complete the following cases which shows how a prominent fraud detection model worked, or failed to work, in detecting the fraud at Enron. Answer thoroughly with explanations. Tip based on grade given. No plagiarism.
Case 6
Citigroup Case (adapted)
Material: You should read Case 6.2 from the Whalen text, which is on pages 374-381.
This case contains a number of facts related to Citigroup in 2008. This was the year when it was
most affected by the 2007 Financial crisis and the Great Recession.
Instead of the “Required” part of the case on page 381, answer the following questions:
1. Principal transactions
a. What are they?
b. Are they a normal part of Citi’s business?
c. What level of gain or loss would you consider normal for principal transactions?
Defend you answer, even though it may be a shaky estimate
d. What level of gain or loss on principal transactions would you predict for Citi for
2009?
e. What information (not in the case) might be relevant to investing 2009 gains or
losses from principal transactions?
2. Gains or losses from sales of investments
a. What are they?
b. Are they a normal part of Citi’s business?
c. What level of gain or loss would you consider normal for principal transactions?
Defend you answer, even though it may be a shaky estimate
d. What level of gain or loss on investments would you predict for Citi for 2009?
e. What other information might be relevant to estimating the future gains or losses
on investments?
3. Provisions for loan losses
a. What are they?
b. Are they a normal part of Citi’s business?
c. What level of loan losses would you consider normal for principal transactions?
Defend you answer, even though it may be a shaky estimate
d. What level of gain or loss on loan losses would you predict for Citi for 2009?
e. What other information might be relevant to estimating the future gains or losses
on investments?
4. Restructuring charges
a. What are they?
b. Are they a normal part of Citi’s business?
c. What level of gain or loss would you consider normal for restructuring? Defend
you answer, even though it may be a shaky estimate
d. What level of gain or loss on restructuring would you predict for Citi for 2009?
e. What other information might be relevant to estimating the future gains or losses
on investments?
5. Goodwill impairments
a. What are they?
b. Are they a normal part of Citi’s business?
c. What level of gain or loss would you consider normal for goodwill impairments?
Is this a one-time event?Defend you answer, even though it may be a shaky
estimate
d. What level of goodwill impairment would you predict for Citi for 2009?
e. What other information might be relevant to estimating the future gains or losses
on goodwill impairments?
6. Discontinued operations
a. What are they? Which operations were discontinued?
b. Are they a normal part of Citi’s business?
c. What level of gain or loss from discontinued operations would you predict for Citi
in 2009? Defend you answer, even though it may be a shaky estimate
d. What other information might be relevant to estimating the future impact of
discontinued operations?
7. Commissions and fees –2008 revenues from this source were about $9 billion below the
2007 level
a. To what extent does this seem to be due to write downs or fair value adjustments
of mortgage servicing assets and finance commitments?
b. Do you expect these write downs to continue at similar levels in 2009? Why or
why not?
c. What additional information might be relevant to estimating future levels of
commissions and fees?
Book Title: eTextbook: Financial Reporting, Financial Statement Analysis
and Valuation
Chapter 6. Accounting Quality
Case 6.2. Citi: A Very Bad Year
378
379
375
381
380
376
377
Case 6.2. Citi: A Very Bad Year
374
Citigroup Inc. (Citi) is a leading global financial services company with more
than 200 million customer accounts and operations in more than 140 countries.
Its operating units Citicorp and Citi Holdings provide a broad range of
financial products and services to consumers, governments, institutions, and
corporations. Services include investment banking, consumer and corporate
banking and credit, securities brokerage, and wealth management.
Citi reported a net loss of $27,684 million, or $5.59 per share, in 2008. Exhibit
6.25 presents Citigroup’s consolidated statements of income for 2006 to 2008.
Exhibit 6.25 Citigroup Inc. Consolidated Statements of Income
(Amounts in Millions, except per Share Amounts) (Case 6.2)
Source: Citigroup Inc., Form 10-K for the Fiscal Years Ended December 31, 2008, 2007, and
2006.
(1)Diluted shares used in the diluted EPS calculation represent basic shares
for 2009 due to the net loss. Using actual diluted shares would result in
anti-dilution.
Excerpts from Financial Statement Notes:
The following excerpts were disclosed in the notes to Citigroup’s 2008
financial statements:
3. Discontinued Operations
Sale of Citigroup’s German Retail Banking Operations
On December 5, 2008, Citigroup sold its German retail banking operations to
Credit Mutuel for Euro 5.2 billion, in cash plus the German retail bank’s
operating net earnings accrued in 2008 through the closing. The sale resulted in
an after-tax gain of approximately $3.9 billion including the after-tax gain on
the foreign currency hedge of $383 million recognised during the fourth
quarter of 2008.
The sale does not include the corporate and investment banking business or
the Germany-based European data center.
The German retail banking operations had total assets and total liabilities as of
November 30, 2008, of $15.6 billion and $11.8 billion, respectively.
Results for all of the German retail banking businesses sold, as well as the net
gain recognized in 2008 from this sale, are reported as Discontinued Operations
for all periods presented.
Summarized financial information for Discontinued Operations, including cash
flows, related to the sale of the German retail banking operations is as follows:
CitiCapital
On July 31, 2008, Citigroup sold substantially all of CitiCapital, the equipment
finance unit in North America. The total proceeds from the transaction were
approximately $12.5 billion and resulted in an after-tax loss to Citigroup of
$305 million. This loss is included in Income from discontinued operations on
the Company’s Consolidated Statement of Income for the second quarter of
2008. The assets and liabilities for CitiCapital totaled approximately $12.9
billion and $0.5 billion, respectively, at June 30, 2008.
This transaction encompassed seven CitiCapital equipment finance business
lines, including Healthcare Finance, Private Label Equipment Finance, Material
Handling Finance, Franchise Finance, Construction Equipment Finance,
Bankers Leasing, and CitiCapital Canada. CitiCapital’s Tax Exempt Finance
business was not part of the transaction and was retained by Citigroup.
CitiCapital had approximately 1,400 employees and 160,000 customers
throughout North America.
Results for all of the CitiCapital businesses sold, as well as the net loss
recognized in 2008 from this sale, are reported as Discontinued operations for
all periods presented.
Summarized financial information for Discontinued operations, including cash
flows, related to the sale of CitiCapital is as follows:
Sale of the Asset Management Business
On December 1, 2005, the Company completed the sale of substantially all of its
Asset Management business to Legg Mason, Inc. (Legg Mason).
On January 31, 2006, the Company completed the sale of its Asset Management
business within Bank Handlowy (an indirect banking subsidiary of Citigroup
located in Poland) to Legg Mason. This transaction, which was originally part of
the overall Asset Management business sold to Legg Mason on December 1,
2005, was postponed due to delays in obtaining local regulatory approval. A
gain from this sale of $18 million after-tax and minority interest ($31 million
pretax and minority interest) was recognized in the first quarter of 2006 in
Discontinued operations.
During March 2006, the Company sold 10.3 million shares of Legg Mason stock
through an underwritten public offering. The net sale proceeds of $ 1.258
billion resulted in a pretax gain of $24 million in ICG.
In September 2006, the Company received from Legg Mason the final closing
adjustment payment related to this sale. This payment resulted in an additional
after-tax gain of $51 million ($83 million pretax), recorded in Discontinued
operations.
Sale of the Life Insurance and Annuities Business
On July 1, 2005, the Company completed the sale of Citigroup’s Travelers Life &
Annuity and substantially all of Citigroup’s international insurance businesses
to MetLife, Inc. (MetLife).
During the first quarter of 2006, $15 million of the total $657 million federal tax
contingency reserve release was reported in Discontinued operations as it
related to the Life Insurance and Annuities business sold to MetLife.
In July 2006, Citigroup recognized an $85 million after-tax gain from the sale
of MetLife shares. This gain was reported in income from continuing
operations in ICG.
In July 2006, the Company received the final closing adjustment payment
related to this sale, resulting in an after-tax gain of $75 million ($115 million
pretax), which was recorded in Discontinued operations.
In addition, during the third quarter of 2006, a release of $42 million of
deferred tax liabilities was reported in Discontinued operations as it related to
the Life Insurance & Annuities business sold to MetLife.
In December 2008, the Company fulfilled its previously agreed upon
obligations with regard to its remaining 10% economic interest in the longterm care business that it had sold to the predecessor of Genworth Financial in
2000. Under the terms of the 2005 sales agreement of Citi’s Life Insurance and
Annuities business to MetLife, Citi agreed to reimburse MetLife for certain
liabilities related to the sale of the long-term-care business to Genworth’s
predecessor. The assumption of the final 10% block Genworth at December 31,
2008, resulted in a pretax loss of $50 million ($33 million after-tax), which has
been reported in Discontinued operations.
Combined Results for Discontinued Operations
The following is summarized financial information for the German retail
banking operations, CitiCapital, Life Insurance and Annuities business, Asset
Management business, and TPC:
5. Interest Revenue and Expense
For the years ended December 31, 2008, 2007, and 2006, respectively, interest
revenue and expense consisted of the following:
(1)Interest expense on Trading account facilities of ICG is reported as a
reduction of interest revenue from Trading account assets.
