as variables that are blended into a single, compre- hensive solution. Our technology and fulfillment systems ensure execution. In current market envi- ronments, these abilities make Enron the right company with the right model at the right time. ECaaOO2648541 The Astonishing Success of EnronOnline In late 1999 we extended our successful busi- ness model to a web-based system, EnronOnline. EnronOnline has broadened our market reach, accelerated our business activity and enabled us to scale our business beyond our own expectations. By the end of 2000, EnronOnline had executed 548,000 transactions with a notional value of $336 billion, and it is now the world's largest web-based eCommerce System. With EnronOnline, we are reaching a greater number of customers more quickly and at a lower cost than ever- It's a great new business generator, attracting users who are drawn by the site's ease of use, transparent, firm prices and the fact that they are transacting directly with Enron. In 2000 our total physical volumes increased significantly as a direct result of EnronOnline. EnronOnline has enabled us to scale quickly, soundly and economically, Since its introduction, EnronOnline has expanded to include more than 1.200 of our products, It also has streamlined our back-office processes, making our entire operation more efficient, It has reduced our overall transaction costs by 75 percent and increased the productivity of our commercial team by five-fold on average, We are not sitting still with this important new business tool - in September 2000 we released EnronOnline 2,0, which added even more customer functionality and customization features and attracted more customers, Enron Wholesale Services The wholesale services business delivered record physical volumes of 51,7 trillion British thermal units equivalent per day (TBtue/d) in 2000, compared to 32,4 TBtue/d in 1999, As a result, wholesale services income before interest, minority interests and taxes (IBIT) increased 72 percent to $2.3 billion. Over the past five years, as physical volumes have increased, wholesale IBIT has grown at a com- pounded average annual rate of 48 percent, and we have had 20 consecutive quarters of year-over-year growth. We have established core wholesale busi- nesses in both natural gas and power in North America and Europe, where we are market leaders. In North America, we deliver almost double the amount of natural gas and electricity than the second tier of competitors. Our network of 2.500 delivery points provides price advantages, flexibility and speed-to-market in both natural gas and power Natural gas, our most developed business, has seen substantial volume growth throughout the United States and Canada, In 2000 our physical natural gas volumes were up 77 percent to 24,7 billion cubic feet per day (Bcfld), Physical power volumes were up 52 percent to 579 million megawatt-hours (MWh), We are building a similar, large network in Europe. In 2000 we marketed 3-6 Bcf/d of natural gas and 53 million MWh in this market, a vast increase over 1999, As markets open, we tenaciously pursue the difficult, early deals that break ground for subsequent business. We are the only pan-European player, and we are optimizing our advantage to conduct cross-border transactions, We are extending Enron's proven business approach to other markets, and integrating EnronOnline into all our businesses as an accelera- tor, Our growth rates are rising in areas such as metals, forest products, weather derivatives and coal, We expect these businesses to contribute to earnings even more significantly in 2001, Enron Energy Services Our retail unit is a tremendous business that experienced a break-out year in 2000, We signed contracts with a total value of $16.1 billion of cus- tomers' future energy expenditures, almost double the $8.5 billion signed in 1999, We recorded increas- ing positive earnings in all four quarters in 2000. and the business generated $103 million of recurring BIT. Energy and facilities management outsourcing is ECaaOO2648542 now a proven concept, and we've established a profitable deal flow, which includes extensions of contracts by many existing customers. Price volatility in energy markets has drawn fresh attention to our capabilities, increasing demand for our services. No other provider has the skill, experience, depth and versatility to offer both energy commodity and price risk management services, as well as energy asset management and capital solutions. In 2001 we expect to close approximately $30 billion in new total contract value, including business from our newest market, Europe. Enron Broadband Services We have created a new market for bandwidth intermediation with Enron Broadband Services. In 2000 we completed 321 transactions with 45 coun- 51.7 273 II 0 Electricity tr Oilier Q,,,) K)) Natural Gas 98 99 00 WHOLESAlE SERVICES - PrnSICAI VOUiWS (trillion British thermal irks equivalent pe day) terparties. We are expanding our broadband inter- mediation capabilities to include a broad range of network services, such as dark fiber, circuits, Internet Protocol service and data storage. Our opportunities are increasing commensurately. Par of the value we bring to the broadband field is network connectivity - providing the switches, the network intelligence and the inter- mediation skills to enable the efficient exchange of capacity between independent networks. We operate 25 pooling points to conned independent third-parties - 18 in the United States, six in Europe and one in Japan. At least 10 more are scheduled to be completed in 2001. Enron also has developed a compelling commerical model to deliver premium content-on- demand services via the Enron Intelligent Network. Content providers want to extend their established businesses and offer viewers at home an additional convenient way to choose and receive entertain- ment. Enron provides the wholesale logistical services that bridge the gap between content providers and last-mile distributors. Full-length movies-on-demand service has been successfully tested in four U.S. metropolitan markets. Enron Transportation Services The new name for our gas pipeline group accu- rately reflects a cultural shift to add more innovative customer services to our efficient pipeline operation. To serve our customers more effectively, we are increasingly incorporating the web into those rela- tionships. Customers can go online to schedule nomi- nations and handle inquiries, and they can transact for available capacity on EnronOnline. The pipelines 16.1 I 85 3 ENRON ENERGY SERVICES - VALUE OF CONTRACTS ORIGINAITI) ($ in billions) continued to provide strong earnings and cash flow in 2000. Demand for natural gas is at a high in the United States, and we're adding capacity to take advantage of expansion opportunities in all markets. New capacity is supported by long-term contracts. Strong Returns Enron is increasing earnings per share and continuing our strong returns to shareholders. Recurring earnings per share have increased steadily since 1997 and were up 25 percent in 2000. The company's total return to shareholders was 89 percent in 2000. compared with a negative 9 percent returned by the S&P 500. The 10-year return to Enron shareholders was 1,415 percent compared with 383 percent for the S&P 500. Enron hardly resembles the company we were in the early days. During our 15-year history, we have stretched ourselves beyond our own expectations. ECaaOO2648543 We have metamorphosed from an asset-based pipeline and power generating company to a marketing and logistics company whose biggest assets are its well-established business approach and its innovative people. Our performance and capabilities cannot be compared to a traditional energy peer group. Our results put us in the top tier of the world's corpora- tions. We have a proven business concept that is eminently scalable in our existing businesses and adaptable enough to extend to new markets. As energy markets continue their transforma- tion, and non-energy markets develop, we are poised to capture a good share of the enormous opportunities they represent. We believe wholesale gas and power in North America, Europe and Japan 380 351 98 99 00 ENRON TRANSPORTATION SERVICES REPORTED INCOME BEFORE INTER! ST AND TAXES (S in nijilionsl Enroncnline will accelerate their growth. We plan to leverage all of these competitive advantages to create significant value for our shareholders. 7< ,4;~5V Kenneth L. Lay Chairman $~ t A Jeffrey K. Skilling President and Chief Executive Officer will grow from a $660 billion market today to a $1.7 trillion market over the next several years. Retail energy services in the United States and Europe have the potential to grow from $180 billion today to $765 billion in the not-so-distant future. Broadband's prospective global growth is huge - it should increase fromjust $17 billion today to $1.4 trillion within five years. Taken together, these markets present a $3.9 trillion opportunity for Enron, and we havejust scratched the surface. Add to that the other big markets we are pursuing - forest products, metals, steel, coal and air-emissions credits - and the opportunity rises by $830 billion to reach nearly $4.7 trillion. Our talented people, global presence, finan- cial strength and massive market knowledge have created our sustainable and unique businesses. ECaaOO2648544 391 236 59 233 3 10 20 30 40 ENRON BROADBAND SERVICES - 2000 BANDWIDTh TRANSACTiONS When customers do business with Enron, they get our commitment to reli- ably deliver their product at a predictable price, regardless of the market condition, This commitment is possible because of Enron 's unrivaled access to markets and liquidity We manage flexible net- works with thousands of delivery points, giving us multiple options and a distinct senhice advantage. Our extensive daily market activity keeps us on top of price movements, so we can manage our customers' price risk. We offer a multitude of predictable pric- ing options. Market access and information allow Enron to deliver comprehensive logistical solutions that work in volatile markets or markets undergoing fundamental changes, such as energy and broadband. This core logistical capability led to our best year ever in 2000 because physi- cal volumes drive our wholesale profits. We see ample opportunities for further volume growth in existing and new mar- kets. Enron's ability to deliver is the one Constant in an increasingly complex and competitive world ~nron bIendN thow toPt oinmon% to deliver premium tdgiabc2i so/v A V. 1< -~ 5 r ~t 14 EVEgYT! I ~ CHANGES BUT US 0~echnoIogy Advantages * Information systems quickly distribute real-time information. EnronOnline extends Enron's reach to increase volumes and market share. * Enrons sophisticated systems track - prices, register exposures and monitor customer Credit. 4-:? * Enron allows customers to choose the optimal way to set a piedictable price. 4 -s k 4 U a 0~ 0' 0%, 'S / ~. - ~xtensive Market Networks * Enron manages large, flexible networks of assets, contracts and services that provide unrivaled liquidity. Liquidity allows Enron to move products in and out of markets so it can maximize opportunity and margins. * Because it has broad physical access, Enron reliably executes contracts. E'~caIabIe Fulfillment * ErronOnline integrates seamlessly into delivery fulfillment systems, reducing transaction costs. * Existing systems scale readily as volumes increase. * Standardized legal and tax compliance - , speed business. Systematic risk assessment and control protect Enron. 4< U t; 6 j El. 0~ "TAt S .9 0~ ENRON WHOLESALE SERVICES Wholesale services is Enrons largest and fastest growing business, with sustainable growth oppor- tunities in each of its markets. In 2000 income before interest, minority interests and taxes (IBIT) rose 72 percent to $2.3 billion, with record physical energy volumes of 51.7 trillion British thermal units equiv- alent per day (TBtueld) - a 59 percent increase over 1999. For the past five years, wholesale services earnings have grown at an average compounded growth rate of 48 percent annually, and our com- petitive position is growing stronger. Customers transact with Enron because we offer products and services few others can match. With our flexible networks and unique capabilities in risk manage- ment and finance, we deliver the widest range of reliable logistical solutions at predictable prices. Enron delivers more than two times the natural gas and power volumes as does its nearest energy marketing competitor. Our formidable lead comes from our willingness to enter markets early and serve as a market-maker to build liquidity and price transparency. Breakthrough technology applications, such as EnronOnline, accelerate our market penetra- tion. These competitive advantages have made us the most successful energy marketer in the two largest deregulating energy markets, North America and Europe. We expect to achieve a similar leader- ship position as we extend our business approach to new regions, products and industries. Our business has flourished with EnronOnline. Launched in November 1999, EnronOnline handled 548,000 transactions in 2000 with a gross notional value of $336 billion. EnronOnline is unquestionably the largest web-based eCommerce site in the world and dwarfs all other energy marketing web sites combined. By the fourth quarter of 2000, it account- ed for almost half of Enron's transactions over all business units. EnronOnline has pushed productivity through the roof: Transactions per commercial person rose to 3,084 in 2000 from 672 in 1999. EnronOnline Version 2.0, launched in September 2000, has attract- ed more users with its additional functionality (see EnronOnline next page). Enron North America In North America, Enrons physical natural gas volumes increased 77 percent to 24.7 billion cubic feet per day (Bcf/d) in 2000 from 13.9 Bcf/d in 1999. Power deliveries increased 52 percent to 579 million megawatt-hours (MWh) from 381 million MWh the year before. EnronOnline has been a runaway success in North America. It accounted for 74 percent of North American volume transacted in 2000, and created liquidity on a scale never seen before. It is a dynamic business accelerator: It took nearly a decade for Enrons daily gas transactions to reach 13.9 Bcf in 1999. Just 12 months later, Enronanline had helped to practically double daily transactions to 24.7 Bcf. EnronOnline magnifies the success of our existing business, which springs from the scale and scope of our established networks. We touch more parts of North America's energy system than any other merchant, with access to upwards of 2,500 distinct delivery points each day. The widespread delivery options and possibilities of our network give us a price and service advantage. Our networks and presence in nationwide energy markets also enable us to capture and distribute massive amounts of information about real-time market supply and demand, grid constraints and bottlenecks. When the market moves, we are able to conduct business while competitors are still fact-finding. Our people also make a difference. We are able to attract the best and the brightest and place them in an entrepreneurial atmosphere in which they can thrive. With our intellectual capital, we develop premium high-margin structured products that draw on our liquidity and market knowledge. A good example is the gas-marketing-services hub in Chicago we launched with People's Energy in March 2000. Known as Enovate, this venture opti- mizes People's 30 Bef a year of Chicago-area storage capacity and related transportation. It played a role in increasing our gas volumes in the central United States by 156 percent, the largest increase in our 2000 North American physical volumes. We continually assess the necessity of adding or owning assets in a region. Sometimes it is less expensive to own an asset than to replicate the asset in the market through contracting and mar- ket-making. We are developing generation plants to sell merchant power to high-demand markets, including proposed facilities in California. Florida, Texas, Louisiana and Georgia. But as liquidity increases, asset ownership may no longer be neces- sary. We plan to sell Houston Pipe Line Company, and Louisiana Resources Company is now held by Bridgeline Holdings, L.R, ajoint venture in which Enron retains an interest. Additionally, in the second quarter of 2001 we expect to close the sale of five of the six electricity peaking generation units in operation. The result is the same earnings power with less invested capital. Mexico's move toward liberalizing its energy markets should gain intensity and speed with its new government. Increased cross-border electricity transactions between Mexico and the United States seem inevitable. Our activities in Mexico seek to E0aa002648548 optimize both the Mexican electricity market and cross-border activity between the two countries. Enron also is active in South America, where we own and develop assets to help create an energy network. Enron Europe We are rapidly extending Enron's market- making approach into the deregulating European markets, focusing on the U.K., the Continent and the Nordic region. The Continent is still in the early stages of liberalization, Although the European Union has mandated liberalization of the power and natural gas markets, each country is responding at its own pace. The velocity of transactions is rising on the Continent, however, and Enron expects to raise the level of liquidity to make the markets work. Our business throughout Europe is growing rapidly. Natural gas and power volumes more than doubled to 10.3 trillion British thermal units equiv- alent per day (TBtueld) in 2000 from 4.1 TBtueld in 1999. We enjoy several competitive advantages in Europe: We are the only pan-European player; we have a proven business strategy: we entered the market early to build a presence; and we have attracted a talented and skilled local workforce. Our cross-border capabilities are becoming increasingly important as markets interconnect. U.K. gas can now be transported to Belgium. and subsequently to the rest of the Continent, giving us the opportunity to develop innovative transactions on both sides of the border The resulting increase in price volatility has nearly doubled U.K. gas prices, which, along with more volatile electricity prices ahead, has significantly improved demand for the U.K. risk management products we offer, both now and over the long term. lust as in North America, EnronOnline is increasing Enrons reach and volumes in Europe and is a prime driver of liquidity. Its simple con- tracts, multi-currency capabilities, transparent and competitive prices and easy accessibility have won EnronOnline rapid acceptance. In the U.K., power and gas volumes more than doubled, with power rising to 113 million MWh in 2000, and gas volumes climbing 119 percent to reach 3.2 Bcf/d. Several market factors are likely to create more business for us. The U.K's New Electricity Trading Agreements, which replace the existing U.K. power pool, are scheduled to be implemented by the second quarter of 2001. The agreements will result in increased price volatility, and Enron is well-positioned to help customers manage this risk. Additionally, lower power prices are shrinking profit margins for U.K. merchant power plants, which increasingly need to turn to market inter- mediaries such as Enron to hedge their fuel and power prices. On the Continent, our power volumes increased to 50 million MWh in 2000 from 7 million MWh in 1999. We are transacting at all major country interconnections, benefiting from cross- border opportunities. We closed our first-ever transaction in France and are an active player in Germany and Switzerland. We are beginning to partner with utilities to offer comprehensive port- folio management services, such as our agreement to purchase and distribute powerjointly with Swiss Citypower AG. which controls 19 percent of the Swiss electricity market, Enrononline Fnron Online successfully leverages Enrons core market -making capabilities, benefiting both exiT customers and Enron. The web-based system makes it easier to do business with Enron. It also accelerates the growth of Enron's existing businesses and facilitates quick and efficient entry into new markets. In Spain, electricity demand is growing faster than anywhere else in Europe. and there are limit- ed import and export capabilities. Enron is respond- ing to this opportunity by developing a 1.200- megawatt plant in Arcos, south of Seville, that should close financing in 2001. Continental gas liquidity isjust starting to increase. Our volumes grew to 472 million cubic feet per day (MMcfld) in 2000 from 53 MMcfld in 1999. While the market is in its early stages, Enron has managed to increase weekly transactions from about 5 to 100 over the course of a year. In October we initiated the first gas supply deal in Germany to the local utilities of Heidelberg, Tuebingen and Bensheirn. We also are delivering natural gas to some large users in the Netherlands and France. ECaaOO2648549 -I We continue to set records in the Nordic region, where we are the largest power marketer. Electricity volumes increased nearly 150 percent to reach 77 million MWh in 2000 from 31 million MWh in 1999. Enron's Oslo office also is now the base of our European weather risk manage- ment business. As more Nordic companies outsource energy supply and management, Enrons products arid serv- ices - including advanced technology applications - are eagerly sought. In December Enron entered into a two-year portfolio management agreement with UPM-Kymmene Corp., one of the world's largest forest products companies. Enron will assist opportunities to support our market-making activi- ties, including inside-the-fence power generation. Under consideration are a number of sites, which may be fueled by gas, liquefied natural gas or coal, Enron Australia Enron's market-making ability has been suc- cessfully extended to Australia, where Enron is a leading provider of logistical solutions in the coun- try's power market. During 2000 we introduced weather risk management products in the region. offering temperature-based products for Sydney, Melbourne, Hong Kong. Tokyo and Osaka. The Sydney office also provides a strategic platform for the extension of Enron's coal, metals and broad- MAKING MARKETS Enron's networks of assets and contractual relationships allow us to make markets and offer real- time pricing for more than 7.200 products on EnronOnline, This tremendous market liquidity attracts cust omen and A#ther increases Enron's volumes and market share. CUSTOMER RELATIONSHIPS EnronOnline provides customers with a more convenient way to dis- cover prices and do business with Enron, which increases transaction volumes and attracts new cus- tomers. The system automatically taps into Enron¶s sophisticated cm- tomer-credit profiles to protect Enron from credit risk UPM-Kymmene in optimizing its Nordic power port- folio of approximately 14 terawatt hours. Enron Japan Enron Japan formally opened its rokyo office in October 2000. Japan represents an enormous opportunity: Its electricity rates are the highest in the world, and electricity consumption is second only to the United States. We have attracted top talent to develop wholesale andjoint venture possi- bilities, and have introduced our first product for large electricity users - three- to five-year contracts that will reduce electricity bills immediately by up to 10 percent the first year, with the possibility of further reductions in subsequent years. Our first contracts were signed in early 2001. Through joint ventures with several Japanese companies, Enron is exploring merchant plant band businesses, as well as providing support for Enrons operations in the Asia-Pacific region. Extending to New Markets Enrons durable business approach, which has driven our success in the natural gas and electricity markets, is eminently applicable to other markets and geographical regions. While we are remaining focused on increasing earnings and opportunities in gas and power, we also are extending Enrons method to large, fragmented industries and prod- ucts, where intermediation can make markets more efficient and responsive to customer needs. We expect these new businesses to contribute to earnings in 2001. Enron Metals was launched in July 2000 when Enron acquired the world's leading merchant of non- ferrous metals, MG plc. Together, MG and Eriron are 17 INFORMATION SYSTEMS Enrononline is fully integrated with Enron's pro prietaq informa- tion systems~ which provide critical market information process thou. sands of deals and help assess and manage market and other risks. As a resulc Enron manages risks ins? antaneously even in the most volatile markets. A w~. A E¶CA LABILITY Enron's well-tuned back-office e'~- tem, integrated with Em-onOnline, has proven its ability to scale as Em-on's total transactions have gromi From an average of ESna day at EnronOnlines November 1999 launch to an average of 7,900 a day by year-end 2000. As Ehrononlii,e expands products and volumes iron's scalable back-office will contirne to be a competitive advantage. I ECaaOO264855O a powerful team. Enron's financial resources and eCommerce abilities add a new dimension to MG'S widespread physical merchant skills and excellent customer relationships. The early results are right on target, with physical volumes up 31 percent in 2000. Enron Metals opens an additional door to large energy customers. Cominco Ltd.. a zinc pro- ducer and an Enron Metals customer in Vancouver, British Columbia, worked with Enron to halt zinc production for six weeks and sell its power into the Northwestern power market, where it was needed. Enron North America protected Cominco by struc- turing a fixed-price swap to guarantee the sale price of the power, and Enron Metals arranged to Coal intermediation moved to a new level in 2000. The industry has been radically affected by the worldwide deregulation of the electricity industry. Like natural-gas-fueled generation, coal-burning generators require flexible terms and risk-manage- ment protection. Enron is able to provide unrivaled logistical support. Our coal business has led us to participate in sea and land logistics as well. Weather has never been better for us. Our weather risk management business is up about five-fold to 1,629 transactions in 2000 from 321 transactions the year before, As in all of our mar- kets, we bring cross-commodity capabilities to our weather products. For instance, we closed a three- One Coal Contract Coven All Logistics The process of sourcing and delivering coal to an electricity generator is a cot,,. plica ted process. Enron provides a single, comprehensive solution to manage all logistics and risk, whether the coal is sourced don,estically or abroad. In some cases, we have reduced the customers cost of coal by as much as 10 percent. 