6. Commissions and Fees
Commissions and fees revenue includes charges to customers for credit and
bank cards, including transaction-processing fees and annual fees; advisory
and equity and debt underwriting services; lending and deposit-related
transactions, such as loan commitments, standby letters of credit and other
deposit and loan servicing activities; investment management-related fees,
including brokerage services and custody and trust services; and insurance
fees and commissions.
The following table presents commissions and fees revenue for the years ended
December 31:
(1)Commissions and fees for Nikko Cordial have not been detailed due to
unavailability of the information.
(2)Includes fair value adjustments on mortgage servicing assets. The mark-
to-market on the underlying economic hedges of the MSRs is included in
Other revenue.
(3)Includes write-downs of approximately $4.9 billion in 2008 and $1.5
billion in 2007, net of underwriting fees, on funded and unfunded highly
leveraged finance commitments, recorded at fair value and reported as
loans held for sale in Other assets. Write-downs were recorded on all
highly leveraged finance commitments where there was value
impairment, regardless of funding date.
7. Principal Transactions
Principal transactions revenue consists of realized and unrealized gains and
losses from trading activities. Not included in the table below is the impact of
net interest revenue related to trading activities, which is an integral part of
trading activities’ profitability. The following table presents principal
transactions revenue for the years ended December 31:
(1)Reclassified to conform to the current period’s presentation.
(2)Includes revenues from government securities and corporate debt,
municipal securities, preferred stock, mortgage securities, and other debt
instruments. Also includes spot and forward trading of currencies and
exchange-traded and over-the-counter (OTC) currency options, options on
fixed income securities, interest rate swaps, currency swaps, swap options,
caps and floors, financial futures, OTC options, and forward contracts on
fixed income securities. Losses in 2008 reflect the volatility and dislocation
in the credit and trading markets.
(3)Includes revenues from structured credit products such as North
America and Europe collateralized debt obligations. In 2007 and 2008,
losses recorded were related to subprime-related exposures in ICG’s
lending and structuring business and exposures to super senior CDOs.
(4)Includes revenues from common, preferred and convertible preferred
stock, convertible corporate debt, equitylinked notes, and exchange-traded
and OTC equity options and warrants.
(5)Includes revenues from foreign exchange spot, forward, option and
swap contracts, as well as translation gains and losses.
(6)Primarily includes the results of Phibro LLC, which trades crude oil,
refined oil products, natural gas, and other commodities.
(7)Includes revenues from various fixed income, equities and foreign
exchange transactions.
10. Restructuring
In the fourth quarter of 2008, Citigroup recorded a pretax restructuring
expense of $1.797 billion pre-tax related to the implementation of a Companywide re-engineering plan. This initiative will generate headcount reductions of
approximately 20,600. The charges related to the 2008 Re-engineering Projects
Restructuring Initiative are reported in the Restructuring line on the
Company’s Consolidated Statement of Income and are recorded in each
segment.
In 2007, the Company completed a review of its structural expense base in a
Company-wide effort to create a more streamlined organization, reduce
expense growth, and provide investment funds for future growth initiatives. As
a result of this review, a pretax restructuring charge of $1.4 billion was
recorded in Corporate/Other during the first quarter of 2007. Additional net
charges of $151 million were recognized in subsequent quarters throughout
2007 and a net release of $31 million in 2008 due to a change in estimates. The
charges related to the 2007 Structural Expense Review Restructuring Initiative
are reported in the Restructuring line on the Company’s Consolidated
Statement of Income.
The primary goals of the 2007 Structural Expense Review and Restructuring,
and the 2008 Re-engineering Projects and Restructuring Initiatives were:
•
eliminate layers of management/improve workforce management;
•
consolidate certain back-office, middle-office and corporate functions;
•
increase the use of shared services;
•
expand centralized procurement; and
•
continue to rationalize operational spending on technology.
The implementation of these restructuring initiatives also caused certain
related premises and equipment assets to become redundant. The remaining
depreciable lives of these assets were shortened, and accelerated depreciation
charges began in the second quarter of 2007 and fourth quarter of 2008 for the
2007 and 2008 initiatives, respectively, in addition to normal scheduled
depreciation.
19. Goodwill and Intangible Assets
Goodwill
The changes in goodwill during 2007 and 2008 were as follows:
In the following press release, Citi further describes the source of the goodwill
impairment:
Citi Announces Fourth Quarter Goodwill
Impairment of $9.6 Billion
Results in Additional Net Loss of $9.0 Billion for 2008
New York — Citi announced today that it recorded a pre-tax goodwill
impairment charge of approximately $9.6 billion ($8.7 billion after-tax) in the
fourth quarter of 2008. Citi had previously announced in its fourth quarter
earnings press release (January 16, 2009) that it was continuing to review its
goodwill to determine whether a goodwill impairment had occurred as of
December 31, 2008, and this charge is the result of that review and testing. The
goodwill impairment charge was recorded in North America Consumer
Banking, Latin America Consumer Banking, and EMEA Consumer Banking, and
resulted in a write-off of the entire amount of goodwill allocated to those
reporting units. The charge does not result in a cash outflow or negatively
affect the Tier 1 or Total Regulatory Capital ratios, Tangible Common Equity or
Citi’s liquidity position as of December 31, 2008.
In addition, Citi recorded a $374 million pre-tax charge ($242 million after-tax)
to reflect further impairment evident in the intangible asset related to Nikko
Asset Management at December 31, 2008.
The primary cause for both the goodwill and the intangible asset impairments
mentioned above was the rapid deterioration in the financial markets, as well
as in the global economic outlook generally, particularly during the period
beginning mid-November through year-end 2008. This deterioration further
weakened the near term prospects for the financial services industry.
Giving effect to these charges, Net Income (Loss) from Continuing Operations
for 2008 was $(32.1) billion and Net Income (Loss) was $(27.7) billion, resulting
in Diluted Earnings per Share of $(6.42) and $(5.59) respectively.
A complete description of Citi’s goodwill impairment testing as of December
31, 2008 and the related charges will be included in Citi’s Form 10-K to be filed
with the Securities and Exchange Commission on or before March 2, 2009.
Required
Consider the following items reported in Citi’s Consolidated Statement of
Income:
•
Principal transactions
•
Realized (gain) losses from sales of investments
•
Provision for loan losses
•
Restructuring
•
Other operating expenses (which presumably includes the goodwill
impairment)
•
Discontinued operations
Discuss whether you would eliminate all or part of each item when assessing
current profitability and forecasting the future earnings of Citi. If so, what
adjustments would you make to the financial statements (assuming a tax rate
of 35%)?
Case 13 – Enron and fraud detection
The Enron fraud was major news in 2001. Enron had been, by some measures the 7th largest
company in the U.S. in terms of revenues. After the fraud was revealed, it quickly went
bankrupt.
There were several elements to the fraud, including:
–
Abusing “mark to market” accounting on its trading activities, and recording gains before
they were earned
Not writing down major unprofitable investments it made in power plants or water
facilities
Using ‘special purpose entities’ to hide liabilities and losses.
Having much activity conducted through entities which Enron reported on the equity
basis, allowing it to avoid disclosing the activities’ full assets and liabilities.
A chart of its stock history1 shows that its stock price stayed high in 2000. There is little
evidence of any market suspicion of fraud. A major factor in the decline in the stock price in
2021 was the sudden resignation of Jeffrey Skilling, who had recently become CEO. The stock
price fell sharply in September, 2021, after the company announced it was restating figures for
some errors.
1
1. Do problem 6-26 in the text, on pages 369-370.This involves using the Beneish fraud
detection model, and identifying the major reasons for the change in probability of manipulation
over the 1998-2000 period.
2. I have placed Enron’s 2000 annual report on Blackboard. Look at the 2000 balance sheet, and
– indicate what particular assets, if any, you suspect might be overstated
-indicate what particular liabilities, if any, you suspect might be understated.
Explain what makes you suspicious of these items.
3. For one item you find suspicious, explain what evidence you would want to see to either make
you believe the company’s amount is accurate, or that would confirm that fraud was occurring.
Enron Annual Report 2000
Enron Annual Report 2000
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.
CONTENTS
1 FINANCIAL HIGHLIGHTS
20 FINANCIAL REVIEW
2 LETTER TO SHAREHOLDERS
53 OUR VALUES
9 ENRON WHOLESALE SERVICES
54 BOARD OF DIRECTORS
14 ENRON ENERGY SERVICES
56 ENRON CORPORATE POLICY COMMITTEE
16 ENRON BROADBAND SERVICES
56 SHAREHOLDER INFORMATION
18 ENRON TRANSPORTATION SERVICES
FINANCIAL HIGHLIGHTS
2000
1999
1998
1997
1996
$100,789
$ 40,112
$ 31,260
$ 20,273
$ 13,289
1,266
(287)
979
957
(64)
893
698
5
703
515
(410)
105
493
91
584
$
1.47
(0.35)
1.12
1.18
(0.08)
1.10
1.00
0.01
1.01
0.87
(0.71)
0.16
0.91
0.17
1.08
Dividends paid per common share
$
0.50
0.50
0.48
0.46
0.43
Total assets
$ 65,503
33,381
29,350
22,552
16,137
Cash from operating activities
(excluding working capital)
$
3,010
2,228
1,873
276
742
Capital expenditures and equity investments
$
3,314
3,085
3,564
2,092
1,483
(Unaudited: in millions, except per share data)
Revenues
Net income:
Operating results
Items impacting comparability
Total
Earnings per diluted common share:
Operating results
Items impacting comparability
Total
NYSE price range
High
Low
Close December 31
$
$
$
$
90 9⁄16
41 3⁄8
83 1⁄8
1,266
100.8
29 3⁄8
19 1⁄16
28 17⁄32
44 7⁄8
28 3⁄4
44 3⁄8
22 9⁄16
17 1⁄2
20 25⁄32
23 3⁄4
17 5⁄16
21 9⁄16
1.47
1.18
957
40.1
31.3
20.3
98
99
00
99
00
99
Income
($ in millions)
REVENUES
OPERATING RESULTS
00
Earnings Per
Diluted Share
(in dollars)
1,415%
89%
129%
Enron
S&P
500
350%
383%
Enron
S&P
500
(9%)
S&P
500
One Year
Five Years
CUMULATIVE TOTAL RETURN
(through December 31, 2000)
Enron
Ten Years
ENRON ANNUAL REPORT 2000
97
($ in billions)
1
TO OUR SHAREHOLDERS
Enron’s performance in 2000 was a success by any measure, as we continued to
outdistance the
competition
and solidify our leadership in each of our major businesses. In our largest business,
wholesale services, we experienced an enormous increase of 59 percent in physical
energy deliveries. Our retail energy business achieved its highest level ever of total
contract value. Our newest business, broadband services, significantly accelerated
transaction activity, and our oldest business, the interstate pipelines, registered
increased earnings. The company’s net income reached a record $1.3 billion in 2000.
Enron has built unique and strong businesses
faster, flexible and more reliable connectivity. Enron
that have tremendous opportunities for growth.
is in a unique position to provide the products and
These businesses — wholesale services, retail energy
services needed in these environments. Our size,
services, broadband services and transportation
experience and skills give us enormous competitive
services — can be significantly expanded within
advantages. We have:
their very large existing markets and extended
• Robust networks of strategic assets that we own
to new markets with enormous growth potential.
or have contractual access to, which give us
At a minimum, we see our market opportunities
greater flexibility and speed to reliably deliver
company-wide tripling over the next five years.
Enron is laser-focused on earnings per share,
and we expect to continue strong earnings per-
that result in price and service advantages.
formance. We will leverage our extensive business
• Risk management skills that enable us to offer
networks, market knowledge and logistical exper-
ENRON ANNUAL REPORT 2000
tise to produce high-value bundled products for an
2
widespread logistical solutions.
• Unparalleled liquidity and market-making abilities
reliable prices as well as reliable delivery.
• Innovative technology such as EnronOnline to
increasing number of global customers.
deliver products and services easily at the lowest
Competitive Advantages
possible cost.
Our targeted markets are very large and are
These capabilities enable us to provide high-
undergoing fundamental changes. Energy deregu-
value products and services other wholesale service
lation and liberalization continue, and customers
providers cannot. We can take the physical compo-
are driving demand for reliable delivery of energy
nents and repackage them to suit the specific needs
at predictable prices. Many markets are experienc-
of customers. We treat term, price and delivery as
ing tighter supply, higher prices and increased
variables that are blended into a single, compre-
volatility, and there is increasing interdependence
hensive solution. Our technology and fulfillment
within regions and across commodities. Similarly,
systems ensure execution. In current market envi-
the broadband industry faces issues of overcapacity
ronments, these abilities make Enron the right
and capital constraint even as demand increases for
company with the right model at the right time.
The Astonishing Success of EnronOnline
In late 1999 we extended our successful busi-
wholesale services income before interest, minority
interests and taxes (IBIT) increased 72 percent to $2.3
ness model to a web-based system, EnronOnline.
billion. Over the past five years, as physical volumes
EnronOnline has broadened our market reach,
have increased, wholesale IBIT has grown at a com-
accelerated our business activity and enabled us
pounded average annual rate of 48 percent, and we
to scale our business beyond our own expectations.
have had 20 consecutive quarters of year-over-year
By the end of 2000, EnronOnline had executed
growth. We have established core wholesale busi-
548,000 transactions with a notional value of $336
nesses in both natural gas and power in North
billion, and it is now the world’s largest web-based
America and Europe, where we are market leaders.
eCommerce system.
In North America, we deliver almost double
With EnronOnline, we are reaching a greater
the amount of natural gas and electricity than the
number of customers more quickly and at a lower
second tier of competitors. Our network of 2,500
cost than ever. It’s a great new business generator,
delivery points provides price advantages, flexibility
attracting users who are drawn by the site’s ease of
and speed-to-market in both natural gas and power.
use, transparent, firm prices and the fact that they
Natural gas, our most developed business, has seen
are transacting directly with Enron. In 2000 our
substantial volume growth throughout the United
total physical volumes increased significantly as a
States and Canada. In 2000 our physical natural gas
direct result of EnronOnline.
volumes were up 77 percent to 24.7 billion cubic feet
per day (Bcf/d). Physical power volumes were up 52
left page:
Jeffrey K. Skilling
President and CEO
right page:
Kenneth L. Lay
Chairman
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
EnronOnline has expanded to include more than
player, and we are optimizing our advantage to
conduct cross-border transactions.
We are extending Enron’s proven business
1,200 of our products. It also has streamlined our
approach to other markets, and integrating
back-office processes, making our entire operation
EnronOnline into all our businesses as an accelera-
more efficient. It has reduced our overall transaction
tor. Our growth rates are rising in areas such as
costs by 75 percent and increased the productivity
metals, forest products, weather derivatives and coal.
of our commercial team by five-fold on average.
We expect these businesses to contribute to earnings
We are not sitting still with this important new
even more significantly in 2001.
business tool — in September 2000 we released
Enron Energy Services
EnronOnline 2.0, which added even more customer
Our retail unit is a tremendous business that
functionality and customization features and
experienced a break-out year in 2000. We signed
attracted more customers.
contracts with a total value of $16.1 billion of cus-
Enron Wholesale Services
tomers’ future energy expenditures, almost double
The wholesale services business delivered
the $8.5 billion signed in 1999. We recorded increas-
record physical volumes of 51.7 trillion British
ing positive earnings in all four quarters in 2000, and
thermal units equivalent per day (TBtue/d) in 2000,
the business generated $103 million of recurring IBIT.
compared to 32.4 TBtue/d in 1999. As a result,
Energy and facilities management outsourcing is
ENRON ANNUAL REPORT 2000
EnronOnline has enabled us to scale quickly,
soundly and economically. Since its introduction,
3
now a proven concept, and we’ve established a
businesses and offer viewers at home an additional
profitable deal flow, which includes extensions of
convenient way to choose and receive entertain-
contracts by many existing customers. Price volatility
ment. Enron provides the wholesale logistical services
in energy markets has drawn fresh attention to our
that bridge the gap between content providers and
capabilities, increasing demand for our services. No
last-mile distributors. Full-length movies-on-demand
other provider has the skill, experience, depth and
service has been successfully tested in four U.S.
versatility to offer both energy commodity and
metropolitan markets.
price risk management services, as well as energy
Enron Transportation Services
asset management and capital solutions. In 2001
The new name for our gas pipeline group accu-
we expect to close approximately $30 billion in
rately reflects a cultural shift to add more innovative
new total contract value, including business from
customer services to our efficient pipeline operation.
our newest market, Europe.
To serve our customers more effectively, we are
Enron Broadband Services
increasingly incorporating the web into those rela-
We have created a new market for bandwidth
tionships. Customers can go online to schedule nomi-
intermediation with Enron Broadband Services. In
nations and handle inquiries, and they can transact
2000 we completed 321 transactions with 45 coun-
for available capacity on EnronOnline. The pipelines
16.1
51.7
32.4
27.3
8.5
3.8
Other
Electricity
Natural Gas
98
99
00
98
WHOLESALE SERVICES – PHYSICAL VOLUMES
(trillion British thermal units equivalent per day)
continued to provide strong earnings and cash flow
mediation capabilities to include a broad range of
in 2000. Demand for natural gas is at a high in the
network services, such as dark fiber, circuits, Internet
United States, and we’re adding capacity to take
Protocol service and data storage. Our opportunities
advantage of expansion opportunities in all markets.
are increasing commensurately.