4/tCOAL PRICE AND SLII'Pt V RISKS Enron allows generators to purchase coal at flexible ten,,s. sach as lo,,g-tenr, fixed rates or a maximum price. Supply and price are assured because Enron has access to flu, It ipte sources all over the globe. Enron is on its way to becoming the worlds largest wholesale coal merchant. supply a portion of the zinc required to fulfill Comincos obligations. Comincos profit from the deal exceeded the annual profit it makes from producing zinc. Enron Credit is a new business with strong mar- ket potential. Enron has leveraged its internal risk management processes and systems to create a real- time, market-based online credit evaluation system. The idea is simple: Existing credit ratings and scoring mechanisms are not market-based and cannot respond in real time to credit events. This means creditors must figure out their credit risk exposure on their own. Enron Credit posts the cost of credit as a simple interest rate for more than 10,000 com- panies on its web site, www.enroncredit.com. Enron Credit also gives corporations the ability to hedge their credit risk via a bankruptcy product. year precipitation transaction that provides finan- cial compensation linked to natural gas prices if precipitation falls below a pre-determined mini- mum. The weather unit worked with several other Enron groups to transfer Enrons risk, ultimately transacting with 10 external companies in three markets (natural gas, weather products and insur- ance). The bundled end-product resulted in an effective hedge for the customer Crude oil. We now average crude deliveries of 7.5 TBtue/d to 240 customers in 46 countries. We have introduced the first-ever 24x7 commodity market of a West Texas Intermediate crude product on EnronOnline, allowing our customers to respond to market-changing events at any time, day or night. We also concluded our biggest physical jet fuel contract, providing 100,000 barrels for one ECaaOO2648551 year at the flexible and market-based prices that the customer needed, LNG. Enron is establishing a liquefied natural gas (LNG) network to create merchant ENG opportu- nities and to bring more gas to areas of the world that need it. Our ING-related assets in operation and development in the Caribbean and the Middle East form part of this network. We source surplus LNG from the Middle East and Asia and currently market it in the United States. Forest Products. Enron has offered pulp, paper and lumber financial products for several years, and now we are marketing physical volumes. In 2000 we acquired Garden State Paper Co., which gives us access to 210,000 tons of newsprint a year and tour recycling centers in key markets. In January 2001 we agreed to purchase a newsprint mill and related assets in Canada. With this acquisition, Enron will become the seventh-largest producer of newsprint in North America, giving us the physical liquidity necessary to quickly grow this business. Enron's Clickpapercom~ is powered by the EnronOnline platform but is totally customized for the forest products industry. It offers more than 100 financial and physical products and features news and information tailored specifically to forest prod- ucts industry customers. steel. In some markets, such as steel, we believe we can run our network with minimal assets. The industry currently suffers from overcapacity, but lacks a market mechanism to efficiently market the surplus. We will offer a core commodity baseline product that can be indexed against almost all other products in this $330 billion industry. The outlook is promising - we have transacted our first steel swap. This year we will build liquidity, improve pricing efficiency and gain contractual access to the physical product to provide compre- hensive logistical support. Enron Global Assets Enron Global Assets manages and optimizes Enrons assets outside North America and Europe. Enron has a solid portfolio of asset-based busi- nesses. However, with the higher returns available in the company's other businesses, we expect to divest some interests in a number of these assets. The remaining asset businesses will continue to focus on performance and complementing our mar- ket-making and services businesses. Enron Wind Corp. The economics of wind power are more promising than ever, creating significant growth for Enror-i Wind. Technological advancements and lower costs associated with today's larger, more efficient wind turbines have made wind power costs competitive with fossil fuel-generation for the first time. This cost competitiveness, together with government policies supporting renewable energy in most key markets and growing consumer demand for green energy, have fueled 30 percent annual growth over the past five years. With focused efforts in the world's three key wind power markets - Germany, Spain and the United States - Enron Wind completed 2000 with revenues of approximately $460 million. Strong growth in both the United States and Europe will account for a projected sales increase of approxi- mately 100 percent in 2001. ECaaOO2648552 ENRON ENERGY SERVICES Enron Energy Services is the retail arm of Enron, serving business users of energy in commercial and industrial sectors. Our comprehensive energy out- sourcing product has proven an exceptionally effective way for companies to reduce their costs, manage risks of energy price volatility, improve their energy infrastructure and focus resources on their core businesses. Enron Energy Services recorded its first prof- itable quarter as expected at the end of 1999, and continued to grow rapidly through 2000, with increasing profits in all four quarters of 2000 and aggregate recurring income before interest and taxes (IBIT) of $103 million for the year The value of our contracts in 2000 totaled more than $16 billion, increasing Enron Energy Services' cumulative con- tract value to more than $30 billion since late 1997. This success reflects growing acceptance of Enrons energy outsourcing product - acceptance that has meant an increasing rate of new contract- ing. Our retail energy success in 2000 also reflects our strong emphasis on contract execution and implementation and on excellence in customer service. Additionally, 2000 was marked by increased activity in Europe - an untapped market for energy outsourcing. We are positioned to dramatically increase our profitability in 2001. Retail energy earnings will be fueled by the rapid growth of our U.S. and European businesses and the strong execution and extension of existing contracts. Market Volatility The U.S. energy sector experienced unprece- dented challenge and opportunity in 2000. In national terms, steady movement toward a func- tioning deregulated energy marketplace continues. More than half the country's population is scheduled to be able to choose their electricity supplier by 2004. The ongoing energy crisis in California has focused everyone's attention on the complexities of incomplete deregulation, the risks of unreliable supply and the costs of unmanaged energy demand. Enron provides commercial and industrial energy customers with the solutions they need, bringing reliability and price-risk management to a market otherwise fraught with uncertainty. The volatility of energy prices across the coun- try has heightened the value of energy management and increased the demand for retail services. With our series of capabilities - energy commodity and price risk management capabilities, energy asset management and capital solutions - we remain the only firm with the skill, experience, depth and versatility to provide a comprehensive solution to address uncertain, rapidly changing markets, Customer Relationships The core of Enron's retail business is developing long-term, multi-year relationships with our cus- tomers, The value at contract signing is only a part of the potential value that can be realized when satisfied customers seek to add additional Enron services to their contracts, Of the $16.1 billion in total contract value signed in 2000. approximately $3 billion came from expansions of existing contract relationships. For example, in 1998, we signed a five-year, $250 million contract with World Color Press, which later merged with Quebecor Printing. In 2000, based on Quebecor World's satisfaction, the relationship was extended and expanded to a 10-year, $1 billion agreement including not only commodity supply, but also over- all energy management, including the design and implementation of improvements in energy asset infrastructure in more than 60 facilities operated by Quebecor World. We value our long-term customer relation- ships, and the health of these relationships can't be left to luck, instinct or vague impressions. Our Customer Satisfaction Program continually cap- tures our performance against expectations and benchmarks those results. Further, it is designed to ensure identification and resolution - including prompt escalation to the executive level if needed - of any issue that might arise. ECaaOO2648553 Medium-size Business Market In the first three years of U.S. operation. Enron Energy Services has been squarely focused on Fortune 1000 customers. But U.K-based Enron Direct has successfully penetrated the immense medium-size business market, proving that we can sell energy to smaller enterprises in a truly open retail market. Since gaining regulatory approval in February 1999 through the end of 2000, Enron Direct has acquired more than 130,000 gas and power cus- tomers, and continues to grow at a substantial rate. The profitability of these smaller accounts comes from Enrons long-term price risk management capa- bility and Enron Directs low-cost sales channels. Our high expectations for medium-size businesses are 4 'N MEASUREMENTS tNIMIZING DOWNTIME something is wrong until the ener- personnel can help control the gy bill comes, and then it is much costs of vendor calls and on-site too late. But with the Enron PMC. repairs through diagnostic data. real-time monitoring means that and through best-practice manage- unusual changes in energy demand ment of a net woi* of thousands of are tracked instantaneously service providers. We wol* with enabling Enron and the wstomer service providers to categorize and to identify and address problems analyze the actual cost of repairs. before energy costs get out of With Enron's expertise and scale, hand, we can improve response times. redece downtime and cut the cost of repairs and maintenance. reflected by the rapid expansion of the European operation. Enron Dire cto already is active in Madrid, Spain, and similar businesses will be launched in other countries as well. It is our strong belief that Enron is uniquely positioned to benefit both in the United States and Europe from the world's steady shift toward dereg- ulated energy markets. We will continue to provide sensible market solutions for the effective manage- ment of energy costs, and will continue to build a dynamic global retail business to drive company profits and sustain our reputation for innovation. ECaaOO2648554 a %4 SENSIBLE INVESThIENTS REDUCING PEAK DEMAND The cost of energy vanes widely over the cowse of the day. The PARC uses real-time pricing infor- mation, and the stream of data coming from the customer site, to automatically and remotely rMice cast omen' tow-priority energy use ten the price of energy is highest -ensuring that the customer gets maximum benefit for every dollar spent on energy. PARC data identify opportunities to improve efficiency through equipment upgrades or through changes in processes, without adversely affecting a clients oper- ations. The PARC's sophisticated modeling systems calculate a cost-benefit analysis for every potential investment in energy assets- This analysis includes a real-tin,. correlation with the price of commodities - to help companies not only make deci- sions but also to show them that there are decisions to be made, ENRON BROADBAND SERVICES Enron Broadband Services made excellent progress executing its business plan in 2000. The build-out of Enron's 18,000-mile global fiber network is near completion, bandwidth interme- diation transaction volume is growing exponen- tially, and we are testing the first commercially sound premium content-on-demand service. Clearly, the Enron business model is working in the broadband market. Enron Broadband Services' goals are to: * Deploy the most open, efficient global broadband network, the Enron Intelligent Network. * Be the worlds largest marketer of bandwidth and network services. * Be the world's largest provider of premium con- tent delivery services. The Enron intelligent Network We expect to be the first to provide broad- band connectivity on a global basis through the Enron Intelligent Network (FIN). The FIN operates as a "network of networks," providing switching capacity between independent networks for low- cost scalability. We will continue to add pooling points, which physically interconnect third parties' networks and serve as reference points for band- width contracts. We currently operate 25 pooling points: 18 in the United States, and one each in Tokyo, London, Brussels, Amsterdam, Paris, Dusseldorf and Frankfurt, We expect to add at least 10 more in 2001, FIN's embedded intelligence, provided by Enron's proprietary Broadband Operating System (BOS), gives Enron unique, powerful multi-layer network control. The Enron BOS enables the FIN to: * Dynamically provision bandwidth in real time. * Control quality and access to the network for Internet Service Providers. * Control and monitor applications as they stream over the network to ensure quality and avoid congested routes. The BOS automates the transaction process all the way from the initial request for capacity to provisioning, electronic billing and funds transfer With the BOS, Enron has created the first scalable, fully integrated transaction processing platform for delivering bandwidth capacity. Bandwidth Intermediation We exceeded our expectations by delivering more than 72,000 terabytes of network services in 2000, demonstrating rapidly growing industry acceptance of our flexible services. We are creating the risk management building blocks to manage almost every element of the network in addition to bandwidth: dark fiber, circuits, Internet Protocol (IP) services (transporting data packets according to P standards) and storage capacity. To date we have transacted with 45 counter- parties, including U.S. and international telecom- munications carriers, marketers and resellers and network service providers. In 2001 we expect to deliver 570.000 terabytes as we grow both the breadth and the depth of our network and prod- ucts. We offer 32 bandwidth-related products on EnronOnline. Enron's ability to provide bandwidth-on- demand at specified service levels and guaranteed delivery enables customers to access capacity with- out necessarily building, buying or expanding their own networks, Our bundled intermediation package includes P transport over land, under the sea, and via satellite, at both fixed and peak-usage terms. For example, we are working with i2 Technologies, a global provider of intelligent eBusiness solutions, to connect with customers in six cities, including four overseas. 2 has provisioned local-loop and long-haul capacity through Enron, and has low- cost access to our network's equipment as if it were its own, but it now has the flexibility to quickly add or discard capacity as day-to-day needs change. Data storage is a $30 billion-per-year business, and we know customers would like to purchase it on an as-needed basis. In January 2001 we com- pleted our first data storage transactions with a ECaaOO2548555 leading provider of managed storage services, StorageNetworks, and a large retailer, Best Buy. Best Buy is buying off-site storage capacity to save money and gain flexibility to accommodate chang- ing storage needs. Content Services In April 2000 Enron signed an agreement with a US. video rental retailer to deliver movies over the Enron Intelligent Network. The trial service is up and running in Seattle; Portland, Ore.; Salt Lake City and New York City. Additionally, we have established relationships with other high-visibility content providers. Over the next two or three years, we plan to deliver on-demand not only movies but sports, educational content, games, music and Sr applications not yet imagined. Market Innovator Enrons innovative approach is as valuable in broadband as it is in energy. Our proven intermedi- ation skills are creating new value for the industry and giving it a flexibility it has never enjoyed. We have combined our business model with readily available technologies to deliver premium content over the Enron Intelligent Network in a very com- pelling commercial model. We are not tied to any particular technology. We use the best solution at the best time for our customers, delivering the most reliable product at the lowest available cost in the marketplace. ECaaOO2648556 I Enronisfadlitating __ ¶YNAMIC PROVlSlOAflNi2rastruc. Enrons pooling point acclivity by establishing pooling tore allows companies to provision points in major metropolitan areas bandwidth quickly, eliminating the to switch bandwidth from one long lead times associated with independent network to another, circuit provisioning in the past. The pooling points help optimize Enhanced connectivity and dynam- network capacity by creating corn- ic provisioning allow bandwidth mon physical delivery points and users to take advantage of band- access to nuiltiple locations. width market opportunities on short notice. f%~nwORA¶ CONtROL Within Eaton's Broatand Operating System (805) lie several unique capabilities that monitor switching activity between networks and control the provisioning of circuits. The Eaton SOS can measure per- formance in real time at eves' layer of the network and ensure quality of service and delivery. '? CAL4SILITY The Eaton Intelligent Network (FIN) has extensive reach through- out the continental United States and connects to Europe and Asia. With its broad connectivity, the FIN is designed to scale without the cost of building additional infrastructure. Leveraging the EnronOnline platform provides additional reach and gives cus- tomers anew, easy option (or their bandwidth needs. ENRON TRANSPORTATION SERVICES The Gas Pipeline Group formally changed its name in September 2000 to Enron Transportation Services to emphasize its ability to deliver innovative solutions to its customers. These emerging services augment our core competency: operating interstate pipelines safely and efficiently. In 2000 we continued our record of strong returns with consistent earnings and cash flow. Income before interest and taxes reached $391 million, up from $380 million in 1999. Cash flow from operations rose to $415 million in 2000 from $370 million in 1999. Throughput remained relatively unchanged in 2000 at 9.13 Purchasing Capacity Through Enron Online Enron transpoitation Senoces has intro. diced several innovative custome, services, including the use of EnronOt-i line. Northen, Natural Gas, Trans weston, Pipeline and Florida Gas Transmission are selling avail- able rti,, and intenvppble capacity cvi EnronOnline in addition to selling capacity through traditional methods. Customers already using £nroo Online to transact gas can now range rranspo.