New capacity is supported by long-term contracts.
field is network connectivity — providing the
ENRON ANNUAL REPORT 2000
00
terparties. We are expanding our broadband inter-
Part of the value we bring to the broadband
4
99
ENRON ENERGY SERVICES –
VALUE OF CONTRACTS ORIGINATED
($ in billions)
Strong Returns
Enron is increasing earnings per share and
switches, the network intelligence and the inter-
continuing our strong returns to shareholders.
mediation skills to enable the efficient exchange
Recurring earnings per share have increased
of capacity between independent networks. We
steadily since 1997 and were up 25 percent in
operate 25 pooling points to connect independent
2000. The company’s total return to shareholders
third-parties — 18 in the United States, six in
was 89 percent in 2000, compared with a negative
Europe and one in Japan. At least 10 more are
9 percent returned by the S&P 500. The 10-year
scheduled to be completed in 2001.
return to Enron shareholders was 1,415 percent
Enron also has developed a compelling
compared with 383 percent for the S&P 500.
commerical model to deliver premium content-on-
Enron hardly resembles the company we were
demand services via the Enron Intelligent Network.
in the early days. During our 15-year history, we have
Content providers want to extend their established
stretched ourselves beyond our own expectations.
We have metamorphosed from an asset-based
EnronOnline will accelerate their growth. We plan
pipeline and power generating company to a
to leverage all of these competitive advantages to
marketing and logistics company whose biggest
create significant value for our shareholders.
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-
Kenneth L. Lay
tions. We have a proven business concept that is
Chairman
eminently scalable in our existing businesses and
adaptable enough to extend to new markets.
As energy markets continue their transformation, and non-energy markets develop, we are
poised to capture a good share of the enormous
Jeffrey K. Skilling
opportunities they represent. We believe wholesale
President and
gas and power in North America, Europe and Japan
Chief Executive Officer
380
391
236
351
59
23
3
98
99
00
ENRON TRANSPORTATION SERVICES
REPORTED INCOME BEFORE INTEREST AND TAXES
($ in millions)
1Q
2Q
3Q
4Q
ENRON BROADBAND SERVICES –
2000 BANDWIDTH TRANSACTIONS
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 from just $17 billion today to
$1.4 trillion within five years.
Taken together, these markets present a $3.9
trillion opportunity for Enron, and we have just
scratched the surface. Add to that the other big
steel, coal and air-emissions credits — and the
opportunity rises by $830 billion to reach nearly
$4.7 trillion.
Our talented people, global presence, financial strength and massive market knowledge have
created our sustainable and unique businesses.
ENRON ANNUAL REPORT 2000
markets we are pursuing — forest products, metals,
5
In Volatile
Markets,
EVERYTHING CHANGES BUT US
ENRON ANNUAL REPORT 2000
When customers do business with
Enron, they get our commitment to reliably 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 networks with thousands of delivery points,
giving us multiple options and a distinct
service 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 pricing 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 physical volumes drive our wholesale profits.
We see ample opportunities for further
volume growth in existing and new markets. Enron’s ability to deliver is the one
constant in an increasingly complex and
competitive world.
6
Enron blends these four elements together
to deliver premium logistical solutions.
>>
Knowledgeable Pricing
• Enron’s market activity captures massive
amounts of pricing information.
• Pricing information helps Enron effectively
manage its customers’ price risk and its
own.
• Enron allows customers to choose the
optimal way to set a predictable price.
Technology Advantages
• Information systems quickly distribute
real-time information.
• EnronOnline extends Enron’s reach to
increase volumes and market share.
• Enron’s sophisticated systems track
prices, register exposures and monitor
customer credit.
Scalable Fulfillment
• EnronOnline 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.
ENRON MAKES
ANNUALMARKETS
REPORT 2000
Extensive 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.
7
created liquidity on a scale never seen before. It is a
dynamic business accelerator: It took nearly a
Wholesale services is Enron’s largest and fastest
decade for Enron’s daily gas transactions to reach
growing business, with sustainable growth oppor-
13.9 Bcf in 1999. Just 12 months later, EnronOnline
tunities in each of its markets. In 2000 income before
had helped to practically double daily transactions
interest, minority interests and taxes (IBIT) rose 72
to 24.7 Bcf.
percent to $2.3 billion, with record physical energy
EnronOnline magnifies the success of our
volumes of 51.7 trillion British thermal units equiv-
existing business, which springs from the scale and
alent per day (TBtue/d) — a 59 percent increase
scope of our established networks. We touch more
over 1999.
parts of North America’s energy system than any
For the past five years, wholesale services
other merchant, with access to upwards of 2,500
earnings have grown at an average compounded
distinct delivery points each day. The widespread
growth rate of 48 percent annually, and our com-
delivery options and possibilities of our network
petitive position is growing stronger. Customers
give us a price and service advantage. Our networks
transact with Enron because we offer products and
and presence in nationwide energy markets also
services few others can match. With our flexible
enable us to capture and distribute massive amounts
networks and unique capabilities in risk manage-
of information about real-time market supply and
ment and finance, we deliver the widest range of
demand, grid constraints and bottlenecks. When
reliable logistical solutions at predictable prices.
the market moves, we are able to conduct business
Enron delivers more than two times the natural
gas and power volumes as does its nearest energy
while competitors are still fact-finding.
Our people also make a difference. We are
marketing competitor. Our formidable lead comes
able to attract the best and the brightest and place
from our willingness to enter markets early and
them in an entrepreneurial atmosphere in which
serve as a market-maker to build liquidity and price
they can thrive. With our intellectual capital, we
transparency. Breakthrough technology applications,
develop premium high-margin structured products
such as EnronOnline, accelerate our market penetra-
that draw on our liquidity and market knowledge.
tion. These competitive advantages have made us
A good example is the gas-marketing-services hub
the most successful energy marketer in the two
in Chicago we launched with People’s Energy in
largest deregulating energy markets, North America
March 2000. Known as Enovate, this venture opti-
and Europe. We expect to achieve a similar leader-
mizes People’s 30 Bcf a year of Chicago-area storage
ship position as we extend our business approach
capacity and related transportation. It played a role
to new regions, products and industries.
in increasing our gas volumes in the central United
Our business has flourished with EnronOnline.
Launched in November 1999, EnronOnline handled
548,000 transactions in 2000 with a gross notional
States by 156 percent, the largest increase in our
2000 North American physical volumes.
We continually assess the necessity of adding
value of $336 billion. EnronOnline is unquestionably
or owning assets in a region. Sometimes it is less
the largest web-based eCommerce site in the world
expensive to own an asset than to replicate the
and dwarfs all other energy marketing web sites
asset in the market through contracting and mar-
combined. By the fourth quarter of 2000, it account-
ket-making. We are developing generation plants
ed for almost half of Enron’s transactions over all
to sell merchant power to high-demand markets,
business units. EnronOnline has pushed productivity
including proposed facilities in California, Florida,
through the roof: Transactions per commercial person
Texas, Louisiana and Georgia. But as liquidity
rose to 3,084 in 2000 from 672 in 1999. EnronOnline
increases, asset ownership may no longer be neces-
Version 2.0, launched in September 2000, has attract-
sary. We plan to sell Houston Pipe Line Company,
ed more users with its additional functionality (see
and Louisiana Resources Company is now held by
“EnronOnline” next page).
Bridgeline Holdings, L.P., a joint venture in which
Enron North America
Enron retains an interest. Additionally, in the second
In North America, Enron’s physical natural gas
quarter of 2001 we expect to close the sale of five
volumes increased 77 percent to 24.7 billion cubic
of the six electricity peaking generation units in
feet per day (Bcf/d) in 2000 from 13.9 Bcf/d in 1999.
operation. The result is the same earnings power
Power deliveries increased 52 percent to 579 million
with less invested capital.
megawatt-hours (MWh) from 381 million MWh the
year before.
EnronOnline has been a runaway success in
Mexico’s move toward liberalizing its energy
markets should gain intensity and speed with its
new government. Increased cross-border electricity
North America. It accounted for 74 percent of
transactions between Mexico and the United States
North American volume transacted in 2000, and
seem inevitable. Our activities in Mexico seek to
ENRON ANNUAL REPORT 2000
ENRON WHOLESALE SERVICES
9
optimize both the Mexican electricity market and
mediaries such as Enron to hedge their fuel and
cross-border activity between the two countries.
power prices.
Enron also is active in South America, where
On the Continent, our power volumes
we own and develop assets to help create an
increased to 50 million MWh in 2000 from 7 million
energy network.
MWh in 1999. We are transacting at all major
Enron Europe
country interconnections, benefiting from cross-
We are rapidly extending Enron’s market-
border opportunities. We closed our first-ever
making approach into the deregulating European
transaction in France and are an active player in
markets, focusing on the U.K., the Continent and
Germany and Switzerland. We are beginning to
the Nordic region. The Continent is still in the early
partner with utilities to offer comprehensive port-
stages of liberalization. Although the European
folio management services, such as our agreement
Union has mandated liberalization of the power and
to purchase and distribute power jointly with Swiss
natural gas markets, each country is responding at
Citypower AG, which controls 19 percent of the
its own pace. The velocity of transactions is rising on
Swiss electricity market.