-tabon at the same time. billion cubic feet per day (Bcfld), compared to 9.18 Bcf/d the previous year. Together, our interstate pipelines span approxi- mately 25,000 miles with a peak capacity of 9.8 Bcf/d. We transport 15 percent of U.S. natural gas demand. We connect to the major supply basins in the United States and Canada, and we continue to increase capacity from those basins to our major markets. We have added 840 million cubic feet per day (MMcfId) over the past two years, and nearly 1 Bcf/d is scheduled to enter service in the next three years. At the same time, our expense per MMcf/d has declined by 26 percent from 1992 to today. Enron Transportation Services pipelines have brought to market a variety of new products and services specifically tailored to address customer needs. Northern Natural Gas, for example, has used interruptible storage products that extend its capa- bility to meet the growing demand for services to manage physical positions. Transwestern Pipeline Company is offering shippers increased service flexibility by accessing third-party storage. Across all pipelines, web-based applications have been introduced to allow customers to better manage transactions and allow the pipelines to maximize their capacity offerings. Northern Natural Gas. Transwestern Pipeline and Florida Gas Transmission began to sell available capacity on Enrononline in 2000 to give customers the convenience of eCommerce transacting (see "Purchasing Capacity Through Enrononline" on this page). Northern Natural Gas Northern Natural Gas, Enron's largest pipeline, has approximately 16,500 miles of pipeline extend- ing from the Permian Basin in Texas to the Great Lakes, providing extensive access to major utilities and industrials in the upper Midwest. The pipeline has market area peak capacity of 4.3 Bcfld. It inter- connects with major pipelines, including Great lakes, Transwestern, El Paso, Northern Border and Trailblazer, to offer excellent northern, southern and western flow capabilities. Ninety-five percent of market area capacity is contracted through 2003. Market area demand is expected to increase considerably with the development of approximately 2.000 megawatts of gas-fired generation over the next three years. The pipeline has developed innova- ECaaOO2648557 'vf~bji Cd~1 DISCOVERY Knowledge helps wstomers make better decisions. Prices am h44v transparent and instantly aecessibl& tic!, allows buyers to know what their transportation costs will be when they are buying their gas. K OPTIMIZING THE ASSETS When a pipeline is not totally subscribed Enrononhine lets the market know it is avail- able. Pipelines also can auction off highly desirable capacity by accepting sealed bids. EnronOnline gives Enron Transportation Services the ability to put more product in front of more of its customers than ever before. tive and flexible services to meet the transportation. storage and balancing needs of power producers. It completed construction in October 2000 of a link to 445 megawatts of peaking power operated by Great River Energy in Minnesota. The link will transport up to 120 MMcf/d of gas. Transwestern Pipeline Transwestern operates approximately 2,500 miles of pipe with 1.7 Bcfld ol' peak capacity. With pipeline originating in the San Juan, Permian and Anadarko Basins, Trarnwestern can move gas east to Texas or west to the California border. To respond to increased gas demand in California, Transwestern Pipeline added compressor facilities near Gallup, New Mexico. in May 2000 to increase mainline capacity by 140 MMcfld to the California border. The new capacity is completely subscribed under long-term contracts, In 2000 the pipeline also added several major interconnects to tap into growing markets east of California. The Transwestern system is fully subscribed for western deliveries through December 2005 and for eastern deliveries through December 2002. The sys- tem has the potential to quickly increase throughput capacity. An expansion project is expected to be flied this year and completed in 2002, Florida Gas Transmission Florida Gas Transmission serves the rapidly growing Florida peninsula and connects with 10 major pipelines. It has maintained a competitive position by staging expansions to keep pace with demand as it grows. With current peak capacity of 1.5 Bcfld, Florida Gas Transmission will add 600 MMcf/d of capacity when its Phase IV and Phase V expansions are completed. The Fort Myers extension. part of a 200 MMcffd Phase IV expansion, went into service on October 1, 2000. and the remainder is scheduled to go into service in May 2001. The 400- MMcf/d Phase V expansion has received preliminary approval from the Federal Energy Regulatory Commission and is expected to be completed in April 2002. The 4,795-mile pipeline currently is evaluating supply connections to two proposed liquefied natu- ral gas facilities. Northern Border Partners, IP. Northern Border Partners, L.P. is a publicly traded partnership (NYSE: NBP), of which Enron is the largest general partner. Northern Border Partners owns a 70 percent general partner interest in Northern Border Pipeline, which extends 1,214 miles from the Canadian border in Montana to Illinois, The pipeline, a low-cost link between Canadian reserves and the Midwest market, has a peak capacity of 2.4 Bcf/d and is fully contracted under long-term agreements with an average term of six years. Its Project 2000 extension - 34 miles of pipe from Manhattan, Illinois, to a point near North Hayden, Indiana - will provide 544 MMcfId to industrial markets in Indiana with a targeted in- service date of late 2001. late in 2000. Northern Border Pipeline settled its rate case, allowing it to switch from a cost-of- service tariff to a stated-rate tariff, which will provide rate certainty to customers, increase competitiveness and allow flexibility in services provided. Northern Border Partners also owns interests in gathering systems in the Powder River and Wind River Basins in Wyoming, and recently signed a letter of intent to purchase Bear Paw INC. which has extensive gathering and processing operations in the Powder River Basin and the Williston Basin. The partnership also owns Black Mesa Pipeline, a 273-mile coal-water slurry pipeline running from Kayenta, Arizona, to Mohave Power Station in Laughlin, Nevada. Portland General Electric The sale of Portland General Electric (PGE) to Sierra Pacific Resources has been delayed by the effect of recent events in California and Nevada on the buyer. In 2000 the Portland, Oregon-based elec- tricity utility performed well in the face of regional wholesale price volatility BIT rose approximately 12 percent to $341 million. Total electricity sales reached 38.4 million megawatt-hours (MWh) compared to 31.9 million MWh in 1999. We will continue to drive performance while we pursue the utility's sale. ECaaOO264855B MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL RISK MANAGEMENT INFORMATION REGARDING FORWARD- LOOKING STATEMENTS MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING REPORTS OF INDEPENDENT PUBLIC ACCO U NTANTS ENRON CORP. AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENT ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 7 ENRON CORR AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS ENRON CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY ENRON CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SELECTED FINANCIAL AND CREDIT INFORMATION (UNAUDITED) ECaaOO2648559 Management S Discussion and Analysis of Financial Condition and Results of Operations The following review of the results of operations and financial condition of Enron Corp. and its subsidiaries and affiliates (Enron) should be read in conjunction with the Consolidated Financial Statements. Si CKHIAFt( IKS %t~r ,¶yvibih>li -A Is Enron's net income for 2000 was $979 million compared to $893 million in 1999 and $703 million in 1998. Items impacting comparability are discussed in the respective segment results. Net income before items impacting comparability was $1,266 million, $957 million and $698 million, respectively, in 2000, 1999 and 1998. Enrons business is divided into five segments and Exploration and Production (Enron Oil & Gas Company) through August 16, 1999 (see Note 2 to the Consolidated Financial Statements). Enrons operating segments include: Transportation and Distribution. Transportation and Distribution consists of Enron Transportation Services and Portland General. Transportation Services includes Enrons interstate natural gas pipelines, primarily Northern Natural Gas Company (Northern), Transwestern Pipeline Company (Transwestern). Enrons 50% interest in Florida Gas Transmission Company (Florida Gas) and Enrons interests in Northern Border Partners, L.P. and FOil Energy Partners, LP. (Eon). Net income includes the following: (In millions) After-tax results before items impacting comparability Items impacting comparability:(a) Charge to reflect impairment by Azurix Gain on TNPC, Inc. (The New Power Company), net Gains on sales of subsidiary stock MTBE-related charges Cumulative effect of accounting changes Net income 2000 1999 1998 $1,266 $957 $698 (326) - 39 345 45 (278) (40) - (131) - $ 979 $893 $703 (a) Tax affected at 35%, except where a specift tax rate applied Diluted earnings per share of common stock were as follows: 2000 1999 1998 Diluted earnings per sharela):...............-............-- After-tax results before items impacting comparability S 1.47 $ 118 $ 1.00 Items impacting comparability: Charge to reflect impainnent by Azurix 40.40) Gain on The New Power Company, net 0.05 Gains on sales of subsidiary stock - 0.45 0.07 MTRE-related charges - (0.36) (0.06) Cumulative effect of accounting changes . (0.17) - Diluted earningsper share $1.12 $1.10 $1.01 W Restated to reflect the tvt~-for-one stock split effective August13, t99R Wholesale Services. 'Wholesale Services includes EnrorYs wholesale businesses around the world, Wholesale Services oper- ates in developed markets such as North America and Europe. as well as developing or newly deregulating markets including South America, India and Japan. Retail Energy Services. Enron, through its subsidiary Enron Energy Services, LIC (Energy Services), is extending its energy expertise and capabilities to end-use retail customers in the indus- trial and commercial business sectors to manage their energy requirements and reduce their total energy costs. Broadband Services. Enrons broadband services business (Broadband Services) provides customers with a single source for broadband services, including bandwidth intermediation and the delivery of premium content. Corporate and Other Corporate and Other includes Enrolls investment in Azurix Corp. (Azurix), which provides water and wastewater services, results of Enron Renewable Energy Corp. (EREC), which develops and constructs wind-generated power projects, and the operations of Enrons methanol and MTBE plants as well as overall corporate activities of Enron. n-mr' S.'f nn-'r'.t,:r,5 Minority lrslcrr:sts and income fates The following table presents income before interest, minor- ity interests and income taxes (IBIfl for each of Enrons operating segments (see Note 20 to the Consolidated Financial Statements): (In millions) 2000 1999 1998 Transportation and Distribution: Transportation Services $ 391 $ 380 $ 351 Portland General 341 305 286 Wholesale Services 2.260 1,317 968 Retail Energy Services 165 (68) (119) Broadband Services (60) - - Exploration and Production - 65 128 Corporate and Other (615) (4) (32) Income before interest, minority interests and taxes $2,482 $1,995 $1,582 rRIr)t.'t,rs'fro (tss'10,,,i.. Transportation Services. The following table summarizes total volumes transported by each of Enrons interstate natural gas pipelines. 2000 1999 1998 Total volumes transported (BBtuld$a) Northern Natural Gas 3,529 3,820 4.098 Transwestern Pipeline 1,657 1,462 1,608 Florida Gas Transmission 1,501 1,495 1,324 Northern Border Pipeline 2.443 2,405 1,770 (a) R0l,on British thermal unas per day Amounts reflect 100% of each entitys throughput volumes. Florida Gas and Northern Border P,peline are unconsoli- dated eguily affliates. ECaaOO264856O Significant components of BIT are as follows: 2000 1999 1998 (In m illions)................................................ Net revenues $650 $626 $640 Operating expenses 280 264 276 Depreciation and amortization 67 66 70 Equity earnings 63 38 32 Other net 25 46 25 Income before interest and taxes $391.....$380 Revenues, net of cost of sales, of Transportation Services ,ncreased $24 million (4%) during 2000 and declined $14 million (2%) during 1999 as compared to 1998. In 2000, Transportation Services' interstate pipelines produced strong financial results. The volumestransported byTranswestern increased 13 percent in 2000 as compared to 1999. Northern's 2000 gross margin was comparable to 1999 despite an 8 percent decline in volumes transported. Net revenues in 2000 were favorably impacted by transportation revenues from Transwestern's Gallup, New Mexico expansion and by sales from Northern's gas storage inventory. The decrease in net revenue in 1999 compared to 1998 was primarily due to the expiration, in October 1998. of certain tran- sition cost recovery surcharges, partially offset by a Northern sale of gas storage inventory in 1999. an increase in wholesale sales, partially offset by higher purchased power and fuel costs. Operating expenses increased primarily due to increased plant maintenance costs related to periodic overhauls. Depreciation and amortization increased in 2000 primarily as a result of increased regulatory amortization. Other, net in 2000 included the impact of an Oregon Public Utility Commission (OPUC) order allowing certain deregulation costs to be deferred and recovered through rate cases, the settlement of litigation related to the Trojan nuclear power generating facility and gains on the sale of certain generation-related assets. Revenues, net of purchased power and fuel costs, decreased $5 million in 1999 as compared to 1998. Revenues increased pri- marily as a result of an increase in the number of customers served by Portland General. Higher purchased power and fuel costs, which increased 42 percent in 1999, offset the increase in revenues. Other income, net increased $31 million in 1999 as compared to 1998 primarily as a result of a gain recognized on the sale of certain assets. In 1999, Enron entered into an agreement to sell Portland General Electric Company to Sierra Pacific Resources. See Note 2 to the Consolidated Financial Statements. Statistics for Portland General are as follows: 2000 1999 1998 (>. [ n n--s Operating expenses, including depreciation and amortiza- lion, of Transportation Services increased $17 million (5%) during 2000 primarily as a result of higher overhead costs related to information technology and employee benefits. Operating expenses decreased $16 million (5%) during 1999 primarily as a result of the expiration of certain transition cost recovery sur- charges which had been recovered through revenues. v [ Fl fl(JS Equity in earnings of unconsolidated equity affiliates increased $25 million and $6 million in 2000 and 1999. respectively. The increase in equity earnings in 2000 as compared to 1999 primarily relatesto Enron's investment in Florida Gas, The increase in earnings in 1999 as compared to 1998 was primarily a result of higher earnings from Northern Border Pipeline and ECU. :1,1 Other, net decreased $21 million in 2000 as compared to 1999 after increasing $21 million in 1999 as compared to 1998. Included in 2000 were gains related to an energy commodity contract and the sale of compressor-related equipment, while the 1999 amount included interest income earned in connection with the financing of an acquisition by ECU, The 1998 amount included gains from the sale of an interest in an equity invest- ment, substantially offset by charges related to litigation, Portland General. Portland General realized BIT as follows: (In millions) 2000 1999 1998 Revenues $2,256 $1,379 $1,196 Purchased power and fuel 1,461 639 451 Operating expenses 3»=1 304 295 Depreciation and amortization 211 181 183 Other, net 78 SD 19 Income before interest and taxes S 341 $ 305 $286 Revenues, net of purchased power and fuel costs, increased $55 million in 2000 as compared to 1999. The increase is primarily the result of a significant increase in the price of power sold and Electricity sales (thousand MWh)(a) Residential Commercial Industrial Total retail Wholesale Total electricity sales Resource mix Coal Combustion turbine Hydro Total generation Firm purchases Secondary purchases Total resources Average variable power cost (MillsIl(Wb)(bI Generation Firm purchases Secondary purchases Total average variable power cost 7.433 7,404 7,101 7,527 7,392 6,781 4,912 4,463 3,562 19,872 19,259 17,444 18,548 12,612 10,869 38,420 31,871 28,313 11% 15% 16% 12 8 12 6 9 9 29 32 37 63 57 56 8 11 7 100% 100% 100% 14.5 34,9 123.6 37.2 Retail customers (end of period, thousands) 725 11.3 8.6 23.2 17.3 19.7 23.6 20.0 15,6 719 704 ~) Thousand rnegavva if-hours. (h) F$41s (I/TO cent) per kilowatt-hour Enron Transportation Services is expected to provide stable earnings and cash flows during 2001. The four major natural gas pipelines have strong competitive positions in their respective markets as a result of efficient operating practices, competitive rates and favorable market conditions. Enron Transportation Services expects to continue to pursue demand-driven expansion opportunities. Florida Gas expects to complete an expansion that will increase throughput by 198 enillion cubic feet per day (MMcf/d) by mid-2001. Florida Gas has received preliminary approval from the Federal Energy Regulatory Commission for an expansion of 428 MMcftd. expected to be completed by early 2003, and is also pursuing an expansion of 150 MMcf/d that is expected to be completed in mid-2003. Tranwestern completed an expansion of 140 MMcf/d in May 2000 and is pursuing an expansion of 50 MMcf/d that is expected to be completed in 2001 ECaaOO2648561 and an additional expansion of up to 150 MMcI/d that is expected to be completed in 2002. Northern Border Partners is evaluating the development of a 325 mile pipeline with a range of capacity from 375 MMcI/d to 500 MMcftd to connect natural gas produc- tion in Wyoming to the Northern Border Pipeline in Montana. In 2001, Portland General anticipates purchased power and fuel costs to remain at historically high levels. Portland General has submitted a request with the OPtiC to recover the anticipated cost increase through a rate adjustment. Enron builds its wholesale businesses through the creation of networks involving selective asset ownership, contractual access to third-party 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 Services' 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 doing 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-party 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 investments value. The following table reflects BIT for each business line: (In millions) Commodity sales and services $1.630 $ 828 $411 Assets and investments 889 850 709 Unallocated expenses (259) (161) (152) Income before interest. minority interests and taxes $2,260 $1,317 $968 The following discussion analyzes the contributions to 1811 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. This market- making activity includes the purchase, sale, marketing and delivery of natural gas, electricity, liquids and other commodi- ties, 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. See Note 1 to the Consolidated Financial Statements. 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 inter- company amounts): 2000 1999 1998 Physical volumes (B8tue/d)Ca~ThY Gas: United States Canada Europe and Other Transportation volumes Total gas volumes Crude oil and Liquids Electricity (c} Total physical volumes (BBtuetd) 17,674 8.982 7,418 6,359 4,398 3,486 3,637 1,572 1,251 27,670 14,952 12,155 649 575 559 28,319 15.527 12,714 6.088 6,160 3.570 17.308 10,742 11,024 51.715 32,429 27,308 Electricity volumes (thousand MWD) United States 578,787 380,518 401,843 Europe and Other 54,670 11,576 529 Total 633.457 392,094 402,372 Financial settlements (notional, BBtuefd) 196,148 99,337 75,266 (a) Bill,bn British thermal units equivalent per day (is) Includes third-part' transacdons by Enron Energy Servkes. (c) Represents electricity vol ume5 convorted to BBwefd. Earnings from commodity sales and services increased $1.0 billion (160%) in 2000 as compared to 1999. Increased profits from North American gas and power marketing operations, European power marketing operations as well as the value of new businesses, such as pulp and paper, contributed to the earnings growth of Erirons commodity sales and services busi- ness. Continued market leadership in terms of volumes trans- acted, significant increases in natural gas prices and price volatility in both the gas and power markets were the key contributors to increased profits in the gas and power interme- diation businesses. In late 1999, Wholesale Services launched an Internet-based ecommerce system, Enrononline, which allows wholesale customers to view Enrons real time pricing and to complete commodity transactions with Enron as principal, with 2000 1999 1998 no direct interaction. In its first full year of operation, EnronOnline positively impacted wholesale volumes, which increased 59 percent over 1999 levels. Earnings from commodity sales and services increased S217 million (53%) in 1999 as compared to 1998. reflecting strong _______________ _____ results from the intermediation businesses in both North America and Europe, which include delivery of energy com- modities and associated risk management products. Wholesale Services also successfully managed its overall portfolio of con- tracts, particularly in minimizing credit exposures utilizing third-party contracts. New product offerings in coal and pulp and paper markets also added favorably to the results. Assets and Investments. Enrons Wholesale businesses make investments in various energy and certain related assets as a part 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 from these investments principally result from operations of the assets or sales of ownership interest. Additionally. Wholesale Services invests in debt and equity securities of energy and technology-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 fair value basis and are included in revenues, result from changes in the market value of the securities. Wholesale Services uses risk ECaaOO2648562 management disciplines, including hedging transactions, to manage the impact of market price movements on its merchant investments. See Note 4 to the Consolidated Financial Statements for a summary of these investments. Earnings from assets and investments increased $39 million (5%) in 2000 as compared to 1999 as a result of an increase in the value of Wholesale Services' merchant investments, partially off- set by lower gains from sales of energy assets. Earnings from asset operations were comparable to 1999 levels. Earnings from merchant investments were positively impacted by power-related and energy investments, partially offset by the decline in value of technology-related and certain energy-intensive industry investments. Gains on sales of energy assets in 2000 included the monetization of certain European energy operations. Earnings from assets and investments increased $141 million (20%) in 1999 as compared to 1998. During 1999, earnings from Wholesale Services' energy-related assets increased, reflecting the operation of the Dabhol Power Plant in India. ownership in Elektro Eletricidade e Servivos SA. (Flektro). a Brazilian electric utility, and assets in various other developing markets, Wholesale Services merchant investments increased in value during the year due to the expansion into certain technology-related invest- ments, partially offset by a decline in the value of certain energy investments, In addition, Wholesale Services' 1999 earnings increased due