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-
EnronOnline
alent per day (TBtue/d) in 2000 from 4.1 TBtue/d in
1999. We enjoy several competitive advantages in
EnronOnline successfully leverages Enron’s core
Europe: We are the only pan-European player; we
market-making capabilities, benefiting both our
have a proven business strategy; we entered the
customers and Enron. The web-based system
market early to build a presence; and we have
makes it easier to do business with Enron. It
attracted a talented and skilled local workforce.
also accelerates the growth of Enron’s existing
Our cross-border capabilities are becoming
businesses and facilitates quick and efficient
increasingly important as markets interconnect.
entry into new markets.
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.
Just as in North America, EnronOnline is
increasing Enron’s reach and volumes in Europe
and is a prime driver of liquidity. Its simple con-
In Spain, electricity demand is growing faster
tracts, multi-currency capabilities, transparent and
than anywhere else in Europe, and there are limit-
competitive prices and easy accessibility have won
ed import and export capabilities. Enron is respond-
EnronOnline rapid acceptance.
ing to this opportunity by developing a 1,200-
In the U.K., power and gas volumes more than
ENRON ANNUAL REPORT 2000
doubled, with power rising to 113 million MWh in
10
megawatt plant in Arcos, south of Seville, that
should close financing in 2001.
2000, and gas volumes climbing 119 percent to reach
Continental gas liquidity is just starting to
3.2 Bcf/d. Several market factors are likely to create
increase. Our volumes grew to 472 million cubic
more business for us. The U.K.’s New Electricity
feet per day (MMcf/d) in 2000 from 53 MMcf/d in
Trading Agreements, which replace the existing
1999. While the market is in its early stages, Enron
U.K. power pool, are scheduled to be implemented
has managed to increase weekly transactions from
by the second quarter of 2001. The agreements
about 5 to 100 over the course of a year. In
will result in increased price volatility, and Enron
October we initiated the first gas supply deal in
is well-positioned to help customers manage this
Germany to the local utilities of Heidelberg,
risk. Additionally, lower power prices are shrinking
Tuebingen and Bensheim. We also are delivering
profit margins for U.K. merchant power plants,
natural gas to some large users in the Netherlands
which increasingly need to turn to market inter-
and France.
We continue to set records in the Nordic
opportunities to support our market-making activi-
region, where we are the largest power marketer.
ties, including inside-the-fence power generation.
Electricity volumes increased nearly 150 percent
Under consideration are a number of sites, which
to reach 77 million MWh in 2000 from 31 million
may be fueled by gas, liquefied natural gas or coal.
MWh in 1999. Enron’s Oslo office also is now
Enron Australia
the base of our European weather risk manage-
Enron’s market-making ability has been successfully extended to Australia, where Enron is a
As more Nordic companies outsource energy
leading provider of logistical solutions in the coun-
supply and management, Enron’s products and serv-
try’s power market. During 2000 we introduced
ices — including advanced technology applications
weather risk management products in the region,
— are eagerly sought. In December Enron entered
offering temperature-based products for Sydney,
into a two-year portfolio management agreement
Melbourne, Hong Kong, Tokyo and Osaka. The
with UPM-Kymmene Corp., one of the world’s
Sydney office also provides a strategic platform for
largest forest products companies. Enron will assist
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 realtime pricing for more than 1,200
products on EnronOnline. This
tremendous market liquidity
attracts customers and further
increases Enron’s volumes and
market share.
CUSTOMER RELATIONSHIPS
EnronOnline provides customers
with a more convenient way to discover prices and do business with
Enron, which increases transaction
volumes and attracts new customers. The system automatically
taps into Enron’s sophisticated customer-credit profiles to protect
Enron from credit risk.
INFORMATION SYSTEMS
EnronOnline is fully integrated
with Enron’s proprietary information systems, which provide critical
market information, process thousands of deals and help assess and
manage market and other risks. As
a result, Enron manages risks
instantaneously even in the most
volatile markets.
SCALABILITY
Enron’s well-tuned back-office system, integrated with EnronOnline,
has proven its ability to scale as
Enron’s total transactions have
grown from an average of 650 a
day at EnronOnline’s November
1999 launch to an average of
7,900 a day by year-end 2000.
As EnronOnline expands products
and volumes, Enron’s scalable
back-office will continue to be
a competitive advantage.
UPM-Kymmene in optimizing its Nordic power port-
band businesses, as well as providing support for
folio of approximately 14 terawatt hours.
Enron’s operations in the Asia-Pacific region.
Enron Japan
Extending to New Markets
Enron Japan formally opened its Tokyo office
Enron’s durable business approach, which has
in October 2000. Japan represents an enormous
driven our success in the natural gas and electricity
opportunity: Its electricity rates are the highest in
markets, is eminently applicable to other markets
the world, and electricity consumption is second
and geographical regions. While we are remaining
only to the United States. We have attracted top
focused on increasing earnings and opportunities
talent to develop wholesale and joint venture possi-
in gas and power, we also are extending Enron’s
bilities, and have introduced our first product for
method to large, fragmented industries and prod-
large electricity users — three- to five-year contracts
ucts, where intermediation can make markets
that will reduce electricity bills immediately by up
more efficient and responsive to customer needs.
to 10 percent the first year, with the possibility of
We expect these new businesses to contribute to
further reductions in subsequent years. Our first
earnings in 2001.
contracts were signed in early 2001.
Through joint ventures with several Japanese
companies, Enron is exploring merchant plant
Enron Metals was launched in July 2000 when
Enron acquired the world’s leading merchant of nonferrous metals, MG plc. Together, MG and Enron are
ENRON ANNUAL REPORT 2000
ment business.
11
a powerful team. Enron’s financial resources and
Coal intermediation moved to a new level in
eCommerce abilities add a new dimension to MG’s
2000. The industry has been radically affected by the
widespread physical merchant skills and excellent
worldwide deregulation of the electricity industry.
customer relationships. The early results are right on
Like natural-gas-fueled generation, coal-burning
target, with physical volumes up 31 percent in 2000.
generators require flexible terms and risk-manage-
Enron Metals opens an additional door to
ment protection. Enron is able to provide unrivaled
large energy customers. Cominco Ltd., a zinc pro-
logistical support. Our coal business has led us to
ducer and an Enron Metals customer in Vancouver,
participate in sea and land logistics as well.
British Columbia, worked with Enron to halt zinc
Weather has never been better for us. Our
production for six weeks and sell its power into the
weather risk management business is up about
Northwestern power market, where it was needed.
five-fold to 1,629 transactions in 2000 from 321
Enron North America protected Cominco by struc-
transactions the year before. As in all of our mar-
turing a fixed-price swap to guarantee the sale
kets, we bring cross-commodity capabilities to our
price of the power, and Enron Metals arranged to
weather products. For instance, we closed a three-
One Coal Contract
Covers All Logistics
The process of sourcing and delivering
coal to an electricity generator is a complicated process. Enron provides a single,
comprehensive solution to manage all
logistics and risk, whether the coal is
sourced domestically or abroad. In some
cases, we have reduced the customer’s
cost of coal by as much as 10 percent.
COAL PRICE AND
SUPPLY RISKS
Enron allows generators
to purchase coal at flexible
terms, such as long-term
fixed rates or a maximum
price. Supply and price are
assured because Enron has
access to multiple sources
all over the globe. Enron is
on its way to becoming the
world’s largest wholesale
coal merchant.
year precipitation transaction that provides finan-
Cominco’s obligations. Cominco’s profit from the
cial compensation linked to natural gas prices if
deal exceeded the annual profit it makes from
precipitation falls below a pre-determined mini-
producing zinc.
mum. The weather unit worked with several other
Enron groups to transfer Enron’s risk, ultimately
ket potential. Enron has leveraged its internal risk
transacting with 10 external companies in three
management processes and systems to create a real-
markets (natural gas, weather products and insur-
time, market-based online credit evaluation system.
ance). The bundled end-product resulted in an
The idea is simple: Existing credit ratings and scoring
effective hedge for the customer.
mechanisms are not market-based and cannot
ENRON ANNUAL REPORT 2000
CURRENCY RISKS
Like oil, imported coal is
denominated in U.S. dollars.
A British generator, however,
collects electricity payments
in pounds sterling. When
appropriate, Enron includes
currency hedges in its contracts to protect customers if
the value of the pound drops
against the dollar.
supply a portion of the zinc required to fulfill
Enron Credit is a new business with strong mar-
12
TRANSPORTATION RISKS
Imported coal travels by sea
and land, and the consumer
usually makes each arrangement separately and bears
the risk if prices or capacity
change. Enron delivers a complete logistical solution for its
customers, managing both
the process and risk as part
of just a single contract for
the coal. Enron also provides
complete domestic logistics.
Crude oil. We now average crude deliveries of
respond in real time to credit events. This means
7.5 TBtue/d to 240 customers in 46 countries. We
creditors must figure out their credit risk exposure
have introduced the first-ever 24×7 commodity
on their own. Enron Credit posts the cost of credit
market of a West Texas Intermediate crude product
as a simple interest rate for more than 10,000 com-
on EnronOnline, allowing our customers to respond
panies on its web site, www.enroncredit.com. Enron
to market-changing events at any time, day or
Credit also gives corporations the ability to hedge
night. We also concluded our biggest physical jet
their credit risk via a bankruptcy product.
fuel contract, providing 100,000 barrels for one
year at the flexible and market-based prices that
costs competitive with fossil fuel-generation for
the customer needed.
the first time. This cost competitiveness, together
LNG. Enron is establishing a liquefied natural
with government policies supporting renewable
gas (LNG) network to create merchant LNG opportu-
energy in most key markets and growing consumer
nities and to bring more gas to areas of the world
demand for green energy, have fueled 30 percent
that need it. Our LNG-related assets in operation
annual growth over the past five years.
and development in the Caribbean and the Middle
With focused efforts in the world’s three key
East form part of this network. We source surplus
wind power markets — Germany, Spain and the
LNG from the Middle East and Asia and currently
United States — Enron Wind completed 2000 with
market it in the United States.
revenues of approximately $460 million. Strong
Forest Products. Enron has offered pulp, paper
growth in both the United States and Europe will
and lumber financial products for several years, and
account for a projected sales increase of approxi-
now we are marketing physical volumes. In 2000 we
mately 100 percent in 2001.
acquired Garden State Paper Co., which gives us
access to 210,000 tons of newsprint a year and
four 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 Clickpaper.com™ 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 products 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 comprehensive logistical support.
Enron Global Assets
Enron Global Assets manages and optimizes
Enron’s assets outside North America and Europe.
Enron has a solid portfolio of asset-based businesses. 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 marEnron Wind Corp.
The economics of wind power are more
promising than ever, creating significant growth
for Enron Wind. Technological advancements and
lower costs associated with today’s larger, more
efficient wind turbines have made wind power
ENRON ANNUAL REPORT 2000
ket-making and services businesses.
13
ENRON ENERGY SERVICES
Enron Energy Services is the retail arm of Enron,
serving business users of energy in commercial and
versatility to provide a comprehensive solution to
address uncertain, rapidly changing markets.
Customer Relationships
The core of Enron’s retail business is developing
industrial sectors. Our comprehensive energy out-
long-term, multi-year relationships with our cus-
sourcing product has proven an exceptionally
tomers. The value at contract signing is only a part
effective way for companies to reduce their costs,
of the potential value that can be realized when
manage risks of energy price volatility, improve
satisfied customers seek to add additional Enron
their energy infrastructure and focus resources
services to their contracts.
on their core businesses.
Enron Energy Services recorded its first prof-
Of the $16.1 billion in total contract value
signed in 2000, approximately $3 billion came from
itable quarter as expected at the end of 1999, and
expansions of existing contract relationships. For
continued to grow rapidly through 2000, with
example, in 1998, we signed a five-year, $250 million
increasing profits in all four quarters of 2000 and
contract with World Color Press, which later merged
aggregate recurring income before interest and
with Quebecor Printing. In 2000, based on Quebecor
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 contract value to more than $30 billion since late 1997.
This success reflects growing acceptance of
Enron’s energy outsourcing product — acceptance
Measuring Performance
that has meant an increasing rate of new contract-
Companies can’t improve what they can’t measure.
ing. Our retail energy success in 2000 also reflects
That’s why Enron has developed a state-of-the-art
our strong emphasis on contract execution and
Performance Measurement Center (PMC) that moni-
implementation and on excellence in customer
tors, predicts and changes customer energy consump-
service. Additionally, 2000 was marked by increased
tion. Powered by a flexible Internet-based link that
activity in Europe — an untapped market for
connects customers’ building controls to the PMC,
energy outsourcing.
and operated by a team of energy management pro-
We are positioned to dramatically increase our
profitability in 2001. Retail energy earnings will be
fessionals, the PMC is a unique resource, enabling
genuinely proactive energy management.
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 unprecedented challenge and opportunity in 2000. In
national terms, steady movement toward a functioning deregulated energy marketplace continues.
More than half the country’s population is scheduled
to be able to choose their electricity supplier by
World’s satisfaction, the relationship was extended
2004. The ongoing energy crisis in California has
and expanded to a 10-year, $1 billion agreement
focused everyone’s attention on the complexities
including not only commodity supply, but also over-
of incomplete deregulation, the risks of unreliable
all energy management, including the design and
supply and the costs of unmanaged energy demand.
implementation of improvements in energy asset
Enron provides commercial and industrial energy
infrastructure in more than 60 facilities operated
customers with the solutions they need, bringing
by Quebecor World.
reliability and price-risk management to a market
otherwise fraught with uncertainty.
ENRON ANNUAL REPORT 2000
The volatility of energy prices across the coun-
14
We value our long-term customer relationships, and the health of these relationships can’t
be left to luck, instinct or vague impressions. Our
try has heightened the value of energy management
Customer Satisfaction Program continually cap-
and increased the demand for retail services. With
tures our performance against expectations and
our series of capabilities — energy commodity and
benchmarks those results. Further, it is designed
price risk management capabilities, energy asset
to ensure identification and resolution — including
management and capital solutions — we remain
prompt escalation to the executive level if needed
the only firm with the skill, experience, depth and
— of any issue that might arise.
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 customers, and continues to grow at a substantial rate.
The profitability of these smaller accounts comes
from Enron’s long-term price risk management capability and Enron Direct’s low-cost sales channels. Our
high expectations for medium-size businesses are
SENSIBLE INVESTMENTS
PMC data identify opportunities
to improve efficiency through
equipment upgrades or through
changes in processes, without
adversely affecting a client’s operations. The PMC’s sophisticated
modeling systems calculate a
cost-benefit analysis for every
potential investment in energy
assets. This analysis includes a
real-time correlation with the
price of commodities — to help
companies not only make decisions but also to show them that
there are decisions to be made.
REDUCING PEAK DEMAND
The cost of energy varies widely
over the course of the day. The
PMC uses real-time pricing information, and the stream of data
coming from the customer site, to
automatically and remotely reduce
customers’ low-priority energy use
when the price of energy is highest
—ensuring that the customer gets
maximum benefit for every dollar
spent on energy.
DIAGNOSTIC MEASUREMENTS
Most energy users don’t realize
something is wrong until the energy bill comes, and then it is much
too late. But with the Enron PMC,
real-time monitoring means that
unusual changes in energy demand
are tracked instantaneously,
enabling Enron and the customer
to identify and address problems
before energy costs get out of
hand.
MINIMIZING DOWNTIME
When repairs are needed, PMC
personnel can help control the
costs of vendor calls and on-site
repairs through diagnostic data,
and through best-practice management of a network of thousands of
service providers. We work with
service providers to categorize and
analyze the actual cost of repairs.
With Enron’s expertise and scale,
we can improve response times,
reduce downtime and cut the cost
of repairs and maintenance.
reflected by the rapid expansion of the European
operation. Enron Directo 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 deregulated energy markets. We will continue to provide
sensible market solutions for the effective managedynamic global retail business to drive company
profits and sustain our reputation for innovation.
ENRON ANNUAL REPORT 2000
ment of energy costs, and will continue to build a
15
ENRON BROADBAND SERVICES
Enron Broadband Services made excellent
progress executing its business plan in 2000. The
bandwidth: dark fiber, circuits, Internet Protocol (IP)
services (transporting data packets according to IP
standards) and storage capacity.
To date we have transacted with 45 counter-
build-out of Enron’s 18,000-mile global fiber
parties, including U.S. and international telecom-
network is near completion, bandwidth interme-
munications carriers, marketers and resellers and
diation transaction volume is growing exponen-
network service providers. In 2001 we expect to
tially, and we are testing the first commercially
deliver 570,000 terabytes as we grow both the
sound premium content-on-demand service.
breadth and the depth of our network and prod-
Clearly, the Enron business model is working in
ucts. We offer 32 bandwidth-related products on
the broadband market.
EnronOnline.
Enron Broadband Services’ goals are to:
Enron’s ability to provide bandwidth-on-
• Deploy the most open, efficient global broadband
demand at specified service levels and guaranteed
network, the Enron Intelligent Network.
• Be the world’s largest marketer of bandwidth and
delivery enables customers to access capacity without necessarily building, buying or expanding their
network services.
• Be the world’s largest provider of premium content delivery services.
The Enron Intelligent Network
We expect to be the first to provide broad-
The Value of Bandwidth
Intermediation
band connectivity on a global basis through the
Enron Intelligent Network (EIN). The EIN operates
Enron’s bandwidth intermediation business gives the
as a “network of networks,” providing switching
broadband industry new tools — standard contracts,
capacity between independent networks for low-
liquidity, price transparency, connectivity, quick provi-
cost scalability. We will continue to add pooling
sioning and flexibility — to help industry participants
points, which physically interconnect third parties’
optimize assets and opportunities.
networks and serve as reference points for bandwidth 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.