to development and construction activities, while gains on sales of energy assets declined. Unallocated Expenses. Net unallocated expenses such as systems expenses and performance-related costs increased in 2000 due to growth of Wholesale Services existing businesses and continued expansion into new markets. In 2000, Wholesale Services reinforced its leading positions in the natural gas and power markets in both North America and Europe. In the coming year, Wholesale Services plans to continue to expand and refine its existing energy networks and to extend its proven business model to new markets and industries. In 2001. Wholesale Services plans to continue to fine-tune its already successful existing energy networks. In North America, Enron expects to complete the sale of five of its peaking power plants located in the Midwest and its intrastate natural gas pipeline. In each case, market conditions, such as increased liquidity, have diminished the need to own physical assets. For energy networks in other geographical areaswhere liquidity may be an issue, Enron will evaluate whether its existing network will benefit from additional physical assets. The existing networks in North America and Europe should continue to provide opportu- nities for sustained volume growth and increased profits. The combination of knowledge gained in building networks in key energy markets and the application of new technology, such as EnronOnline, is expected to provide the basis to extend Wholesale Services' business model to new markets and industries. In key international markets, where deregulation is underway, Enron plans to build energy networks by using the optimum combination of acquiring or constructing physical assets and securing contractual access to third-party assets. Enron also plans to replicate its business model to new industrial markets such as metals, pulp, paper and lumbe~ coat and steel. Enron expects to use its eCommerce platform, EnronOnline, to accelerate the pene- tration into these industries. Earnings from Wholesale Services are dependent on the origination and completion of transactions, some of which are individually significant and which are impacted by market condi- tions, the regulatory environment and customer relationships. Wholesale Services' transactions have historically been based on a diverse product portfolio, providing a solid base of earnings. Enron's strengths, including its ability to identify and respond to customer needs, access to extensive physical assets and its inte- grated product offerings, are important drivers of the expected continued earnings growth. In addition, significant earnings are expected from Wholesale Services commodity portfolio and investments, which are subject to market fluctuations. External factors, such as the amount of volatility in market prices. impact the earnings opportunity associated with Wholesale Services' business, Risk related to these activities is managed using natu- rally offsetting transactions and hedge transactions, The effec- tiveness of Enrons risk management activities can have a materi- al impact on future earnings. See "Financial Risk Management" for a discussion of market risk related to Wholesale 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 outsourcing solutions to customers for full energy management. This integrated product includes the management of commodity delivery, energy information and energy assets, and price risk management activities. The com- modity portion of the contracts associated with this business are accounted for under the mark-to-market method of accounting. See Note ito the Consolidated Financial Statements, (In millions) 2000 1999 1998 Revenues 54,815 11.807 $1,072 Cost of sales 4,028 1,551 955 Operating expenses 449 308 210 Depreciation and amortization 38 29 31 Equity losses (60) - (2) Other, net 63 13 7 BIT before items impacting comparability 103 (68) (119) Items impacting comparability: Gain on The New Power Company stock issuance 121 - - Retail Energy Services charges (59) - - Income (loss) before interest, minority interests and taxes 6 165 $ (68) $ (119) Revenues and gross margin increased $2,808 million and $331 million, respectively, in 2000 compared to 1999. primarily resulting from execution of commitments on its existing cus- tomer base, long-term energy contracts originated in 2000 and the increase in the value of Energy Services' contract portfolio. Operating expenses increased as a result of costs incurred in building the capabilities to deliver services on existing customer contracts and in building Energy Services' outsourcing business in Europe. Other, net in 2000 consisted primarily of gains associat- ed with the securitization of non-merchant equity instruments. Equity losses reflect Energy Services portion of losses of The New Power Company. Items impacting comparability in 2000 included a pre-tax gain of $121 million related to the issuance of common stock by The New Power Company and a charge of $59 million related to the write-off of certain information technology and other costs. The New Power Company, which is approximately 45 percent owned by Enron. was formed to provide electricity and natural gas to residential and small commercial customers in deregulated energy markets in the United States, ECaaOO2648563 During 2001, Energy Services anticipates continued growth in the demand for retail energy outsourcing solutions. Energy Services will deliver these services to its existing customers, while continuing to expand its commercial and industrial customer base for total energy outsourcing. Energy Services also plans to contin- ue integrating its service delivery capabilities, extend its business model to related markets and offer new products. In implementing Enron's network strategy. Broadband Services is constructing the Enron Intelligent Network, a nation- wide fiber-optic network that consists of both fiber deployed by Enron and acquired capacity on non-Enron networks and is man- aged by Enrons Broadband Operating System software. Enron is extending its market-making and risk management skills from its energy business to develop the bandwidth intermediation busi- ness to help customers manage unexpected fluctuation in the price, supply and demand of bandwidth, Enron's bandwidth-on- demand platform allows delivery of high-bandwidth media-rich content such as video streaming, high capacity data transport and video conferencing. Broadband Services also makes invest- ments in companies with related technologies and with the potential for capital appreciation. Earnings from these merchant investments, which are accounted for on a fair value basis and are included in revenues, result from changes in the market value of the securities. Broadband Services uses risk management disci- plines, including hedging transactions, to manage the impact of market price movements on its merchant investments, Broadband Services also sells interests in certain investments and other assetsto improve liquidity and overall return, thetiming of which is dependent on market conditions and management's expectations of the investment's value, The components of Broadband Services' businesses include the development and construction of the Enron Intelligent Network, sales of excess fiber and software, bandwidth interme- diation and the delivery of content, Significant components of Broadband Services' results are as follows: (In millions) Cross margin Operating expenses Depreciation and amortization Other, net loss before interest minority interests and taxes 2000 $318 305 77 S (60) Broadband Services recognized a loss before interest, minority interests and taxes of $60 million in 2000, Gross margin included earnings from sales of excess fiber capacity, a significant increase in the market value of Broadband Services' merchant investments and the monetization of a portion of Enron's broadband content deliv- cry platform. Expenses incurred during the period include expenses related to building the business and depreciation and amortization, Gui 00k Broadband Services is extending Enrons proven business model to the communications industry, In 2001, Enron expects to further develop the Enron Intelligent Network, a global broad- band network with broad connectivity potential to both buyers and sellers of bandwidth through Enron's pooling points, In addi- tion, Enron expects to further deploy its proprietary Broadband Operating System across the Enron Intelligent Network, enabling Enron to manage bandwidth capacity independent of owning the underlying fiber. Broadband Services expects its intermediation transaction level to increase significantly in 2001 as more market participants connect tothe pooling points and transact with Enron to manage their bandwidth needs, The availability of Enron's bandwidth intermediation products and prices on EnronOnline are expected to favorably impact the volume of transactions. In 2001, Broadband Services expects to continue to expand the commercial roll-out of its content service offerings including video-on- demand, Enron expects the volume of content delivered over its network to increase as more content delivery contracts are signed and as more distribution partner locations are connected. Significant components of Corporate and Others BIT areas follows: (In millions) BIT before items impacting comparability 2000 1999 1998 S(289) $ (17) $ 7 Items impacting comparability: Charge to reflect impairment by Azurix (326) - - Gains on exchange and sales of Enron Oil & Gas Company (EOG) stock - 454 22 Charge to reflect impairment of MTBE assets and losses on contracted MTBE production - (441) (61) Loss before interest, minority interests and taxes 5(615) $ (4) $(32) Results for Corporate and Other in 2000 reflect operating losses from Enron's investment in Azurix (excluding the impair- ments discussed below) and increased information technology. employee compensation and corporate-wide expenses, Results for Corporate and Other in 1999 were impacted by higher corporate expenses, partially offset by increased earnings from EREC resulting from increased sales volumes from its German manufacturing subsidiary and from the completion and sale of certain domestic wind projects, Enron also recognized higher earnings related to Azurix, Results in 1998 were favor- ably impacted by increases in the market value of certain corpo- rate-managed financial instruments, partially offset by higher corporate expenses. Items impacting comparability in 2000 included a $326 mil- lion charge reflecting Enrons portion of impairments recorded by Azurix related to assets in Argentina, Items impacting compa- rability in 1999 included a pre-tax gain of $454 million on the exchange and sale of Enron's interest in FOG (see Note 2 to the Consolidated Financial Statements) and a $441 million pre-tax charge for the impairment of its MTBE assets (see Note 17 to the Consolidated Financial Statements). During 1998, Enron recognized a pre-tax gain of $22 million on the delivery of 10,5 million shares of EOG stock held by Enron as repayment of mandatorily exchangeable debt, Enron also recorded a $61 million charge to reflect losses on contracted MTBE production, Interest and related charges, net of interest capitalized which totaled $38 million, $54 million and $66 million for 2000, 1999 and 1998, respectively, increased to $838 million in 2000 from $656 million in 1999 and $550 million in 1998, The increase in 2000 as compared to 1999 was primarily a result of increased long-term debt levels, increased average short-term borrowings, short-term debt assumed as a result of the acquisition of MG plc and higher interest rates in the U.S. The increase was partially offset by the replacement of debt related to a Brazilian sub- sidiary with lower interest rate debt. ECaaOO2645564 The increase in 1 999 as compared to 1998 was primarily due to debt issuances and debt related to a Brazilian subsidiary, par- tially offset by a decrease in debt related to EOG following the sale and exchange of Enron's interests in August 1999. See Note 2 to the Consolidated Financial Statements. Ft Minority interests include the following: (In millions) 2000 1999 1998 Elektro(a) Majority-owned limited liability company and limited partnerships 105 71 - Enron Oil & Gas company - 2 24 Other 16 23 53 Total $154 $135 $77 (a) Relates to the resperrive parents of Elekrro. wtiith had m4'orily shareholders in 2000 and 1999 See NoteS to the Consolidated Financial Statement Minority interests include Elektro beginning January 1, 1999, a majority-owned limited liability company and majority-owned limited partnerships since their formation during 1998 through 2000 and EOG until the exchange and sale of Enron's interests in August 1999 (see Note? to the Consolidated Financial Statements). Income tax expense increased in 2000 as compared to 1999 primarily as a result of increased earnings, decreased equity earn- ings and decreased tax benefits related to the foreign tax rate differential, partially offset by an increase in the differences between the book and tax basis of certain assets and stock sales. Income tax expense decreased in 1999 compared to 1998 primarily as a result of increased equity earnings, tax benefits related to the foreign tax rate differential and the audit settle- ment related to Monthly Income Preferred Shares, partially offset by increased earnings. (:ijrri(illiuvct F Is?sjt Ct I ( In 1999, Enron recorded an after-tax charge of $131 million to reflect the initial adoption (as of January 1,1999) of two new accounting pronouncements, the AICPA Statement of Position 98-S (SOP 98-5), Reporting on the Costs of Start-Up Activities," and the Emerging Issues Task Force Issue No. 98-10, Accounting for Contracts Involved in Energy Trading arid Risk Management Activities." The 1999 charge was primarily related to the adop- tion of SOP 98-5. N' k-V A:'(hIJRI1IN.( ~5F¾)NrtHk(?i 'Mi NV In 1998, the Financial Accounting Standards Board (FAiR) issued Statement of Financial Accounting Standards (SPAS) No, 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SPAS No, 137 and SFAS No. 138. SEAS No. 133 must be applied to all derivative instru- ments and certain derivative instruments embedded in hybrid instruments and requires that such instruments be recorded in the balance sheet either as an asset or liability measured at its fair value through earnings, with special accounting allowed for cer- tain qualifying hedges. Enron will adopt SPAS No. 133 as of January 1, 2001. Due to the adoption of SFAS No, 133, Enron will recognize an after-tax non-cash loss of approximately $5 million in earnings and an after-tax non-cash gain in "Other Comprehensive Income," a component of shareholders' equity, of approximately $22 million from the cumulative effect of a change in accounting principle. Enron will also reclassify $532 million from "Long-Term Debt" to "Other Liabilities" due to the adoption. The total impact of Enron's adoption of SFAS Ne. 133 on earnings and on "Other Comprehensive Income" is dependent upon certain pending interpretations, which are currently under consideration, including those related to "normal purchases and normal sales" and inflation escalators included in certain con- tract payment provisions. The interpretations of these issues, and others, are currently under consideration by the FASA. While the ultimate conclusions reached on interpretations being consid- ered by the FASA could impact the effects of Enron's adoption of SFAS No. 133, Enron does not believe that such conclusions would have a material effect on its current estimate of the impact of adoption, F tN/V CIA'. (MCNEil Ilk F ow:; (In millions) 2000 1999 1998 Cash provided by (used in): Operating activities $4,179 $1,228 $ 1,640 Investing activities $264) (3,507) (3,965) Financing activities 571 2,456 2,266 Net cash provided by operating activities increased $3,551 million in 2000, primarily reflecting decreases in working capital, positive operating results and a receipt of cash associated with the assumption of a contractual obligation. Net cash provided by operating activities decreased $412 million in 1999, primarily reflecting increases in working capital and net assets from price risk management activities, partially offset by increased earn- ings and higher proceeds from sales of merchant assets and investments, The 1998 amount reflects positive operating cash flow from Enron's major business segments, proceeds from sales of interests in energy-related merchant assets and cash from timing and other changes related to Enron's commodity portfo- lio, partially offset by new investments in merchant assets and investments, Net cash used in investing activities primarily reflects capital expenditures and equity investments, which total $3,314 million in 2000, $3,085 million in 1999 and $3,564 million in 1998, and cash used for business acquisitions. See "Capital Expenditures and Equity Investments" below and see Note 2 to the Consolidated Financial Statements for cash used for business acquisitions. Partially offsetting these uses of cash were proceeds from sales of non-merchant assets, including certain equity instruments by Energy Services and an international power project, which totaled $494 million in 2000- Proceeds from non-merchant asset sales were $294 million in 1999 and $239 million in 1998. Cash provided by financing activities in 2000 included pro- ceeds from the issuance of subsidiary equity and the issuance of common stock related to employee benefit plans, partially offset by payments of dividends. Cash provided by financing activities in 1999 included proceeds from the net issuance of short- and long-term debt, the issuance of common stock and the issuance of subsidiary equity, partially offset by payments of dividends. Cash provided by financing activities in 1998 included proceeds from the net issuance of short- and long-term debt the issuance of common stock and the sale of a minority interest in a sub- sidiary, partially offset by payments of dividends. E0aa002648565 I' v AKtW..-A )~ Capital expenditures by operating segment are as follows: 2001 (In millions) Estimate 2000 1999 1998 Transportation and Distribution $ 140 S 270 $ 316 $ 310 Wholesale Services 570 1.280 1,216 706 Retail Energy Services 50 70 64 75 Broadband Services 700 436 - - Exploration and Production - - 226 690 Corporate and Other 40 325 541 124 Total $1,500 $2381 $2,363 $1,905 Capital expenditures increased $18 million in 2000 and $458 million in 1999 as compared to the previous year. Capital expen- ditures in 2000 primarily relate to construction of power plants to extend Wholesale Services' network and fiber optic network infrastructure for Broadband Services. During 1999, Wholesale Services expenditures increased due primarily to construction of domestic and international power plants. The 1999 increase in Corporate and Other reflects the purchase of certain previously leased MTBE-related assets. Cash used for investments in equity affiliates by the operat- ing segments is as follows: (In millions) 2000 1999 1998 Transportation and Distrrbutson $ 1 $ - S 27 Wholesale Services 911 712 703 Corporate and Other 21 10 929 Total $933 $722 $1,659 Equity investments in 2000 relate primarily to capital invested for the ongoing construction, by a joint venture, of a power plant in India as well as other international investments. EqtAty invest- ments in 1999 relate primarily to an investment in a joint venture that holds gas distribution and related businesses in South Korea and the power plant project in India. The level of spending for capital expenditures and equity investments will vary depending upon conditions in the energy and broadband markets, related economic conditions and den- titled opportunities. Management expects that the capital spending program will be funded by a combination of internally generated funds, proceeds from dispositions of selected assets and short- and long-term borrowings. I(J At December 31, 2000, Enron had working capital of $2.0 billion. If a working capital deficit should occur, Enron has credit facilities in place to fund working capital requirements. At December 31, 2000. those credit lines provided for up to $4.2 billion of committed and uncommitted credit, of which $290 million was outstanding. Certain of the credit agreements contain prefunding covenants. However, such covenants are not expected to restrict Enron's access to junds under these agreements. In addition. Enron sells commercial paper and has agreements to sell trade accounts receivable, thus providing financing to meet seasonal working capital needs. Management believes that the sources of funding described above are suffi- cient to meet short- and long-term liquidity needs not met by cash flows from operations. Total capitalization at December 31, 2000 was $25.0 billion. Debt as a percentage of total capitalization increased to 40.9 percent at December 31, 2000 as compared to 38.5 percent at December 31, 1999. The increase in the ratio primarily reflects increased debt levels and the impact on total equity of the decline in the value of the British pound sterling. This was par- tially offset by the issuances, in 2000, of Enron common stock and the contribution of common shares (see Note 16 to the Consolidated Financial Statements). The issuances of Enron com- mon stock primarily related to the acquisition of a minority shareholders interest in Enron Energy Services, INC and the exercise of employee stock options. Enron is a party to certain financial contracts which contain provisions for early settlement in the event of a significant market price decline in which Enrons common stock falls below certain levels (prices ranging from $28.20 to $55.00 per share) or if the credit ratings for Enron's unsecured, senior long-term debt obligations fall below investment grade. The impact of this early settlement could include the issuance of additional shares of Enron common stock. Enron's senior unsecured long-term debt is currently rated BBB+ by Standard & Poor's Corporation and Fitch IBCA and Baal by Moody's Investor Service. Enrons continued investment grade status is critical to the success of its wholesale businesses as well as its ability to maintain adequate liquidity. Enrons management believes it will be able to maintain its credit rating. Financial Risk Management Wholesale Services offers price risk management services primarily related to commodities associated with the energy sector (natural gas, electricity, crude oil and natural gas liquids). Energy Services and Broadband Services also offer price risk man- agement services to their customers. These services are provided through a variety of financial instruments including forward contracts, which may involve physical delivery, swap agreements, which may require payments to (or receipt of payments from) counterparties based on the differential between a fixed and variable price for the commodity, options and other contractual arrangements. Interest rate risks and foreign currency risks asso- ciated with the fair value of Wholesale Services' commodities portfolio are managed using a variety of financial instruments. including financial futures, swaps and options. On a much more limited basis, Enron's other businesses also enter into financial instruments such as forwards, swaps and other contracts primarily for the purpose of hedging the impact of market fluctuations on assets, liabilities, production