EIN’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 EIN 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
own networks. Our bundled intermediation package
over the network to ensure quality and avoid
includes IP transport over land, under the sea, and
congested routes.
via satellite, at both fixed and peak-usage terms.
ENRON ANNUAL REPORT 2000
The BOS automates the transaction process
16
For example, we are working with i2 Technologies,
all the way from the initial request for capacity to
a global provider of intelligent eBusiness solutions,
provisioning, electronic billing and funds transfer.
to connect with customers in six cities, including
With the BOS, Enron has created the first scalable,
four overseas. i2 has provisioned local-loop and
fully integrated transaction processing platform
long-haul capacity through Enron, and has low-
for delivering bandwidth capacity.
cost access to our network’s equipment as if it
Bandwidth Intermediation
were its own, but it now has the flexibility to
We exceeded our expectations by delivering
more than 72,000 terabytes of network services
in 2000, demonstrating rapidly growing industry
quickly add or discard capacity as day-to-day
needs change.
Data storage is a $30 billion-per-year business,
acceptance of our flexible services. We are creating
and we know customers would like to purchase it
the risk management building blocks to manage
on an as-needed basis. In January 2001 we com-
almost every element of the network in addition to
pleted our first data storage transactions with a
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 changing storage needs.
Content Services
In April 2000 Enron signed an agreement with
a U.S. 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
CONNECTIVITY
Enron is facilitating network connectivity by establishing pooling
points in major metropolitan areas
to switch bandwidth from one
independent network to another.
The pooling points help optimize
network capacity by creating common physical delivery points and
access to multiple locations.
DYNAMIC PROVISIONING
Enron’s pooling point infrastructure allows companies to provision
bandwidth quickly, eliminating the
long lead times associated with
circuit provisioning in the past.
Enhanced connectivity and dynamic provisioning allow bandwidth
users to take advantage of bandwidth market opportunities on
short notice.
NETWORK CONTROL
Within Enron’s Broadband Operating
System (BOS) lie several unique
capabilities that monitor switching
activity between networks and
control the provisioning of circuits.
The Enron BOS can measure performance in real time at every
layer of the network and ensure
quality of service and delivery.
SCALABILITY
The Enron Intelligent Network
(EIN) has extensive reach throughout the continental United States
and connects to Europe and Asia.
With its broad connectivity, the
EIN is designed to scale without
the cost of building additional
infrastructure. Leveraging the
EnronOnline platform provides
additional reach and gives customers a new, easy option for
their bandwidth needs.
applications not yet imagined.
Market Innovator
Enron’s innovative approach is as valuable in
broadband as it is in energy. Our proven intermediation 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 comparticular 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.
ENRON ANNUAL REPORT 2000
pelling commercial model. We are not tied to any
17
ENRON TRANSPORTATION
SERVICES
needs. Northern Natural Gas, for example, has used
interruptible storage products that extend its capability to meet the growing demand for services to
The Gas Pipeline Group formally changed its
manage physical positions. Transwestern Pipeline
name in September 2000 to Enron Transportation
Company is offering shippers increased service
Services to emphasize its ability to deliver innovative
flexibility by accessing third-party storage. Across
solutions to its customers. These emerging services
all pipelines, web-based applications have been
augment our core competency: operating interstate
introduced to allow customers to better manage
pipelines safely and efficiently. In 2000 we continued
transactions and allow the pipelines to maximize
our record of strong returns with consistent earnings
their capacity offerings. Northern Natural Gas,
and cash flow. Income before interest and taxes
Transwestern Pipeline and Florida Gas Transmission
reached $391 million, up from $380 million in 1999.
began to sell available capacity on EnronOnline
Cash flow from operations rose to $415 million
in 2000 to give customers the convenience of
in 2000 from $370 million in 1999. Throughput
eCommerce transacting (see “Purchasing Capacity
remained relatively unchanged in 2000 at 9.13
Through EnronOnline” on this page).
Purchasing Capacity
Through EnronOnline
Enron Transportation Services has introduced several innovative customer services,
including the use of EnronOnline. Northern
Natural Gas, Transwestern Pipeline and
PRICE DISCOVERY
Knowledge helps customers make better
decisions. Prices are fully transparent and
instantly accessible, which allows buyers to
know what their transportation costs will be
when they are buying their gas.
Florida Gas Transmission are selling available firm and interruptible capacity on
OPTIMIZING THE ASSETS
When a pipeline is not totally subscribed,
EnronOnline lets the market know it is available. 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.
EnronOnline in addition to selling capacity
through traditional methods. Customers
already using EnronOnline to transact gas
can now arrange transportation at the
same time.
billion cubic feet per day (Bcf/d), compared to 9.18
Bcf/d the previous year.
ENRON ANNUAL REPORT 2000
Together, our interstate pipelines span approxi-
18
Northern Natural Gas
Northern Natural Gas, Enron’s largest pipeline,
has approximately 16,500 miles of pipeline extend-
mately 25,000 miles with a peak capacity of 9.8
ing from the Permian Basin in Texas to the Great
Bcf/d. We transport 15 percent of U.S. natural gas
Lakes, providing extensive access to major utilities
demand. We connect to the major supply basins in
and industrials in the upper Midwest. The pipeline
the United States and Canada, and we continue to
has market area peak capacity of 4.3 Bcf/d. It inter-
increase capacity from those basins to our major
connects with major pipelines, including Great
markets. We have added 840 million cubic feet per
Lakes, Transwestern, El Paso, Northern Border and
day (MMcf/d) over the past two years, and nearly 1
Trailblazer, to offer excellent northern, southern
Bcf/d is scheduled to enter service in the next three
and western flow capabilities. Ninety-five percent
years. At the same time, our expense per MMcf/d
of market area capacity is contracted through 2003.
has declined by 26 percent from 1992 to today.
Enron Transportation Services pipelines have
Market area demand is expected to increase
considerably with the development of approximately
brought to market a variety of new products and
2,000 megawatts of gas-fired generation over the
services specifically tailored to address customer
next three years. The pipeline has developed innova-
tive and flexible services to meet the transportation,
under long-term agreements with an average term
storage and balancing needs of power producers. It
of six years. Its Project 2000 extension — 34 miles of
completed construction in October 2000 of a link to
pipe from Manhattan, Illinois, to a point near North
445 megawatts of peaking power operated by Great
Hayden, Indiana — will provide 544 MMcf/d to
River Energy in Minnesota. The link will transport up
industrial markets in Indiana with a targeted in-
to 120 MMcf/d of gas.
service date of late 2001.
Transwestern Pipeline
Transwestern operates approximately 2,500
Late in 2000, Northern Border Pipeline settled
its rate case, allowing it to switch from a cost-of-
miles of pipe with 1.7 Bcf/d of peak capacity. With
service tariff to a stated-rate tariff, which will provide
pipeline originating in the San Juan, Permian and
rate certainty to customers, increase competitiveness
Anadarko Basins, Transwestern can move gas east
and allow flexibility in services provided.
to Texas or west to the California border. To respond
Northern Border Partners also owns interests
to increased gas demand in California, Transwestern
in gathering systems in the Powder River and Wind
Pipeline added compressor facilities near Gallup,
River Basins in Wyoming, and recently signed a letter
New Mexico, in May 2000 to increase mainline
of intent to purchase Bear Paw LLC, which has
capacity by 140 MMcf/d to the California border.
extensive gathering and processing operations in
The new capacity is completely subscribed under
the Powder River Basin and the Williston Basin.
long-term contracts. In 2000 the pipeline also added
The partnership also owns Black Mesa Pipeline, a
several major interconnects to tap into growing
273-mile coal-water slurry pipeline running from
markets east of California.
Kayenta, Arizona, to Mohave Power Station in
The Transwestern system is fully subscribed for
western deliveries through December 2005 and for
eastern deliveries through December 2002. The sys-
Laughlin, Nevada.
Portland General Electric
The sale of Portland General Electric (PGE) to
tem has the potential to quickly increase throughput
Sierra Pacific Resources has been delayed by the
capacity. An expansion project is expected to be filed
effect of recent events in California and Nevada on
this year and completed in 2002.
the buyer. In 2000 the Portland, Oregon-based elec-
Florida Gas Transmission
tricity utility performed well in the face of regional
Florida Gas Transmission serves the rapidly
wholesale price volatility. IBIT rose approximately 12
growing Florida peninsula and connects with 10
percent to $341 million. Total electricity sales reached
major pipelines. It has maintained a competitive
38.4 million megawatt-hours (MWh) compared to
position by staging expansions to keep pace with
31.9 million MWh in 1999. We will continue to drive
demand as it grows. With current peak capacity
performance while we pursue the utility’s sale.
of 1.5 Bcf/d, 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 MMcf/d Phase IV expansion, went into
service on October 1, 2000, and the remainder is
scheduled to go into service in May 2001. The 400MMcf/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 natural gas facilities.
Northern Border Partners, L.P.