or other contractual commitments. Changes in the market value of these hedge transactions are deferred until the gain or loss is recog- nized on the hedged item. Enron manages market risk on a portfolio basis, subject to parameters established by its Board of Directors. Market risks are monitored by an independent risk control group operating separately from the units that create or actively manage these risk exposures to ensure compliance with Enrons stated risk management policies. ECaaOO2S48566 k.4 The use of financial instruments by Enron's businesses may expose Enron to market and credit risks resulting from adverse changes in commodity and equity prices, interest rates and foreign exchange rates. For Enrons businesses, the major market risks are discussed below: Commodity Price Risk. Commodity price risk is a consequence of providing price risk management services to customers. As dis- cussed above, Enron actively manages this risk on a portfolio basis to ensure compliance with Enron's stated risk management policies. Interest Rate Risk. Interest rate risk is also a consequence of providing price risk management services to customers and having variable rate debt obligations, as changing interest rates impact the discounted value of future cash flows. Enron utilizes forwards. futures, swaps and options to manage its interest rate risk. Foreign Currency Exchange Rate Risk. Foreign currency exchange rate risk is the result of Enron's international operations and price risk management services provided to its worldwide customer base. The primary purpose of Enron's foreign currency hedging activities is to protect against the volatility associated with foreign currency purchase and sale transactions. Enron pri- marily utilizes forward exchange contracts, futures and purchased options to manage Enrons risk profile. Equity Risk. Equity risk arises from Enron's participation in investments. Enron generally manages this risk by hedging spe- cific investments using futures, forwards, swaps and options. Enron evaluates, measures and manages the market risk in its investments on a daily basis utilizing value at risk and other methodologies. The quantification of market risk using value at risk provides a consistent measure of risk across diverse markets and products. The use of these methodologies requires a num- ber of key assumptions including the selection of a confidence level for expected losses, the holding period for liquidation and the treatment of risks outside the value at risk methodologies. including liquidity risk and event risk. Value at risk represents an estimate of reasonably possible net losses in earnings that would be recognized on its investments assuming hypothetical movements in future market rates and no change in positions. Value at risk is not necessarily indicative of actual results which may occur. Enron performs regular stress and scenario analyses to estimate the economic impact of sudden market moves on the value of its portfolios. The results of the stress testing, along with the pro- fessional judgment of experienced business and risk managers. are used to supplement the value at risk methodology and cap- ture additional market-related risks, including volatility, liquidity and event, concentration and correlation risks. The following table illustrates the value at risk for each component of market risk: December 31. Year ended December 31, 2000 High Low 2lXtj 1999 Averaget~1 valuation Ca) Valuationid) (In millions) Trading Market Risk: Commodity price (b) Interest rate Foreign currency exchange rate Equity Cc) $66 $21 $50 $81 $23 59 26 45 59 36 Non-Trading Market Riskid): Commodity price 2 1 2 5 2 Intereitrate - 2 1 2 Foreign currency exchange rate 8 4 8 10 4 Equity 7 3 6 7 5 (a) The average value present a twelve month average of the month-end values. The high and tori, valuations for each market risk component represenr the h4hesr and lowest monrh-er,ri vaitte during 2000. W In 2000. increased natural gas prices combined vvirh increased price volatility in power and gas market caused Enron 's value at risk to increase significantly fc) Enron s equity trading market risk prima rily relates to merchant investments (see Note 4 to the Consolidated Financial Starementi In 2000. the vaksearrkk model utilized for equity trading marlcet risk was refried to mo,-e close4' cor- relate with the valuation methodologies used for merchant activities fd) Includes only the risk related to the friancial insrn.sment that serve as hedges and does not include the related underfying hedged tern. Atxt.t.isitiscq PoNcies Accounting policies for price risk management and hedging activities are described in Note 1 to the Consolidated Financial Statements. "J,,iwo at Intl Enron has performed an entity-wide value at risk analysis of virtually all of Enrons financial instruments, including price risk management activities and merchant investments. Value at risk incorporates numerous variables that could impact the fair value at Enroot investments. including commodity prices, interest rates, foreign exchange rates, equity prices and associated volatilities, as well as correlation within and across these variables. Enron estimates value at risk for commodity, interest rate and foreign exchange exposures using a model based on Monte Carlo simulation of delta/gamma positionswhich captures a significant portion of the exposure related to option positions. The value at risk for equity exposure discussed above is based on JR Morgan's RiskMetricsM approach. Both value at risk methods utilize a one-day holding period and a 95% confidence level. Cross-commodity correlations are used as appropriate. The use of value at risk models allows management to aggregate risks across the company, compare risk on a consistent basis and identify the drivers of risk. Because of the inherent limitations to value at risk, including the use of delta/gamma approximations to value options, subjectivity in the choice of liquidation period and reliance on historical data to calibrate the models, Enron relies on value at risk as only one component in its risk control process. In addition to using value at risk measures, ECaaOO2848567 In [craw hon Regarding ForvvarcLLooking Sta tern en ts This Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 F of the Securities Exchange Act of 1934. All statements other than statements of historical facts contained in this document 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, com- mencement 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 (including energy outsourcing markets) in the United States and foreign jurisdic- tions; development of Enrons 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 condi- tions 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 gas and electric utilities and other industries; the timing and extent of changes in commodity prices for crude oil, natural gas, electricity, foreign currency and interest rates; the extent of success in acquiring oil and gas properties and in discovering, developing, producing and marketing reserves; the timing and success of Enron's efforts to develop international power, pipeline and other infrastructure projects; the effective- ness of Enrons risk management activities; the ability of coun- terparties 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 equi- ty 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, Managernen t 's Responsibility for Financial Reporting The following financial statements of Enron Corp and sub- sidiaries (collectively, Enron) were prepared by management, which is responsible for their integrity and objectivity. The state- ments have been prepared in conformity with generally accepted accounting principles and necessarily include some amounts that are based on the best estimates and judgments of management. The system of internal controls of Enron is designed to provide reasonable assurance as to the reliability of financial statements and the protection of assets from unauthorized acquisition, use or disposition. This system is augmented by written policies and guidelines and the careful selection and training of qualified personnel. It should be recognized, however, that there are inherent limitations in the effectiveness of any system of internal control, Accordingly, even an effective internal control system can provide only reasonable assurance with respect to the preparation of reliable financial statements and safeguarding of assets, Further, because of changes in conditions, internal control system effectiveness may vary over time. Enron assessed its internal control system as of December 31, 2000, 1999 and 1998, relative to current standards of control criteria. Based upon this assessment, management believes that its system of internal controlswas adequate during the periods to provide reasonable assurance as to the reliability of financial statements and the protection of assets against unauthorized acquisition, use or disposition, Arthur Andersen tIP was engaged to audit the financial statements of Enron and issue reports thereon. Their audits included developing an overall understanding of Enrons accounting systems, procedures and internal controls and con- ducting tests and other auditing procedures sufficient to support their opinion on the financial statements. Arthur Andersen LIP was also engaged to examine and report on management's assertion about the effectiveness of Enrons system of internal controls, The Reports of Independent Public Accountants appear in this Annual Report. The adequacy of Enrons financial controls and the account- ing principles employed in financial reporting are under the general oversight of the Audit Committee of Enron Corp.'s Board of Directors, No member of this committee is an officer or employee of Enron. The independent public accountants have direct access to the Audit Committee, and they meet with the committee from time to time, with and without financial man- agement present, to discuss accounting, auditing and financial reporting matters. ECaaOO2648568 Reports Of lr)depefldefl t Pub/ic AccOUntan S To the Shareholders and Board of Directors of Enron Corp.: We have examined management's assertion that the system of internal control of Fnron Corp. (an Oregon corporation) and subsidiaries as of December 31, 2000, 1999 and 1998 was adequate to provide reasonable assurance as to the reliability of financial statements and the protection of assets from unautho- rized acquisition, use or disposition, included in the accompany- ing report on Management's Responsibility for Financial Reporting. Management is responsible for maintaining effective internal control over the reliability of financial statements and the protection of assets against unauthorized acquisition, use or disposition. Our responsibility is to express an opinion on management's assertion based on our examination. Our examinations were made in accordance with attesta- tion standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the system of internal control, testing and eval- uating the design and operating effectiveness of the system of internal control and such other procedures as we considered necessary in the circumstances. We believe that our examinations provide a reasonable basis for our opinion. Because of inherent limitations in any system of internal control, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the system of internal control to future periods are sublect to the risk that the system of internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assertion that the system of internal control of Fnron Corp. and its subsidiaries as of December 31, 2000, 1999 and 1998 was adequate to provide rea- sonable assurance as to the reliability of financial statements and the protection of assets from unauthorized acquisition, use or disposition is fairly stated, in all material respects, based upon current standards of control criteria. Arthur Andersen lIP To the Shareholders and Board of Directors of Fnron Corp.: We have audited the accompanying consolidated balance sheet of Enron Corp. (an Oregon corporation) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of Enron Corp.'s management. Our responsibil- ity is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing stan- dards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Enron Corp. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 2000, in conformity with accounting princi- ples generally accepted in the United States. As discussed in Note 18 to the consolidated financial state- ments, Enron Corp. and subsidiaries changed its method of accounting for costs of start-up activities and its method of accounting for certain contracts involved in energy trading and risk management activities in the first quarter of 1999. Arthur Andersen LIP Houston, Texas February 23, 2001 Houston, Texas February 23, 2001 ECaaOO2648569 Error? Corp. and Subsidiaries Consolidaied Inc orne Statement Year ended December 31, (In m,Ilions, except per shave amounts) Revenues Natural gas and other products Electricity Metals Other Total revenues Costs and Expenses Cost of gas, electricity, metals and other products Operating expenses Depreciation, depletion and amortization Taxes, other than income taxes Impairment of long-lived assets Total costs and expenses Operating Income Other Income and Deductions Equity in earnings of unconsolidated equity affiliates Gains on sales of non-merchant assets Gains on the issuance of stock by TNPC, Inc. Interest income Other income, net Income Before Interest, Minority Interests and Income Taxes Interest and related charges, net Dividends on company-obligated preferred securities of subsidiaries Minority interests Income tax expense Net income before cumulative effect of accounting changes Cumulative effect of accounting changes, net of tax Net Income Preferred stock dividends Earninqs on Common Stock 2000 1999 S 50,500 33,823 9,234 7,232 $19,536 15.238 5,338 1998 513.276 13,939 4,045 100785 40.112 31.260 94,517 34,761 26,381 3184 3,045 2,473 855 870 827 280 193 201 - 44t 98836 39,310 29.882 1,953 802 1378 87 309 97 146 541 56 121 212 162 88 (37) 181 (37) 2482 1,995 1,582 838 656 550 77 76 77 154 135 77 434 104............- - 175 979 1,024 703 - --____ 979 893 703 83 66 17 $ 896 $ 827 $ 686 Earnings Per Share of Common Stock Basic Before cumulative effect of accounting changes S 1.22 $ 136 $ 1.07 Cumulative effect of accounting changes (0,19) Basic earnings per share $ 1.22 $ 117 $ 1.07 Diluted Before cumulative effect of accounting changes S 1.12 $ 117 $ 1.01 Cumulative effect of accounting changes - (0.17) Diluted earnings per share S 1.12 $ 1.10 $ 1.01 Average Number of Common Shares Used in Computation Basic 736 705 642 Diluted 814 769 695 Enron Corp. and Subsidiaries Consolidated Statement of Comprehensive Income Year ended December 31, (In milli ns) 2000 1999 1998 Net income S 979 $893 $ 703 Other comprehensive income: Foreign currency translation adjustment and other (307) (579) __ __ (14) Total Comprehensive Income S 672 $314 $ 689 The acconipanyinq notes are an integral part of these consolidated fnancialsfarements. ECaaOO264857O Enron Corp and Subsidia des Cunsolida ted Balance Sheet December 31, (In millions, except shares) ASSETS Current Assets Cash and cash equivalents Trade receivables (net of allowance for doubtful accounts of $133 and $40, respectively) Other receivables Assets from price risk management activities Inventories Deposits Other Total current assets 2000 1999 $ 1,374 Investments and Other Assets Investments in and advances to unconsolidated equity affiliates Assets from price risk management activities Goodwill Other Total investments and other assets Property, Plant and Equipment, at cost Natural gas transmission electric generation and distribution Fiber-optic network and equipment Construction in progress Other less accumulated depreciation, depletion and amortization Property, plant and equipment, net $ 288 10,395 3,030 1,874 518 12,018 2,205 953 598 2,433 81 1,333 535 30,321 7255 5,294 5,036 8,988 2.929 3,638 2,799 5,459 4,681 23,379 15.445 6,916 6,948 4,766 3,552 839 379 682 1,120 2,256 1,913 15.459 13,912 3,716 3,231 11,743 10,681 Total Assets $65,503 $33,381 The accompanying notes are an nteg,a(part of these consolidared fr,ancia) statement. ECaaOO2648571 December 31, LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable Liabilities from price risk management activities Short-term debt Customers' deposits Other 2000 1999 9,777 10,495 1,679 4,277 2,178 Total current liabilities $ 2,154 1,836 1,001 44 1,724 28,406 6,759 ______ Long-Term Debt Deferred Credits and Other Liabilities Deferred income taxes Liabilities from price risk management activities Other Total deferred credits and other liabilities 8,550 7,151 1,644 1,894 9,423 2,990 2.692 1,587 13,759 6,471 Commitments arid Contingencies (Notes 13. 14 and IS) Minority Interests Company-Obligated Preferred Securities of Sttsidiaries Shareholders Equity Second preferred stock, cumulative, no par value, 1,370,000 shares authorized, 1,240,933 shares and 1,296,184 shares issued, respectively Mandatorily Convertible Junior Preferred Stock, Series B, no par value, 250,000 shares issued Common stock, no par value, 1,200,000,000 shares authorized, 752,205,112 shares and 716.865.081 shares issued, respectively Retained earnings Accumulated other comprehensive income Common stock held in treasury, 577,066 shares and 1,337,714 shares, respectively Restricted stock and other Total shareholders' equity 2,414 2,430 904 1,000 124 1,000 130 1,000 8,348 6,637 3,226 2,698 (1,048) (741) (32) (49) (148) (105) 11,470 9,570 Total Liabilities and Shareholders' Equity $65,503 $33,381 ECaaOO2648572 Enron Corp. and Subsidiaries Conso/idated Statement of Cash Flows Year ended December 31. (In millions) 2000 1999 1998 Cash flows Front Operating Activities Reconciliation of net income to net cash provided by operating activities Net income S 979 Cumulative effect of accounting changes Depreciation, depletion and amortization Impairment of long-lived assets (including equity investments) Deferred income taxes Gains on sales of non-merchant assets Changes in components of working capital Net assets from price risk management activities Merchant assets and investments: Realized gains on sales Proceeds from sales Additions and unrealized gains Other operating activities Not Cash Provided by Operating Activities Cash Flows Froo, Investing Activities Capital expenditures Equity investments Proceeds from sales of non-merchant assets Acquisition of subsidiary stock Business acquisitions, net of cash acquired (see Note 2) Other investing activities Net Cash Used in Investing Activities Cash Flows Front Financing Activities Issuance of long-term debt Repayment of long-term debt Net increase (decrease) in short-term borrowings Net issuance (redemption) of company-obligated preferred securities of subsidiaries Issuance of common stock Issuance of subsidiary equity Dividends paid Net disposition of treasury stock Other financing activities Net Cash Provided by Financing Activities 855 326 207 (146) 1,769 (783) $ 893 131 870 441 21 (541) (1,000) (395) $ 703 827 87 (82) (233) 350 (104) (756) (628) 1,839 2,217 1,434 fIns) (827) (721) 1113 174 (97) 4779 1,228 1,640 (2,381) (2,363) (1,905) (933) (722) (1,659) 494 294 239 (485) (180) (777) (311) (104) (182) (405) (356) (4,264) (3,507) (3,965) 3,894 1,776 1,903 (2,337) (1,837) (870) (1,595) 1,565 (158) (96) 8 307 852 867 500 568 828 (523) (467) (414) 327 139 13 (6) (140) 89 571 2,456 2,266 Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents. Beginning of Year Cash and Cash Equivalents. End of Year 1,066 288 177 111 (59) 170 - $ 1,374 $ 2 $ 111 Changes in Components of Working Capital Receivables 6(8,203) $ (662) 1(1,055) Inventories 1,336 (133) (372) Payables 7,187 (246) 433 Other 1469 41 761 Total $ 1,769 $(1,000) $ (233) The accompanying flares are an in tegral part of these consolidated franciat statements ECaaOO2648573 Enron Corp. and Subsidiaries ConsclidaiQd SMternent of Changes in Sf~arehoIders'Equity fIr millions, except per share amounts, shares in thousa~~s) Cumulative Second Preferred Convertible Stock Balance, beginning of year Exchange of convertible preferred stock for common stock Balance, end of yea--------------- - Mandatorily Convertible Junior Preferred Stock, Serses B Balance, beginning of year Issuances Balance, end of year Common Stock Balance, beginning of year Exchange of convertible preferred stock for common stock Issuances related to benefit and dividend reinvestment plans Sales of common stock Issuances of common stock in business acquisitions (see Note 2) Other 2000 Shares Amount 1,296 S 130 (55) 1,241...S 124 250 $ 1.000 250 S 1,000 716. 865 1.509 6,637 6 1999 1998 Shares Amount Shares Amount 1,320 $ 132 1,296 $ 130 - $ - 250 1,000 250 $1,000 671094 $5,117 465 (1) 28,100 966 10,054 258 - 27,600 839 1,338 $ 134 (13) 2»= 1,320 $ 132 $ $ - 636,594 $4,224 - (7) 34,500 45 836 5.731 409 7,652 250 - - - 330 - 174 - 19 Balance, end of year 752,205 6 8,348 716,865 $6,637 671,094 $5,117 Retained Earnings Balance, beginning of year $ 2,69~ $2,226 $1,852 Net income 979 893 703 Cash dividends Common stock (10.5000, 10.5000 and $04812 per share in 2000. 1999 and 1998, respectively) (363) (355) (312) Cumulative Second Preferred Convertible Stock ($13,652, 113.652 and 113.1402 per share in 2000, 1999 and 1998, respectively) (17) (17) Series A and B Preferred Stock (66) $ 3,226 (17) (49) $2,698 $2,226 Balance, en..of..ea Accumulated Other Comprehensive Income Balance, beginning of year $ (7411 1 (162) S. (148) Translation adjustments and other..............................................(~q7*), -~ (579) (14) Balance, end of year S (1,048) $ (741) $ (162) Treasury Stock Balance, beginning of year (1,338) S (49) (9,334) $ (195) (14,102) $ (269) Shares acquired (3.114) (234) (1,845) (71) (2,236) (61) Exchange of convertible preferred stock for common stock - 181 4 486 9 Issuances related to benefit and dividend reinvestment plans 3,875 251 9,660 213 6,426 124 Issuances of treasury stock in business acquisitions................................ - 92 2 Balance, end of year (577) $ (32)0.338) $ (49) (9.334) (195) Restricted Stock and Oilier Balance, beginning of year S (105) $ (70) $ (175) Issuances related to benefit and dividend reinvestment plans (43) (35) 105 Balance, end of year..........- $ ~ $ (105) $ (70) Total Shareholders Equity $11,470 $9,570 $7,048 The accompanying notes are an integral pa C? of these consolidated (henna? statements. ECaaOO2648574 Fnrcri Corp. and Subsidiaries Notes to the Consobda ted Financial Statements ICAM /Ci. C>lNl~iNCPOi*j(*>L5. '-'I The accounting and financial reporting policies of Enron Corp. and its subsidiaries conform to generally accepted account- ing principles and prevailing industry practices. The consolidated financial statements include the accounts of all subsidiaries controlled by Enron Corp. after the elimination of signifkant intercompany accounts and transactions. 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. '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 its subsidiaries and affili- ates whose operations are managed by their respective officers. Enron records as cash equivalents all highly liquid short-term investments with original maturities of three months or less. Inventories consist primarily of commodities, priced at market as such inventories are used in trading activities. At ricr1i7»=iti()ri The provision for depreciation and amortization with respect to operations other than oil and gas producing activities is computed using the straight-line or regulatorily mandated method, based on estimated economic lives. Composite depreci- ation rates are applied to functional groups of property having similar economic characteristics. The cost of utility property units retired, other than land, is charged to accumulated depreciation. Provisions for depreciation, depletion and amortization of proved oil and gas properties are calculated using the units-of- production method. Enron accounts for income taxes using an asset and liability approach under which deferred assets and liabilities are recog- nized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases (see Note 5). Shirt Basic earnings per share is computed based upon the weighted-average number of common shares outstanding during the periods. Diluted earnings per share is computed based upon the weighted-average number of common shares out- standing plus the assumed issuance of common shares for all potentially dilutive securities. All share and per share amounts have been adjusted to reflect the August 13. 1999 two-for-one stock split. See Note 11 for a reconciliation of the basic and dilut- ed earnings per share computations. Enron engages in price risk management activities for both trading and non-trading purposes. Instruments utilized in con- nection with trading activities are accounted for using the mark- to-market method. Under the mark-to-market method of accounting, forwards, swaps, options, energy transportation con- tracts utilized for trading activities and other instruments with third parties are reflected at fair value and are shown as "Assets and Liabilities from Price Risk Management Activities' in the Consolidated Balance Sheet. These activities also include the commodity risk management component embedded in energy outsourcing contracts. Unrealized gains and losses from newly originated contracts, contract restructurings and the impact of price movements are recognized as "Other Revenues." Changes in the assets and liabilities from price risk management activities result primarily from changes in the valuation of the portfolio of contracts, newly originated transactions and the timing of settle- ment relative to the receipt of cash for certain contracts. The market prices used to value these transactions reflect manage- ment's best estimate considering various factors including closing exchange and over-the-counter quotations, time value and volatility factors underlying the commitments. Financial instruments are also utilized for non-trading purposes to hedge the impact of market fluctuations on assets, liabilities, production and other contractual commitments. Hedge accounting is utilized in non-trading activities when there is a high degree of correlation between price movements in the derivative and the item designated as being hedged. In instances where the anticipated correlation of price movements does not occur, hedge accounting is terminated and future changes in the value of the financial instruments are recognized as gains or losses. If the hedged item is sold, the value of the financial instrument is recognized in income. Gains and losses on financial instruments used for hedging purposes are recognized in the Consolidated Income Statement in the same manner as the hedged item. The cash flow impact of financial instruments is reflected as cash flows from operating activities in the Consolidated Statement of Cash Flows. See Note 3 for further discussion of Enron's price risk management activities. Ascoj- rt~nq ~or r~ »=vnlooTer- Act iv:.; Development costs related to projects, including costs of feasibility studies, bid preparation, permitting, licensing and con- tract negotiation, are expensed as incurred until the project is estimated to be probable. At that time, such costs are capitalized or expensed as incurred, based on the nature of the costs incurred. Capitalized development costs may be recovered through reimbursements from joint venture partners or other third parties, or classified as part of the investment and recov- ered through the cash flows from that project. Accumulated capitalized project development costs are otherwise expensed in the period that management determines it is probable that the costs will not be recovered. Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Environmental expenditures relating to current or future revenues are expensed or capitalized as appropriate based on the nature of the costs incurred. Liabilities are recorded when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. ECaaOO2648575 Direct costs of materials and services consumed in developing or obtaining software, including payroll and payroll-related costs for employees who are directly associated with and who devote time to the software project are capitalized. Costs may begin to be capitalized once the application development stage has begun. All other costs are expensed as incurred. Enron amortizes the costs on a straight-line basis over the useful life of the software. Impairment is evaluated based on changes in the expected useful- ness ot the software. At December 31, 2000 and 1999, Enron has capitalized, net of amortization, $381 million and $240 million, respectively, of software costs covering numerous systems, includ- ing trading and settlement, accounting, billing, and upgrades. '»''\L>.1]aterl Affii41 A LIV 0/ In 2000, Enron acquired all minority shareholders' interests in Enron Energy Services, LIC and other businesses with Enron common stock. See Note 2. In 2000 and 1999, Enron entered into various transactions with related panics, which resulted in an exchange of assets and an increase in common stock of $171 million in 2000. See Note 16. In 2000, a partnership in which Enron was a limited partner made a liquidating distribution to Enron resulting in a non-cash increase in current assets of $220 million, a decrease of $20 million in non-current assets and an increase in current liabilities of $160 million. During 2000 and 1999, Enron received the rights to specific third-party fiber-optic cable in exchange for the rights on spe- cific fiber-optic cable held for sale by Enron. These exchanges resulted in non-cash increases in assets of $69 million and $111 million, respectively. During 1999, Enron issued approximately 7.6 million shares of common stock in connection with the acquisition, by an unconsolidated equity affiliate, of interests in three power plants in New Jersey. In December 1998, Enron extinguished its 6.25% Exchange- able Notes with 10.5 million shares of EOG common stock. / ORE. 1)11 FAD,. I irs AND BEEF Enron has credit facilities with domestic and foreign banks which provide for an aggregate of $1.4 billion in long-term committed credit, of which 5150 million relates to Portland General, and $2.4 billion in short-term committed credit. Expiration dates of the committed facilities range from February 2001 to May 2005. Interest rates on borrowings are based upon the London Interbank Offered Rate, certificate of deposit rates or other short- term interest rates. Certain credit facilities contain covenant which must be met to borrow funds. Such debt covenants are not antici- pated to materially restrict Enron's ability to borrow funds under such facilities. Compensating balances are not required, but Enron is required to pay a commitment or facility fee. At December 31, 2000, $290 million was outstanding under these facilities. Enron has also entered into agreements which provide for uncommitted lines of credit totaling $420 million at December 31, 2000. The uncommitted lines have no stated expiration dates. Neither compensating balances nor commitment fees are required, as borrowings under the uncommitted credit lines are available subject to agreement by the participating banks. At December 31, 2000, no amounts were outstanding under the uncommitted lines. In addition to borrowing from banks on a short-term basis, Enron and certain of its subsidiaries sell commercial paper to pro- vide financing for various corporate purposes. As of December 31, 2000 and 1999, short-term borrowings of $15 million and $330 mil- lion, respectively, and long.term debt due within one year of $1,303 million and $670 million, respectively, have been reclassi- fied as long-term debt based upon the availability of committed credit facilities with expiration dates exceeding one year and man- agement's intent to maintain such amounts in excess of one year. Weighted average interest rates on short-term debt outstanding at December 31, 2000 and 1999 were 6.9% and 6.4%, respectively. (In millions) Enron Corp. Senior debentures 6.75% to 8.25% due 2005 to 2012 Notes payable(a) 1.00% exchangeable notes due 2002 6.40% to 9.88% due 2001 to 2028 floating rate notes due 2000 to 2005 Other Northern Natural Gas Company Notes payable 6.75% to 7.00% due 2005 to 2011 Transwestern Pipeline Company Notes payable 9.20% due 2004 Portland General First mortgage bonds 6.47% to 9.46% due 2000 to 2023 Pollution control bonds Various rates due 2010 to 2033 Other Other Amount reclassified from short-term debt Unamortized debt discount and premium Total long-term debt December 31, 2000 1999 $ 262 $ 318 532 239 4,416 4,114 92 79 242 34 500 500 11 15 328 373 200 200 282 129 414 204 1,118 1,000 (47) (54) $8,550 $7,151 (a) Includes debt denon,inaredin tbreign currencies ofapproxinateby $955 m/llion and $525 mi/hon. respectVely at December 3?, 2000 and 1999 Fnron has entered into derivative trafltacpons to hedge interest rate and brdgn currency exchange (kactuations associated v,4th such debt See Note 3 The indenture securing Portland General's First Mortgage Bonds constitutes a direct first mortgage lien on substantially all electric utility property and franchises, other than expressly excepted property. The aggregate annual maturities of long-term debt out- standing at December 31, 2000 were $2,112 million, $750 million, $852 million, $646 million and $1,592 million for 2001 through 2005, respectively. In February 2001, Enron issued $1.25 billion zero coupon convertible senior notes that mature in 2021. The notes carry a 2.125 percent yield to maturity with an aggregate face value of $1.9 billion and may be converted, upon certain contingencies being met, into Enron common stock at an initial conversion premium of 45 percent. 2 MINoR: EY N~ EQ~Si S Enron's minority interests at December 31, 2000 and 1999 include the following: (In millions) 2000 1999 Majority-owned limited liability company and limited partnerships $1,759 $1,773 Elektro(a) 462 475 Other 193 182 $2,414 $2,430 (a> Relates to the respectrse parent ot Elektro. L4*PC)~ had minori~' shareholders in 2000 and ~g9g Enron has formed separate limited partnerships and a limited liability company with third-party investors for various purposes. These entities are included in Enrons consolidated financial statements, with the third-party investors interests reflected in "Minority Interests in the Consolidated Balance Sheet. In October2000, Enron contributed approximately $1.0 bil- lion of net assets to a wholly-owned limited liability company. A third party contributed $500 million for a preferred membership ECaaOO264858O interest in the limited liability company. The contribution by the third party was invested in highly liquid investment grade securities (including Enron notes) and short-term receivables. At December 31, 2000, the malority-owned limited liability com- pany held net assets of $1.0 billion. During 1999, third-party investors contributed cash and merchant investments totaling $1.0 billion to Enron-sponsored entities to invest in highly liquid investment grade securities (including Enron notes) and short-term receivables. The mer- chant investments, totaling $500 million, were sold prior to December31, 1999. During 2000, Enron acquired a portion ofthe minority shareholder's interest for $485 million. In 1998, Enron formed a wholly-owned limited partnership for the purpose of holding $1.6 billion of assets contributed by Enron. That partnership contributed $850 million of assets and a third party contributed $750 million to a second newly-formed limited partnership. The assets held by the wholly-owned limited partnership represent collateral for a $750 million note receivable held by the second limited partnership. In 2000 and 1999. the wholly-owned and second limited partnerships sold assets valued at approximately $152 million and $460 million. respectively, and invested the proceeds in Enron notes. Absent certain defaults or other specified events, Enron has the option to acquire the minority holders' interests in these partnerships. Enron has the option to acquire the minority hold- er's interest in the limited liability company after November 2002, If Enron does not acquire the minority holders' interests before December 2004 through May 2009, or earlier upon certain specified events, the minority interest holders may cause the entities to liquidate their assets and dissolve. In 2000, as part of a restructuring, Jacare Electrical Distribution Trust (Jacar~) sold a 47 percent interest in Enron Rrazil Power Holdings V Ltd. a subsidiary that holds its invest- ment in Elektro, to Whitewing for approximately $460 million. See Note 9. The proceeds were used to acquire the original minority shareholder's interest in Jacar~. In 2000, Enron acquired all minority shareholders' interests in Enron Energy Services, LIC and Enron Renewable Energy Corp. See Note 2. 9 ir'JZC[ 'IA] I-K) FQI)KYAFFIiLATFS Enrons investment in and advances to unconsolidated affil- iates which are accounted for by the equity method is as follows: Voting December 31, (In millions) Interestla) 2000 1999 Azurix Corp. 34% 1 325 $ 762 Bridgeline Holdings Citrus Corp. Dabhol Power Company Joint Energy Development Investments L.P. (JEDI}(b) Joint Energy Development Investments II L.P. (ff01 1)(b) 51< - Enron Co. Ltd. Transportadora de Gas del Sur SA. Whitewing Associates, L.R(b) Other Enron's equity in earnings (losses) of unconsolidated equity affiliates is as follows: (In millions) ~U¾i &~Th Citrus Corp. Dabhol Power Company Joint Energy Development Investments [P. Joint Energy Development Investments II, L.R TNPC, Inc. (The New Power Company) Transportadora de Gas del Sur SA. Whitewing Associates, LP. Other 2000 1999 1998 sf428) $ 23 $ 6 50 25 23 51 30 - 197 11 (45) 58 92 (4) (60) - - 38 32 36 58 9 - 123 87 81 S 87 $309 $97 (a) Outing the tour/h quarter of 2000, Azurix Corp. (Azurix) impaired the carrying valueofitsArgentine assets. resulting in a charge of approximateky $470 million. Enron 's portion of the charge was $326 million. Summarized combined financial information of Enron's unconsolidated affiliates is presented below: December 31, (In millions) 2000 1399 Balance sheet Current assets(a) $ 5,884 $ 3,168 Property, plant and equipment, net 14,786 14,356 Other noncurrent assets 13,485 9,459 Current liabilities(a) 4,739 4,401 Long-term debt(8) 9.717 8,486 Other noncurrent liabilities 6,148 2,402 Owners' equity ____ 13,561 11,694 (a) Includes $470 million and $327 million receivable from Enron and $302 million and $84 million payable to Enron at December 37. 2000 and 7999, respectively 2000 1999 1998 Income statemer~1---------------------------~''----------- Operating revenues 115.903 $11,568 $8,508 Operating expenses 14,110 9,449 7,244 Net income 586 1,857 142 Distributions paid to Enron ___ 137 482 87 (a) Fnron recognized revenues from transactions with unconsolidated egui~' affil- rates of $570 million in 2000. $674 million in 7999 and $563 million in 7998.. In 2000 and 1999, Enron sold approximately $632 million and $192 million, respectively, of merchant investments and other assets to Whitewing. Enron recognized no gains or losses Net in connection with these transactions. Additionally, in 2000, ECT Merchant Investments Corp., a wholly-owned Enron subsidiary, contributed two pools of merchant investments to a limited partnership that is a subsidiary of Enron. Subsequent to the 40% 229 - contributions, the partnership issued partnership interests 50% 530 480 50% 693 466 representing 100% of the beneficial, economic interests in the two asset pools, and such interests were sold for a total of $545 50% 399 211 million to a limited liability company that is a subsidiary of Whitewing. See Note 3. These entities are separate legal entities 50% 220 162 from ~nron and have separate assets and liabilities. In 2000 and 50% 258 269 1999, the Related Party, as described in Note 16, contributed $33 35% 479 452 million and $15 million, respectively, of equity to Whitewing. In 50% 558 662 2000, Whitewing contributed $7.1 million to a partnership formed by Enron, Whitewing and a third party. Subsequently, Enron sold a portion of its interest in the partnership through a securitization. See Note 3. In 2000, The New Power Company sold warrants convertible into common stock of The New Power Company for $50 million to the Related Party (described in Note 16). From time to time, Enron has entered into various adminis- trative service, management, construction, supply and operating --1,603 1,572 65,294 fr)................... la) Certain investments have income sharing ratios which differ from Enron voting interests (6) lEVI and $01 //account kit thor investment at fair value Vthiterr.srrg accounts tbr certain of its inved~a' 0$ Summarized information for Enron's company-obligated preferred securities of subsidiaries is as follows: (In millions, except per k Enron has authorized 16,500.000 shares of preferred stock, no par value. At December 31, 2000, Enron had outstanding 1.240,933 shares of Cumulative Second Preferred Convertible Stock (the Convertible Preferred Stock), no par value. The Convertible Preferred Stock pays dividends at an amount equal to the higher of $10.50 per share or the equivalent dividend that would be paid if shares of the Convertible Preferred Stock were converted to common stock. Each share of the Convertible Preferred Stock is convertible at any time at the option of the holder thereof into 27.304 shares of Enron's common stock, subject to certain adjust- ments. The Convertible Preferred Stock is currently subject to redemption at Enron's option at a price of $100 per share plus accrued dividends. During 2000, 1999 and 1998. 55,251 shares, 23,664 shares and 17,797 shares, respectively, of the Convertible Preferred Stock were converted into common stock. In 1999, all outstanding shares of Series A Preferred Stock held by Whitewing were exchanged for 250,000 shares of Enron Mandatorily Convertible Junior Preferred Stock, Series B (Series B Preferred Stock). Also in 1999, Enron entered into a Share Settlement Agreement under which Enron could be obligated, under certain circumstances, to deliver additional shares of common stock or Series B Preferred Stock to Whitewing for the amount that the market price of the converted Enron common shares is less than $28 per share. In 2000, Enron increased the strike price in the Share Settlement Agreement to $48.55 per share in exchange for an additional capital contribution in Whitewing by third-party investors. The number of shares of Series B Preferred Stock authorized equals the number of shaves necessary to satisfy Enrons obligation under the Share Settlement Agreement. Absent certain defaults or other specified events, Enron has the option to acquire the third-party investors' inter- ests. If Enron does not acquire the third-party investors' interests before January 2003, or earlier upon certain specified events, Whitewing may liquidate its assets and dissolve. At December 31, 2000, Enron had outstanding 250,000 shares of Series B Preferred Stock with a liquidation value of $1.0 billion. The Series B Preferred Stock pays semi-annual cash dividends at an annual rate of 6.50%. Each share of Series B Preferred Stock is mandatorily convertible into 200 shares of Enron common stock on January IS, 2003 or earlier upon the occurrence of certain events. In connection with the 1998 financial restructuring (yielding proceeds of approximately $1.2 billion) of EnrorVs investment in Azurix, Enron committed to cause the sale of Enron convertible preferred stock, if certain debt obligations of the related entity which acquired an interest in Azurix, are defaulted upon, or in certain events, including, among other things, Enron's credit ratings fall below specified levels. If the sale of the convertible preferred stock is not sufficient to retire such obligations, Enron would be liable for the shortfall. Such obligations will mature in December 2001. The number of common shares issuable upon conversion is based on future common stock prices. share amounts and shares) Enron Capital LLC 8% Cumulative Guaranteed Monthly Income Preferred Shaves (8,550,000 shaves)(a) Enron capital Trust I 8.3% Trust Originated Preferred Securities (8,000,000 preferred securitiessa) Enron Capital Trust II 8 1/8% Trust Originated Preferred Securities (6,000,000 preferred securities) (a) Enron Capital Trust Ill Adjustable~Rate capital Trust Securities (200.000 preferred securities) [NC Power II L.L,C. 6.74% Preference Units (105,000 shares) (b) Enron Equity Corp. 8.57% Preferred Stock (880 shares) (a) 7.39% Preferred Stock (150 shares)(axc) Enron Capital Resources, L.R 9% Cumulative Preferred Securities. Series A (3,000,000 preferred securities) (a) Liquidation December_31, Value 2000 1999 Per Share $214 $ 214 $ 25 200 200 25 150 ISO 25 200 1,000 105 88 15 1,000 88 100,000 15 100.000 75 75 25 Other 67 58 $904 $1,000 ______ (a) Redeemable under certain circunlswnces after specifr.d dares. (b) Inirial rate is 6.74% increasing to 7.79%. (0 Mandatorily redeemable ib 2006. ECaaOO2648582 A At December 31, 2000. Enron had derivative instruments (excluding amounts disclosed in Note 10) on 54.8 million shares of Enron common stock, of which approximately 12 million shares are with JEDI and 22.5 million are with related parties (see Note 16), at an average price of $67.92 per share on which Enron was a fixed price payon Shares potentially deliverable to counterparties under the contracts are assumed to be outstand- ing in calculating diluted earnings per share unless they are antidilutive. At December 31, 2000. there were outstanding non-employee options to purchase 6.4 million shares of Enron $979 $1,024 $703 common stock at an exercise price of $19.59 per share. Sioc L,rUon':,'rs (17) (17) (30) (66) (19) Enron applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for its stock option plans. In accordance with APR Opinion 25, no compensation expense has been recognized for the fixed stock option plans. Compensation expense charged against income for the restricted _______________________ stock plan for2000, 1999 and l99Bwas $220 million, $131 million and $58 million, respectively. Had compensation cost for Enron's stock option compensation plans been determined based on the fair value at the grant dates for awards under those plans. Enrons net income and earnings per share would have been $886 million ($1.09 per share basic. $1.01 per share diluted) in $896 $ 958 $ 6S6 2000, $827 million ($1.08 per share basic, $1.01 per share diluted) in 1999 and $674 million ($1.02 per share basic, $0.97 per share 17 17 17 diluted) in 1998. The fair value of each option grant is estimated on the date 913 975 703 of grant using the Black-Scholes option-pricing model with weighted-average assumptions for grant in 2000, 1999 and - (131) - 1998. respectively: Ci) dividend yield of 2.4%, 2.4% and 2.5%; (ii) expected volatility of 22.3%, 20.0% and 18.3%; (iii) risk-free $913 $ 844 $703 interest rates of 5.8%. 