Northern Border Partners, L.P. is a publicly
traded partnership (NYSE: NBP), of which Enron
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
ENRON ANNUAL REPORT 2000
is the largest general partner. Northern Border
19
FINANCIAL REVIEW
CONTENTS
21 MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
27 FINANCIAL RISK MANAGEMENT
29 INFORMATION REGARDING FORWARDLOOKING STATEMENTS
29 MANAGEMENT’S RESPONSIBILITY FOR
FINANCIAL REPORTING
30 REPORTS OF INDEPENDENT PUBLIC
ACCOUNTANTS
31 ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
ENRON ANNUAL REPORT 2000
31 ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
20
32 ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
34 ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
CASH FLOWS
35 ENRON CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS’ EQUITY
36 ENRON CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
52 SELECTED FINANCIAL AND CREDIT
INFORMATION (UNAUDITED)
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.
RESULTS OF OPERATIONS
Consolidated Net Income
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. Enron’s 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). Enron’s operating segments include:
Transportation and Distribution. Transportation and
Distribution consists of Enron Transportation Services and
Portland General. Transportation Services includes Enron’s
interstate natural gas pipelines, primarily Northern Natural
Gas Company (Northern), Transwestern Pipeline Company
(Transwestern), Enron’s 50% interest in Florida Gas Transmission
Company (Florida Gas) and Enron’s interests in Northern Border
Partners, L.P. and EOTT Energy Partners, L.P. (EOTT).
Wholesale Services. Wholesale Services includes Enron’s
wholesale businesses around the world. Wholesale Services operates in developed markets such as North America and Europe, as
well as developing or newly deregulating markets including
South America, India and Japan.
Retail Energy Services. Enron, through its subsidiary Enron
Energy Services, LLC (Energy Services), is extending its energy
expertise and capabilities to end-use retail customers in the industrial and commercial business sectors to manage their energy
requirements and reduce their total energy costs.
Broadband Services. Enron’s broadband services business
(Broadband Services) provides customers with a single source for
broadband services, including bandwidth intermediation and the
delivery of premium content.
Corporate and Other. Corporate and Other includes Enron’s
investment in Azurix Corp. (Azurix), which provides water and
wastewater services, results of Enron Renewable Energy Corp.
(EREC), which develops and constructs wind-generated power
projects, and the operations of Enron’s methanol and MTBE
plants as well as overall corporate activities of Enron.
Net income includes the following:
(In millions)
After-tax results before items
impacting comparability
2000
1999
1998
$1,266
$ 957
$ 698
–
–
345
(278)
45
(40)
(131)
$ 893
$ 703
Items impacting comparability: (a)
Charge to reflect impairment by Azurix (326)
Gain on TNPC, Inc. (The New
Power Company), net
39
Gains on sales of subsidiary stock
MTBE-related charges
Cumulative effect of
accounting changes
Net income
$ 979
(a) Tax affected at 35%, except where a specific tax rate applied.
Diluted earnings per share of common stock were as follows:
Diluted earnings per share (a):
After-tax results before items
impacting comparability
2000
1999
1998
$ 1.47
$ 1.18
$ 1.00
0.45
(0.36)
0.07
(0.06)
(0.17)
$ 1.10
$ 1.01
Items impacting comparability:
Charge to reflect impairment by Azurix (0.40)
Gain on The New Power Company, net 0.05
Gains on sales of subsidiary stock
MTBE-related charges
Cumulative effect of
accounting changes
Diluted earnings per share
$ 1.12
(a) Restated to reflect the two-for-one stock split effective August 13, 1999.
Income Before Interest, Minority Interests and Income Taxes
The following table presents income before interest, minority interests and income taxes (IBIT) for each of Enron’s operating
segments (see Note 20 to the Consolidated Financial Statements):
(In millions)
Transportation and Distribution:
Transportation Services
Portland General
Wholesale Services
Retail Energy Services
Broadband Services
Exploration and Production
Corporate and Other
Income before interest,
minority interests and taxes
2000
1999
1998
$ 391
341
2,260
165
(60)
(615)
$ 380
305
1,317
(68)
65
(4)
$ 351
286
968
(119)
128
(32)
$2,482
$1,995
$1,582
Transportation and Distribution
Transportation Services. The following table summarizes
total volumes transported by each of Enron’s interstate natural
gas pipelines.
Total volumes transported (BBtu/d) (a)
Northern Natural Gas
Transwestern Pipeline
Florida Gas Transmission
Northern Border Pipeline
2000
1999
1998
3,529
1,657
1,501
2,443
3,820
1,462
1,495
2,405
4,098
1,608
1,324
1,770
(a) Billion British thermal units per day. Amounts reflect 100% of each entity’s
throughput volumes. Florida Gas and Northern Border Pipeline are unconsolidated equity affiliates.
ENRON ANNUAL REPORT 2000
Management’s Discussion and Analysis
of Financial Condition and Results
of Operations
21
Significant components of IBIT are as follows:
(In millions)
Net revenues
Operating expenses
Depreciation and amortization
Equity earnings
Other, net
Income before interest and taxes
2000
$650
280
67
63
25
$391
1999
$626
264
66
38
46
$380
1998
$640
276
70
32
25
$351
Net Revenues
Revenues, net of cost of sales, of Transportation Services
increased $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 volumes transported by Transwestern 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 transition cost recovery surcharges, partially offset by a Northern sale
of gas storage inventory in 1999.
Operating Expenses
Operating expenses, including depreciation and amortization, 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 surcharges which had been recovered through revenues.
Equity Earnings
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 relates to 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 EOTT.
Other, Net
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 EOTT. The 1998 amount
included gains from the sale of an interest in an equity investment, substantially offset by charges related to litigation.
ENRON ANNUAL REPORT 2000
Portland General. Portland General realized IBIT as follows:
22
(In millions)
Revenues
Purchased power and fuel
Operating expenses
Depreciation and amortization
Other, net
Income before interest and taxes
2000
$2,256
1,461
321
211
78
$ 341
1999
$1,379
639
304
181
50
$ 305
1998
$1,196
451
295
183
19
$ 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
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 primarily 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:
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
2000
1999
1998
7,433
7,527
4,912
19,872
18,548
38,420
7,404
7,392
4,463
19,259
12,612
31,871
7,101
6,781
3,562
17,444
10,869
28,313
11%
12
6
29
63
8
100%
15%
8
9
32
57
11
100%
16%
12
9
37
56
7
100%
Average variable power cost (Mills/KWh) (b)
Generation
14.5
Firm purchases
34.9
Secondary purchases
123.6
Total average variable power cost
37.2
11.3
23.2
19.7
20.0
8.6
17.3
23.6
15.6
Retail customers (end of period, thousands) 725
719
704
(a) Thousand megawatt-hours.
(b) Mills (1/10 cent) per kilowatt-hour.
Outlook
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 million 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 MMcf/d, 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. Transwestern 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
Wholesale Services
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 investment’s value.
The following table reflects IBIT for each business line:
(In millions)
Commodity sales and services
Assets and investments
Unallocated expenses
Income before interest,
minority interests and taxes
2000
$1,630
889
(259)
1999
$ 628
850
(161)
1998
$411
709
(152)
$2,260
$1,317
$968
The following discussion analyzes the contributions to IBIT
for each business line.
Commodity Sales and Services. Wholesale Services provides
reliable commodity delivery and predictable pricing to its
customers through forwards and other contracts. This marketmaking activity includes the purchase, sale, marketing and
delivery of natural gas, electricity, liquids and other commodities, as well as the management of Wholesale Services’ own
portfolio of contracts. Contracts associated with this activity are
accounted for using the mark-to-market method of accounting.
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 intercompany amounts):
Physical volumes (BBtue/d) (a)(b)
Gas:
United States
Canada
Europe and Other
Transportation volumes
Total gas volumes
Crude oil and Liquids
Electricity (c)
Total physical volumes (BBtue/d)
Electricity volumes (thousand MWh)
United States
Europe and Other
Total
Financial settlements
(notional, BBtue/d)
2000
1999
1998
17,674
6,359
3,637
27,670
649
28,319
6,088
17,308
51,715
8,982
4,398
1,572
14,952
575
15,527
6,160
10,742
32,429
7,418
3,486
1,251
12,155
559
12,714
3,570
11,024
27,308
578,787
54,670
633,457
380,518
11,576
392,094
401,843
529
402,372
196,148
99,337
75,266
(a) Billion British thermal units equivalent per day.
(b) Includes third-party transactions by Enron Energy Services.
(c) Represents electricity volumes, converted to BBtue/d.
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 Enron’s commodity sales and services business. Continued market leadership in terms of volumes transacted, 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 intermediation businesses. In late 1999, Wholesale Services launched an
Internet-based eCommerce system, EnronOnline, which allows
wholesale customers to view Enron’s real time pricing and to
complete commodity transactions with Enron as principal, with
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 $217
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 commodities and associated risk management products. Wholesale
Services also successfully managed its overall portfolio of contracts, 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. Enron’s 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 interests.
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
ENRON ANNUAL REPORT 2000
and an additional expansion of up to 150 MMcf/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 MMcf/d to 500 MMcf/d to connect natural gas production in Wyoming to the Northern B…
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