5.6% and 5.0%; and (iv) expected lives of 3.2 years, 3.7 years and 3.8 years. Enron has four fixed option plans (the Plans) under which 736 705 642 options for shares of Enrons common stock have been or may be granted to officers, employees and non-employee members of 35 36 36 the Board of Directors. Options granted may be either incentive 28 17 stock options or nonqualified stock options and are granted at not less than the fair market value of the stock at the time of grant. Under the Plans, Enron may grant options with a maxi- mum term of 10 years. Options vest under varying schedules. Year Ended December31, 2000 1999 1998 (17) 896 958 686 (131) $896 $ 827 $686 ii C>.}l'IIN.4l>N S The computation of basic and diluted earnings per share is as follows: (In millions, except per share amounts) Numerator: Basic Income before cumulative effect of accounting changes Preferred stock dividends: Second Preferred Stock Series A Preferred Stock Series B Preferred Stock Income available to common share- holders before cumulative effect of accounting changes Cumulative effect of accounting changes Income available to common shareholders Diluted Income available to common share- holders before cumulative effect of accounting changes Effect of assumed conversion of dilutive securities(a): Second Preferred Stock Income before cumulative effect of accounting changes Cumulative effect of accounting changes Income available to common share- holders after assumed conversions Denominator: Denominator for basic earnings per share~ weighted-average shares Effect of dilutive securities: Preferred stock Stock options Dilutive potential common shares Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions 43 78 64 53 814 769 695 Basic earnings per share: Before cumulative effect of accounting changes cumulative effect of accounting changes - (0.19) ,~py~~p~4a e...........................$1.22 $ 1.17 __ $1.07 Diluted earnings per share: Before cumulative effect of accounting changes Cumulative effect of accounting changes - (0.17) - Diluted earnings per share $1.12 $ 1.10 $1.01 (a) The Series A F~eferred Stock and the Series B Preferred Stock wore not inc/uded in the calculation of diluted earnings per share because conversion of these shares would be antidilutiee. $1.22 $ 1.36 $1.07 $1.12 $ 1.27 $1.01 ECaaOO2648583 Summarized information for Enron's Plans is as follows: 2000 1999 1998 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price (Shares in thousands) Shares Shares Shares Outstanding, beginning of year 93,531 526.74 79,604 119.60 78,858 11789 Granted 39187 7002 35,118 37.49 15,702 24.99 Exercisedla) (32235) 2443 (19,705) 18.08 (13,072) 15.70 Forfeited (4,358) 35.68 (1,465) 24.51 (1,498) 19.77 Expired (42) 23.75 (21) 18.79 (386) 19.76 Outstanding, end of year 96,063 $4424 93,531 126.24 79,604 $19.60 Exercisable, end of year 46,755 $29.85 52,803 $22.56 45,942 $18.16 Available for grant, end of year(b) 22.066 24,864 10,498 Weighted average fair value of options granted $13.35 $ 7.24 $ 4.20 (a) In 2000. Enron recorded tax benefit related to stock options exercised by employees of approximately $390 million refkcted in shareholders equi~ (6) Includes up to 20,707,969 shares. 22.740.962 shares and tO.497,670 shares as ofDece,nber 3?, 2000, 7999 and 1998, respectively which may be issued either as restr,cted stock or pursuant to stock options. The following table summarizes information about stock options outstanding at December 31. 2000 (shares in thousands): Options Outstanding Options Exercisable Number Outstanding at 12/31/00 Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number Exercisable at 12/31/00 Weighted Average Exercise Price Range of Exercise Prices 1 6.88 to $20.00 15,368 4.7 $16.72 14,001 516.54 20.06 to 34.81 24,091 6.8 24.79 12.304 24.13 35.03 to 47.31 21,520 6.8 40.52 8,731 40.27 50.48 to 69.00 13.965 6.5 60.18 4,072 61.81 71,06 to 86.63 21,119 5.6 79.69 1,647 72.36 96,063 6.2 $44.24 46.755 $29.85 Hon'!' hvt $to~k P an Under Enrons Restricted Stock Plan, participants may be granted stock without cost to the participant. The shares granted under this plan vest to the participants at various times ranging from immediate vesting to vesting at the end of a fr~e-year period. Upon vesting, the shares are released to the participants. The following summarizes shares of restricted stock under this plan: (Shares in thousands) Outstanding, beginning of year Granted Released to participants Forfeited outstanding, end of year Available for grant end of year Weighted average fair value of restricted stock granted :~ FFRSQSM ANrIS ()TIILR 2KNEFITS, employees. Benefits under the FF5 Plan are based on years of service, final average pay and covered compensation. Enron also maintains a noncontributory employee stock ownership plan (ESOP) which covers all eligible employees. Allocations to individual employees retirement accounts within the ESOP offset a portion of benefits earned under the Enron Plan, All shares included in the ESOP have been allocated to the employee accounts. At December 31, 2000 and 1999, 12,600,271 2000 1999 1998 shares and 17,241.731 shares, respectively, of Enron common stock were held by the ESOP, a portion of which may be used to offset benefits under the Enron Plan. Assets of the Enron Plan, the Portland General Plan and the EFS Plan are comprised primarily of equity securities, fixed ________________________________ income securities and temporary cash investments, It is Enrons 20,708 22,141 10,498 policy to fund all pension costs accrued to the extent required by federal tax regulations. _____________ Enron provides certain postretirement medical, life insur- ance and dental benefits to eligible employees and their eligible dependents. Benefits are provided under the provisions of con- tributory defined dollar benefit plans. Enron is currently funding that portion of its obligations under these postretirement bene- fit plans which are expected to be recoverable through rates by its regulated pipelines and electric utility operations. Enron accrues these postretirement benefit costs over the service lives of the employees expected to be eligible to receive such benefits. Enron is amortizing the transition obligation which existed at January 1,1993 over a period of approximately 19 years. The following table sets forth information related to changes in the benefit obligations, changes in plan assets, a reconciliation of the funded status of the plans and components of the expense recognized related to Enron's pension and other postretirement plans: 6,781 6,034 5.074 2.243 2,672 2,122 (2.201) (1,702) (1,064) (1.444) (223) (98) 5,379 6,781 6,034 557.69 $37.38 $23.70 Enron maintains a retirement plan (the Enron Plan) which is a noncontributory defined benefit plan covering substantially all employees in the United States and certain employees in foreign countries, The benefit accrual is in the form of a cash balance of 5% of annual base pay. Portland General has a noncontributory defined benefit pension plan (the Portland General Plan) covering substantially all of its employees. Benefits under the Portland General Plan are based on years of service, final average pay and covered compensation. Enron Facility Services has a noncontributory defined bene- fit pension plan (the FFS Plan) covering substantially all of its ECaaOO2648584 Pension Benefits Other Benefits (In millions) 2000 1999 2000 3999 Change in benefit obligation Benefit obligation, beginning of year Service cost Interest cost Plan participants' contributions Plan amendments Actuarial loss (gain) Acquisitions and divestitures Effect of curtailment and settlements (a) Benefits paid Benefit obligation, end of year $708 33 53 9 $687 32 49 6 (51) 36 $120 2 10 4 10 (2) (8) (55) (43) (22) (16) $746 $708 $124 $120 Change in plan assets Fair value of plan assets, beginning of year(b) £853 $774 Actual return on plan assets 41 80 Acquisitions and divestitures - 37 Employer contribution 19 5 Plan participants' contributions - - Benefits paid (55) (43) Fair value of p lan assets, en~ of year (b) 5858 $853 £64 $68 Reconciliation of funded status, end of year Funded status, end of year $112 $145 5(60) $152) Unrecognized transition obligation (asset) (6) (13) 44 48 Unrecognized prior service cost 25 32 12 14 Unrecognized net actuarial loss (gain) 55 11 (17) (29) Pre5~ied) benefit cost $186 $115 8(21) 1(19) Weighted-average assumptions at December31 Discount rate 775% 7.75% 7.75% 7.75% Expected return on plan assets (pre-tax) (cI (c) (d) (d) Rate of compensation increase ______ Ic) (e) (e) (C Components of net periodic benefit cost Servicecost S 33 $32 S 2 $ 2 Interest cost 53 49 10 9 Expected return on plan assets (75) (70) (4) (4) Amortization of transition obligation (asset) (6) (6) 4 4 Amortization of prior service cost 5 5 1 1 Recognized net actuarial loss (gain) - 3 (1) - Effect of curtailment and settlements(B) - (6) - 6 Net periodic benefit cost $ 10 $ 7 S 12 $ 18 (a) Represent one-time nonrecurring events including the exchange and sale of FOG (see Note 2) and certain employees ceasing participa finn in the Portland General Ffan as a result of union negotiatifln& fbi Includes plan asset of the FSOPoUl IS million and $121 million at December 3?, 2000 and 1999, respectively (C) Long-term 'ate of return on assets is assumed to he 10.5% for the Enron Plan, 9 0','. for the Portland General Plan and 9.5% for the FF5 Plan. (d) Long-tern~ rare of return on assets is assumed to be 7.5% for the Enron assets and 9.5% for the Portland General assets. Is) Rare of compensation increase Is assumed to be 4.0% for the Enron Plan, 4.0% to 0.5% for the Portland General Plan and 5.0% for the EtS Plan. Included in the above amounts are the unfunded obligations for the supplemental executive retirement plans. At both December 31, 2000 and 1999, the projected benefit obligation for these unfunded plans was $56 million and the fair value of assets was $1 million, $ 68 $ 60 (4) 7 7 6 4 3 (11) (8) The measurement date of the Enron Plan and the ESOP is September 30, and the measurement date of the Portland General Plan, the FF5 Plan and the postretirement benefit plans is December 31-The funded status as of the valuation date of the Enron Plan, the Portland General Plan, the ESOP and the postretirement benefit 2 plans reconciles with the amount detailed above which is included in "Other Assets" on the Consolidated Balance Sheet. 3 For measurement purposes. 6% and 10% annual rates of (12) increase in the per capita cost of covered health care benefits were assumed for the period 2000 to 2001 for the Enron and Portland General postretirement plans, respectively. The rates were assumed to decrease to 5% by 2002 and 2010 for the Enron and Portland General postretirement plans, respectively. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects: 1-Percentage 1-Percentage Point Increase Point Decrease (In millions) __________ Effect on total of service and interest cost components 10,4 8(0.3) Effect on postretirement benefit obligation $4.4 $13.8) Additionally, certain Enron subsidiaries maintain various incentive based compensation plans for which participants may receive a combination of cash or stock options, based upon the achievement of certain performance goals. Us kA't& 15N17 kECiAhOkV .&&JjR Rates and regulatory issues related to certain of Enron's natural gas pipelines and its electric utility operations are subject to final determination by various regulatory agencies. The domestic interstate pipeline operations are regulated by the Federal Energy Regulatory Commission (FEAC) and the electric utility operations are regulated by the FERC and the Oregon Public Utility Commission (OPUC). As a result, these operations are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," which recognizes the economic effects of regulation and, accordingly, Enron has recorded regu- latory assets and liabilities related to such operations. The regulated pipelines operations' net regulatory assets were $290 million and $250 million at December 31. 2000 and 1999, respectively, and are expected to be recovered over varying time periods. The dectric utility operations' net regulatory assets were $450 million and $494 million at December 31, 2000 and 1999, respectively. Based on rates in place at December 31, 2000, Enron estimates that it will collect substantially all of its regulatory assets within the next 11 years. P pc''r-c Curs-up-c IS On April 16, 1999, Northern Natural Gas Company (Northern) filed an uncontested Stipulation and Agreement of Settlement (Settlement) with the FERC and an order approving the Settlement was issued by the FERC on June 18. 1999. The rates effectuated by Northern on November 1, 1999 remain in effect, On May 1.2000. Northern filed to implement an option- al volumetric firm throughput service. An order approving such service was issued November 8, 2000 with effectiveness November 1. 2000; a rehearing request is pending. On November 1, 2000. Northern tiled to increase its rates for the recovery of return and taxes on its System Levelized Account. ECaaOO2648585 On November 22, 2000, the FERC issued an order approving the rates, subject to refund. On November 1, 2000, Transwestern Pipeline Company implemented a rate escalation of settled transportation rates in accordance with its May 1995 global settlement, as amended in May 1996. On August 23, 1999, Transwestern filed for a new service, Enhanced Firm Backhaul. An order by the FERC was issued February 23, 2000, approving the service. I I ii On October 2, 2000 PGE filed a restructuring plan with the OPUC that implements the provisions of the State Senate Bill 5B1149, signed into law in July 1999. The new law provides indus- trial and commercial customers of investor-owned utilities in the state direct access to competing energy suppliers by October 1, 2001. As filed, PGE's plan also proposes an increase in base rates, with new tariffs effective on October 1. 2001, PGE is a 67,5% owner of the Trojan Nuclear Plant (Trojan). In September 2000, PGE entered into an agreement with the OPUC related to Trojan, See Note 14. At December 31, 2000, PGEs regulatory asset relat- ed to recovery of Trojan decommissioning costs from customers was $190 million. Enron believes, based upon its experience to date and after considering appropriate reserves that have been established, that the ultimate resolution of pending regulatory matters will not have a material impact on Enron's financial position or results of operations, Enron is a party to various claims and litigation, the signifi- cant 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 estab- lished, that the ultimate resolution of such items, individually or in the aggregate, will not have a material adverse impact on Enron's financial position or results of operations. 'I 'Q,iliOV 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 negli- gent misrepresentation in connection with the "Panhandle pro- gram," a special marketing program established in the early 1980s, This case was tried in October 1996 and resulted in a ver- dict 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 vigorously contest the claims. Although no assurances can be given. Enron believes that the ultimate resolution of these matters will not have a material adverse effect on its financial position or results of operations. On November 21, 1996, an explosion occurred in or around the Humberto Vidal Building in San Juan, Puerto Rico, The explo- sion 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 insur- ance 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. Ilumberto 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 inter- ruption and property damage allegedly caused by the explosion, After nearly four years without determining the cause of the explosion, all parties have 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 have agreed on a fund for settlements or final awards, Numerous claims have been settled, Although no assurances can be given, Enron believes that the ultimate resolu- tion of these matters will not have a material adverse effect on its financial position or results of operations. * ~ ~ In early 1993, PGE ceased commercial operation of the Trojan nuclear power generating facility. The OPUC granted PGE, through a general rate order; recovery of, and a return on, 87 percent of its remaining investment in Trojan. The OPUC's general rate order related to Trojan has been sub- ject 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 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 agree- ments, CUB agreed to withdraw from the litigation and to sup- port 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, ME'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 CUB's withdrawal, URP is the one remaining significant adverse party in the litigation. Urn' has indicated that it plans to continue to challenge the OPUC order allowing PGE recovery of 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. i~J:rOIrVeThr t,/it Enron is subject to extensive federal, state and local envi- ronmental 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 ECaaOO2648585 expenses. These increased operating expenses are not expected to have a material impact on Enrons financial position or results of operations. Enrons natural gas pipeline companies conduct soil and groundwater remediation on a number of their facilities. Enron does not expect to incur material expenditures in connection with soil and groundwater remediation. Enron has firm transportation agreements with various joint venture and other pipelines. Under these agreements, Enron must make specified minimum payments each month. At December 31, 2000, the estimated aggregate amounts of such required future payments were $91 million, $88 million, $89 mil- lion, $85 million and $77 million for 2001 through 2005, respec- tively, and $447 million for later years. The costs recognized under firm transportation agreements, including commodity charges on actual quantities shipped, totaled $68 million, $55 million and $30 million in 2000,1999 and 1998, respectively. Enron leases property, operating facilities and equipment under various operating leases, certain of which contain renewal and purchase options and residual value guarantees. Future commitments related to these items at December 31. 2000 were 5123 million, $98 million, $69 million, $66 million and $49 million for 2001 through 2005, respectively, and $359 million for later years. Guarantees underthe leasestotal $556 million at December 31, 2000. Total rent expense incurred during 2000, 1999 and 1998 was $143 million, $143 million and $147 million, respectively. Enron has entered into two development agreements whereby Enron is required to manage construction of a certain number of power projects on behalf of third-party owners, Under one development agreement, where construction is expected to be completed on or before March 31, 2004, Enron has agreed to enter into power offtake agreements for varying portions of the offtake from each facility. Under both develop- ment agreements, Enron maintains purchase options, which may be assigned to a third party. In addition to the purchase option under the other development agreement Enron main- tains lease options on the power projects. If upon completion. which is expected to occur on or before August 31, 2002, Enron has failed to exercise one of its options. Enron may participate in the remarketing of the power projects which Enron has guar- anteed the recovery of 89.9 percent of certain project costs, of which approximately $140 million has been incurred through December 31, 2000. Enron guarantees the performance of certain of its uncon- solidated equity affiliates in connection with letters of credit issued on behalf of those entities. At December 31, 2000. a total of $264 million of such guarantees were outstanding, including $103 million on behalf of EGH Energy Partners, LR (EOTT). In addition, Enron is a guarantor on certain liabilities of uncon- solidated equity affiliates and other companies totaling approxi- mately $1,863 million at December 31, 2000, including $538 million related to FOrT trade obligations. The EDIT letters of credit and guarantees of trade obligations are secured by the assets of FOTT. Enron has also guaranteed $386 million in lease obligations for which it has been indemnified by an "Investment Grade" company. Management does not consider it likely that Enron would be required to perform or otherwise incur any loss- es associated with the above guarantees. In addition, certain commitments have been made related to capital expenditures and equity investments planned in 2001. On December 15, 2000, Enron announced that it had entered into an agreement with Azurix under which the holders of Azurix's approximately 39 million publiclytraded shareswould receive cash of $8375 in exchange for each share. The agree- ment, which is subject to the approval of Azurix shareholders, is expected to close in early 2001. ( ~R,KJSA2 iONs In 2000 and 1999, Enron entered into transactionswith lim- ited partnerships (the Related Party) whose general partner's managing member is a senior officer of Enron. The limited part- ners of the Related Party are unrelated to Enron. Management believes that the terms of the transactions with the Related Party were reasonable compared to those which could have been negotiated with unrelated third parties. In 2000, Enron entered into transactions with the Related Party to hedge certain merchant investments and other assets. As part of the transactions, Enron (i) contributed to newly-formed entities (the Entities) assets valued at approximately $1.2 billion. including $150 million in Enron notes payable, 3.7 million restricted shares of outstanding Enron common stock and the right to receive up to 18.0 million shares of outstanding Enron common stock in March 2003 (subject to certain conditions) and (ii) transferred to the Entities assets valued at approximately $309 million, including a $50 million note payable and an invest- ment in an entity that indirectly holds warrants convertible into common stock of an Enron equity method investee. In return, Enron received economic interests in the Entities, $309 million in notes receivable, of which $259 million is recorded at Enren's carryover basis of zero, and a special distribution from the Entities in the form of $1.2 billion in notes receivable, subject to changes in the principal for amounts payable by Enron in con- nection with the execution of additional derivative instruments. Cash in these Entities of $172.6 million is invested in Enron demand notes. In addition, Enron paid $123 million to purchase share-settled options from the Entities on 21.7 million shares of Enron common stock. The Entities paid Enron $10.7 million to terminate the share-settled options on 14.6 million shares of Enron common stock outstanding. In late 2000, Enron entered into share-settled collar arrangements with the Entities on 15.4 million shares of Enron common stock. Such arrangements will be accounted for as equity transactions when settled. In 2000, Enron entered into derivative transactions with the Entities with a combined notional amount of approximately $2.1 billion to hedge certain merchant investments and other assets. Enrons notes receivable balance was reduced by $36 million as a result of premiums owed on derivative transactions. Enron recognized revenues of approximately $500 million related to the subsequent change in the market value of these derivatives, which offset market value changes of certain merchant invest- ments and price risk management activities. In addition, Enron recognized $44.5 million and $14.1 million of interest income and interest expense, respectively, on the notes receivable from and payable to the Entities. In 1999, Enron entered into a series of transactions involving a third party and the Related Party. The effect of the transactions was (i) Enron and the third party amended certain forward contracts to purchase shares of Enron common stock, resulting in Enron having forward contracts to purchase Enron common shares at the market price on that day, (ii) the Related Party received 6.8 million shares of Enron common stock subject to cer- tain restrictions and (iii) Enron received a note receivable, which E0aa002648587 was repaid in December 1999, and certain financial instruments hedging an investment held by Enron. Enron recorded the assets received and equity issued at estimated fair value. In connection with the transactions, the Related Par-ty agreed that the senior officer of Enron would have no pecuniary interest in such Enron common shares and would be restricted from voting on matters related to such shares. In 2000, Enron and the Related Party entered into an agreement to terminate certain financial instru- ments that had been entered into during 1999. In connection with this agreement Enron received approximately 3.1 million shares of Enron common stock held by the Related Party. A put option, which was originally entered into in the first quarter of 2000 and gave the Related Party the right to sell shares of Enron common stock to Enron at a strike price of $71.31 per share, was terminated under this agreement. In return, Enron paid approxi- mately $26.8 million to the Related Party. In 2000. Enron sold a portion of its dark fiber inventory to the Related Party in exchange for $30 million cash and a $70 million note receivable that was subsequently repaid. Enron recognized gross margin of $67 million on the sale. In 2000, the Related Party acquired, through securitizations, approximately $35 million of merchant investments from Enron, In addition, Enron and the Related Party formed partnerships in which Enron contributed cash and assets and the Related Party contributed $17.5 million in cash. Subsequently, Enron sold a por- tion of its interest in the partnership through securitizations. See Note 3. Also. Enron contributed a put option to a trust in which the Related Party and Whitewing hold equity and debt interests. At December 31, 2000, the fair value of the put option wasa $36 million loss to Enron. In 1999, the Related Party acquired approximately $371 mil- lion of merchant assets and investments and other assets from Enron. Enron recognized pre-tax gains of approximately $16 mil- lion related to these transactions. The Related Party also entered into an agreement to acquire Enron's interests in an unconsoli- dated equity affiliate for approximately $34 million. 1 7 ASSfr I 't'/i 'AIKM [NI In 1999, continued significant changes in state and federal rules regarding the use of MTBE as a gasoline additive have significantly impacted Enron's view of the future prospects for this business. As a result, Enron completed a reevaluation of its position and strategy with respect to its operated MTBE assets which resulted in (i} the purchase of certain previously-leased MTBE related assets, under provisions within the lease, in order to facilitate future actions, including the potential disposal of such assets and (ii) a review of all MTSE-related assets for impair- ment considering the recent adverse changes and their impact on recoverability. Based on this review and disposal discussions with market participants, in 1999, Enron recorded a $441 million pre-tax charge for the impairment of its MTBE-related assets. AX ...........XALIX>:(. ~>~a:.2(,.! i('i~~4.: fQT K In 1999, Enron recorded an after-tax charge of $131 million to reflect the initial adoption (as of January 1, 1999) of two new accounting pronouncements, the AICPA Statement of Position 98-5 (SOP 98-5). 'Reporting on the Costs of Start-Up Activities" and the Emerging Issues Task Force Issue No. 98-10, 'Accounting for Contracts Involved in Energy Trading and Risk Management Activities. The 1999 charge was primarily related to the adop- hon of SOP 98-5 I ,~tit r - In 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SFAS No. 137 and SFAS No. 138. SEAS No. 133 must be applied to all derivative instruments and certain derivative instruments embedded in hybrid instruments and requires that such instru- ments be recorded in the balance sheet either as an asset or liability measured at its fair value through earnings, with special accounting allowed for certain qualifying hedges. Enron will adopt SFAS No. 133 as of January 1,2001. Due to the adoption of SFAS No. 133, Enron will recognize an after-tax non-cash loss of approximately $5 million in earnings and an after-tax non- cash gain in Other Comprehensive Income." a component of shareholders equity, of approximately $22 million from the cumulative effect of a change in accounting principle. Enron will also reclassify $532 million from 'Long-Term Debt to Other Liabilities" due to the adoption. The total impact of Enron's adoption of SEAS No. 133 on earnings and on "Other Comprehensive Income" is dependent upon certain pending interpretations, which are currently under consideration. including those related to "normal pur- chases and normal sales" and inflation escalators included in certain contract payment provisions. The interpretations of these issues, and others, are currently under consideration by the FASB. While the ultimate conclusions reached on interpre- tations being considered by the FASB could impact the effects of Enron's adoption of SEAS No. 133, Enron does not believe that such conclusions would have a material effect on its cur- rent estimate of the impact of adoption. 2Caa002648588 19 OlAIJIF 0KV I ftJA I Summarized quarterly financial data is as follows: (In millions, except First Second Third Fourth Total PC sh re am CU.................................................Quarter Quarter Quarter y~~~(a) Quarter 2000 Revenues 513.145 $18,826 $30,001 $40,751 $100,789 Income before interest, minority interests and income taxes 624 809 666 583 2,482 Net income 332 289 292 60 979 Earnings per share: Basic S 0.44 $ 037 S 037 5 0.05 $ 1.22 Diluted 040 034 0.34 0.05 1.12 1999 Revenues $ 7,632 $ 9,672 $11,835 $10,973 $ 40,112 Income before interest, minority interests and income taxes 533 469 520 473 1.995 Net income 122 222 290 259 893 Earnings per share: Basic $ 017 $ 0.29 $ 038 $ 0.33 1 1.17 Diluted 0.16 0.27 0.35 0.31 1.10 (a) The sum of earnIngs per share for the four quarters may nor equal earnings per share for the total year due to changes in the average number of common shares outstanding. 20 (;FcThr::API IC/-NJ, Pt 19N1 V StCVVr N 7 NOIUVIAI ON Enrons business Is divided into operating segments, defined as components of an enterprise about wVsich financial informa- tion is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. Enron's chief operating decision- making group is the Office of the Chairman. Enrons chief operating decision-making group evaluates performance and allocates resources based on income before interest, minority interests and income taxes (IBIT) as well as on net income. Certain costs related to company-wide functions are allocated to each segment. However, interest on corporate debt is primarily maintained at Corporate and is not allocated to the segments. Therefore, management believes that BIT is the dom- inant measurement of segment profits consistent with Enrons consolidated financial statements. The accounting policies of the segments are substantially the same as those described in the summary of significant accounting policies in Note 1. Beginning in 2000, Enrons communications business is being managed as a separate operating segment named Broadband Services and therefore, based on criteria set by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information, is reported separately. Enron has divided its operations into the following reportable segments, based on similarities in economic charac- teristics. products and services, types of customers, methods of distributions and regulatory environment, Transportation and Distribution - Regulated industries. Interstate transmission of natural gas. Management and opera- tion of pipelines- Electric utility operations. Wholesale Services - Energy commodity sales and services, risk management products and financial services to wholesale customers, Development acquisition and operation of power plants, natural gas pipelines and other energy-related assets. Retai/ Energy Services - Sales of natural gas and electricity directly to end-use customers, particularly in the commercial and industrial sectors, including the outsourcing of energy- related activities. Broadband Services - Construction and management of a nationwide fiber optic network, the marketing and management of bandwidth and the delivery of high-bandwidth content. Exploration and Production - Natural gas and crude oil exploration and production primarily in the United States, Canada, Trinidad and India until August 16, 1999. See Note 2. Corporate and Other - Includes operation of water and renewable energy businesses as well as clean fuels plants. Financial information by geographic and business segment follows for each of the three years in the period ended December 31, 2000. a, WI::: Seqr-si' (In millions) Operating revenues from unaffiliated customers United States Foreign Year Ended December 31. 2000 1999 1998 S 17,831 530,176 $25,247 22,898 9,936 6,013 $100,789 $40,112 $31,260 Income before interest, minority interests and income taxes United States S 2,131 $ 1,273 $ 1.008 Foreign 351 722 574 Long-lived assets United States Foreign $ 2,482 $ 1,995 $ 1,582 S 10,899 844 S 11,743 $ 8,286 $ 9,382 2,395 1,275 $10,681 $10,657 ECaaOO2648589 Transportation Retail Corporate and Wholesale Energy Aroadhand and (In n,illio r,s) Distribution Services Services Services Other(d) Total 2000 Unaffiliated revenuesla) $2,742 593,278 53,824 S 408 S 531 5100,789 Intersegment reverlues(b) 213 1,628 791 - (2,632) - Total revenues 2,955 94,906 4.615 408 (2095) 100,789 Depreciation, depletion and amortization 278 343 38 77 119 855 Opetating income (loss) 565 1,668 58 - - (64).........274)..........1,953 Equity in earnings of unconsolidated equity affiliates 65 486 (60) 1 (405) 87 Gains on sales of assets and investments 25 9 74 - 38 146 Gain on the issuance of stock by TNPC, Inc. 121 - 121 Interest income 6 111 5 3 21 212 Other income, net 71 (74) (33) - (1) (31) Income (loss) before interest, minority interests and income taxes 732 2,260 165 (60) (615) 2,482 Capital expenditures 270 1,280 70 436 325 2,381 Identifiable assets 7,509 43,920 4,266 1,113 3,201 60,209 Investments in and advances to unconsolidated equity affiliates 774 4,014 104 24 378 5,294 Total assets 58.283 547,934 $4,370 $1,337 S 3,579 S 65,503 (In millions) 1999 Unaffiliated revenuesla) Intersegment revenues(b) Total revenues Depreciation, depletion and amortization Operating income (loss) Equity in earnings of unconsolidated equity affiliates Gains on sales of assets and investments Intetest income Other income, net Income (loss) before interest, minority interests and income taxes Capital expenditures Identifiable assets Investments in and advances to unconsolidated equity affiliates Total assets 1998 Unaffiliated revenues(a) Intersegment revenues(b) Total revenues Depseciation. depletion and amortization Operating income (loss) Equity in earnings of unconsolidated eluity affiliates Gains on sales of assets and investments Interest income Other income, net Income (loss) before interest, minority interests and income taxes Capital expenditures Identifiable assets Investments in and advances to unconsolidated equity affiliates Total assets Transportation Retail Exploration Corporate and Wholesale Energy and and Distribution Services Services Production(c) Other(d) Total $2,013 $35,501 $1,518 $ 429 $ 651 $ 40,112 19 786 289 97 (1,191) - 2,032 36,287 1,807 526 (540) 40.112 247 294 29 213 87 870 551 889 (81) 66 (623) 802 50 237 . 22 309 19 11 - . 511 541 20 126 5 - 11 162 45 54 8 (1) 75 181 -~ 685 - 1,317 (68) 65 (4) 1,995 316 1,216 84 226 541 2,363 7,148 18,501 956 - 1,740 28,345 All $7,959 2.684 $21,185 $ 956 1,541 $3,281 5,036 $ 33,381 $ $1,833 $27,220 $1,072 $ 750 $ 385 $ 31,260 16 505 . 134 1,849 27,725 1,072 884 (270) 31,260 253 195 31 315 33 827 562 880 (124) 133 (73) 1.378 33 42 (2) . 24 97 31 4 . . 21 56 9 67 - 1 11 88 2 (25) 7 (6) (15) (37) 637-----------968 (119) ____ 128 (32) 1,582 ----i6 706 75 _ _ 690 124 1,905 6.955 12,205 747 3,001 2.009 24,917 1,140 4,433 $ 3.149 $ 29,350 661 2,632 $7,616 $14,837 $ 747 $3,001 (a) Unafffiated revenues include sates to unconsolidated equity afffiates (I,) Incersegment sales are made at prices comparable to those rereived from unaffziated customers and in some instances are affected by regulatory considerations. Cc) Reflects results through August 16 1999. See Note 2 Cd) Includes consolidating eliminations. 5Caa002648590 Se/cc ted Financial and Credit Information (Unaudited~ The following review of the credit characteristics of Enron Corp. and its subsidiaries and affiliates should be read in con)unction with the Consolidated Financial Statements. The credit information that follows represents management's calculation of certain key credit ratios of Enron. 2000 On millions) Total Obligations Balance sheet debt (short- and long-term) $10229 1999 8,152 Source Balance Sheet Items added to liability profile: Guarantees (a) Residual value guarantees of synthetic leases Net liability Irom price risk management activities16) Debt exchangeable for EOG Resources, Inc. shares(c) Debt of unconsolidated equity affiliatesld) Firm transportation obligations(C) Total Obligations Shareholders' Equity and Certain Other tans Shareholders' Equity Items added to shareholders' equity: Minority interests Company-obligated preferred securities of subsidiaries Total Shareholders' Equity and Certain Other Items 213 556 (532) 180 Note 15 715 Note 15 - Balance Sheet (239) Note 7 - Noteg - Note 15 $10466 $ 8,808 $11,470 $ 9,570 Balance Sheet 2414 2,430 Balance Sheet, Note 8 904 1,000 Balance Sheet, Note 10 $14,788 $13,000 Funds Flow from Operations Net cash provided by operating activities $ 4,719 $ 1,228 Cash Flow Statement Changes in working capital 1,769 (1,000) Cash Flow Statement Funds Flow fro pperations..............................- S 3,010 $ 2,228 --------------------------------------- Interest and Estimated Lease Interest Expense Interest incurred S 876 $ 710 Capitalized interest (38) (54) Management's Discussion and Analysis Interest and Related Charges, net $ 838 $ 656 Income Statement Estimated Lease Interest Expense~0 $ 106 $ 124 Adjusted Earnings for Credit Analysis Income before interest, minority interests and income taxes Adjustments to BIT: Gain on sales of non'merchant assets Impairment of long'lived assets (including equity investments) Distributions in excess of (less than) earnings of unconsolidated equity affiliates Estimated lease interest expenseW Total Adjusted Earnings for Credit Analysis Key Credit Ratios Funds flow interest coverag~(g) Pretax interest coverage (h) Funds flow from operationsfl'otal obligations Total obligations/Total obligations plus Total shareholders' equity and certain other items DebtlTotal Capital (I) S 2.482 (146) 326 (276) 106 $ 1,995 (541) 441 1 73 124 Income Statement Cash Flow Statement Cash Flow Statement Note 9 $ 2.492 $ 2,192 4.07 2,54 28,8% 414% 409% 3,67 263 25.3% 40.4% 38.5% (a) Management estimates triton risk adjusted exposure on uncollateral,zed guarantees is approximately 10% of the total nominal value of the guarantees issued. (I,) Excess of price risk management liabilities over price risk management assets. Ic) triton expects to extinguish this obligation by delivering shares of FOG Resources, Inc stock. Id) Debt of unconsolidated equity aff#iares is non-recourse and therefore is excluded from triton's obligations. Ce) Firm transportation obligations are excluded, as contracted capacity has market value. (0 Management estimates triton s lease interest expense for the year based on the average minimum lease payment or commitment (excluding prircrjnl repayments and other itemst (g) Calculated as funds fl,w from operations plus ,nteresr incurred and estimated lease interest expense, divided by interest incurred arid estimated lease interest expense (h) Calculated as total adjusted earnings divided by interest incurred and estimated lease interest expense. 6) Total capital includes debt, minority interests, company-obligated preferred securiries of subsidiaries and shareholders 'eguity ECaaOO2648591 OUR VALUES Cotrinu inicat ion * We have an obligation to communicate. Here, we take the time to * talk with one another.., and to listen. We believe that information :s meant to move and that infoimation moves people. Respect We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. lnt~'ity I We work with customers and prospects openly, honestly and sin- cerely. flea we say we will do something, we will do it when we say we cannot or will not do something, then we won't do it. 0~ C, a Es E1 :1 Excellence with nothing less than the very best in everything We are satisfied we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to disco ver just how good we can really be. ann a r r .9 Es a a a a U. -- ii- ECaaOO2648592 t t r 1< ROBERT A. BELFER New York. New York Chairman, Relco Oil & Gas Corp. NORMAN P BLAKE, JR Colorado Springs, Colorado Chairman, President and CEO, Comdisco, Inc., and Former CEO and Secretary General, United States Olympic Committee RONNIE C. CHANt Hong Kong Chairman, Hang Lung Group JO/IN It DUNCAN Houston, Texas Former Chairman of the Executive Committee of Gulf & Western Industries, Inc. WENDY L CRAMM Washington, B.C. Director of the Regulatory Studies Program of the Mercatus Center at George Mason University Former Chairman, U.S. Commodity Futures Trading Commission KEN C HARRfSON Portland, Oregon Former Chairman and CEO, Portland General Electric Company ROBERT K. JAFOICKE Stanford, California Professor of Accounting (Emeritus) and Former Dean. Graduate School of Business, Stanford University KENNETHL. LAY Houston, Texas Chairman. Enron Corp. CHARLES A. LEMAISTRE San Antonio, Texas President Emeritus. University of Texas M.D. Anderson Cancer Center JOHN MENDELSORN Houston, Texas President, University of Texas M.D. Anderson Cancer Center JEROME I MEYER Wilsonville, Oregon Chairman. Tektronix, Inc. PAULO V FERRAZ REPS/PA Rio do Janeiro, Brazil Executive Vice President of Group Bozano Former President and COO. Meridional Financial Group, and Former President and CEO, State Bank of Rio do janeiro, Brazil FRANK SAVAGE' Stamford, Connecticut Chairman. Alliance Capital Management International (a division of Alliance Capital Management 1.9) JEFFREY K. SR/LUNch> Houston, Texas President and CEO, Enron Corp. ECaaOO2648593 j A A 'S. 1* (No text was detected on this page) Enron Corporate Policy Committee Chairman, Enron president and Chief Executive Officer. Enron i-F P Vice Chairman & Chief Strategic Officer. Enron P(V -~ Executive Vice President & Chief Accounting Officer. Enron C' 4\ HOP LU" Chairman & CEO. Enron Transportation Services £ flAt Executive Vice President & Chief of Staff, Enron '9Y~~ Ffz A'~EY Chairman A CEO. Enron Energy Services .." .113,1 K Executive Vice President & General Counsel. Enron 'ANDY EASTOW Executive Vice President A Chief Financial Officei Enron MARIK FREVERT Chairman & CEO. Enron Wholesale Services LOU [£41 Chairman & CEO, Enron Xcelerator NV RIG F Chairman & CEO. Enron Broadband Services ~CHN V President & CEO, Enron Europe GREG WI-ALLE< President & COO, Enron Wholesale Services KEVIN HANNON Chief Operating Officer, Enron Broadband Services Shareholder In formation [Ft.ANSFF P :\CIFN I, R: Cs: RAN, DiVIDEND PAYING AND RFHVFSTMENi PLAN .4011k) 1)1 RE C i-SF EVIL 11 PROC RAM) First Chicago Trust Company do EquiServe P.O. Box 2500 Jersey City, NJ 07303-2500 (800) 519-3111 (201) 324-1225 TOD: (201) 222-4955 For direct deposit of dividends only, call: (800) 870.2340 Internet address: http:/~v.equ serve, corn 2Q(IC ...NC.,I..Ai ,i This Annual Report and the statements contained herein are submitted for the general information of the shareholders of Enron Corp. and are not intended for use in con nection with or to induce the sale or purchase of securities. ft N .1'. 5 Enron Corp.'s Annual Report to share- holders and Form 10-K report to the Securities and Exchange Commission are available upon request on Enrons Internet address http:/~Av,enron.com For information regarding specific shareholder questions, write or call the Transfer Agent. Financial analysts and investors who need additional information should contact: Enron Corp. Investor Relations Dept. PLO. Box 1188, Suite Aa)SB Houston, TX 77251-1188 (713) 853-3956 Enrons Internet address: http:/A~.enron,com ANN U AL ME ETENG OF HAP F HO 1 The Annual Meeting of Shareholders will be held in Houston, Texas. in the LaSalle Ballroom of the Doubletree Hotel at Allen Center, 400 Dallas Street, on Tuesday, May 1, 2001. at 10 a,m, Information with respect to this meeting is contained in the Proxy Statement sent with this Annual Report to holders of record of Enron Corps Common Stock and the Cumulative Second Preferred Convertible Stock on March 2,2001. The 2000 Annual Report is not to be considered a part of the proxy soliciting material, l1)iv'IDI9KL RFi>.IVESTFvIENI The Transfer Agent offers holders of Enron Corp. Common Stock the oppor- tunity to reinvest part or all of their dividends in the purchase of additional shares of Common Stock by participating in the DirectSERVlCE Program for Shareholders of Enron Corp. This pro- gram gives almost everyone the oppor- tunity to purchase additional shares of Common Stock without paying a bro- kerage commission. Anyone wishing to participate in the program may, upon timely application, reinvest some, all. or none of the cash dividends paid on their Common Stock, or make optional cash payments of as little as $25. after an initial investment of $250 for new shareholders, with a limit of $120,000 per calendar year. Direct requests for further information to: DirectSERVICE Program for Shareholders of Enron Corp. do First Chicago Trust Company do EquiServe P.O. Box 2598 Jersey City. NJ 07303-2598 Shareholders may call: (800) 519-3111 Non-shareholders requests for program materials: (800) 662-7662 Internet address: http:/A~vw.equ iservecom TDD: (201) 222-4955 ECaaOO2648595 Ii I ~.I a.. 0~ .3 .3 *9.3 0* 0~ 0~ 0~ Endless possibilitiesa 1400 Smith Street 1-Jousta,,, Texas 77002-7361 zvT~'wefl rancom o »=005 Enran Corp. Enron and the Enron logo are on gintern d n'ademark~ and Endless possibilities. Enrononline OcalSench. Snerqydesk.com. Commoditylogic and Clickyapercoct, are trademarks of Enron Corp. or one of ~ Other company, product and services names nay be trademarks of othert ECaaOO2648597 .3flrm4¶W.3 nt 0 n C (0 0