Enron annual report by kevin clark

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 FINA NCIA L HIGHLIGHTS

20 FINA NCIA L REVIEW

2 LETTER TO SHA REHOLDERS

53 OUR VA LUES

9 ENRON W HOLESA LE SERVICES

54 BOA RD OF DIRECTORS

14 ENRON ENERGY SERVICES

56 ENRON CORPORATE POLICY COM M ITTEE

16 ENRON BROA DBA ND SERVICES

56 SHA REHOLDER INFORM ATION

18 ENRON TRA NSPORTATION SERVICES

FINANCIAL HIGHLIGHTS 2000

(Unaudit ed: in millions, except per share dat a)

Revenues

$ 100,789

Net income: Operat ing result s It ems impact ing comparabilit y Total

1998

1997

1996

$ 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

0.48

0.46

0.43

Total assets

$ 65,503

33,381

29,350

22,552

16,137

Cash from operating activities (excluding w orking capital)

3,010

2,228

1,873

276

742

Capital expenditures and equity investments

3,314

3,085

3,564

2,092

1,483

Earnings per diluted common share: Operat ing result s It ems impact ing comparabilit y Total

NYSE price range High Low Close December 31

1999

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

Income ($ in millions)

REVENUES

Earnings Per Diluted Share (in dollars)

OPERATING RESULTS

1,415%

89%

129%

Enron

S&P 500

350%

383%

Enron

S&P 500

(9%) S&P 500

One Year

Five Years

CUMULATIVETOTAL RETURN (through December 31, 2000)

Enron

Ten Years

ENRON ANNUAL REPORT 2000

($ in billions)

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 st rong businesses

is in a unique posit ion t o provide t he product s and

These businesses — wholesale services, retail energy

services needed in t hese environment s. Our size,

services, broadband services and t ransport at ion

experience and skills give us enormous compet it ive

services — can be signif icant ly expanded w it hin

advant ages. We have:

t heir very large exist ing market s and ext ended

• Robust net w orks of st rat egic asset s t hat w e ow n

t o new market s w it h enormous grow t h pot ent ial.

or have cont ract ual access t o, w hich give us

At a minimum, w e see our market opport unit ies

great er fl exibilit y and speed t o reliably deliver

company-w ide t ripling over t he next fi ve years. Enron is laser-f ocused on earnings per share, and w e expect t o cont inue st rong earnings perf ormance. We w ill leverage our ext ensive business net w orks, market know ledge and logist ical expert ise t o produce high-value bundled product s f or an

ENRON ANNUAL REPORT 2000

w idespread logist ical solut ions. • Unparalleled liquidit y and market -making abilit ies t hat result in price and service advant ages. • Risk management skills t hat enable us t o off er reliable prices as w ell as reliable delivery. • Innovat ive t echnology such as EnronOnline t o

increasing number of global cust omers.

deliver product s and services easily at t he low est

Competitive Advantages

possible cost .

Our t arget ed market s are very large and are

f ast er, fl exible and more reliable connect ivit y. Enron

t hat have t remendous opport unit ies f or grow t h.

These capabilit ies enable us t o provide high-

undergoing f undament al changes. Energy deregu-

value product s and services ot her w holesale service

lat ion and liberalizat ion cont inue, and cust omers

providers cannot . We can t ake t he physical compo-

are driving demand f or reliable delivery of energy

nents and repackage them to suit the specifi c needs

at predict able prices. M any market s are experienc-

of cust omers. We t reat t erm, price and delivery as

ing t ight er supply, higher prices and increased

variables t hat are blended int o a single, compre-

volat ilit y, and t here is increasing int erdependence

hensive solut ion. Our t echnology and f ulf illment

w it hin regions and across commodit ies. Similarly,

syst ems ensure execut ion. In current market envi-

t he broadband indust ry f aces issues of overcapacit y

ronment s, t hese abilit ies make Enron t he right

and capit al const raint even as demand increases f or

company w it h t he right model at t he right t ime.

The Astonishing Success of EnronOnline In lat e 1999 w e ext ended our successf ul busi-

w holesale services income bef ore int erest , minorit y interests and taxes (IBIT) increased 72 percent to $2.3

ness model t o a w eb-based syst em, EnronOnline.

billion. Over t he past fi ve years, as physical volumes

EnronOnline has broadened our market reach,

have increased, w holesale IBIT has grow n at a com-

accelerat ed our business act ivit y and enabled us

pounded average annual rat e of 48 percent , and w e

t o scale our business beyond our ow n expect at ions.

have had 20 consecut ive quart ers of year-over-year

By t he end of 2000, EnronOnline had execut ed

growth. We have established core wholesale busi-

548,000 t ransact ions w it h a not ional value of $336

nesses in bot h nat ural gas and pow er in Nort h

billion, and it is now t he w orld’s largest w eb-based

America and Europe, w here w e are market leaders.

eCommerce syst em. Wit h EnronOnline, w e are reaching a great er

In Nort h America, w e deliver almost double t he amount of nat ural gas and elect ricit y t han t he

number of cust omers more quickly and at a low er

second t ier of compet it ors. Our net w ork of 2,500

cost t han ever. It ’s a great new business generat or,

delivery point s provides price advant ages, fl exibilit y

at t ract ing users w ho are draw n by t he sit e’s ease of

and speed-t o-market in bot h nat ural gas and pow er.

use, t ransparent , fi rm prices and t he f act t hat t hey

Nat ural gas, our most developed business, has seen

are t ransact ing direct ly w it h Enron. In 2000 our

subst ant ial volume grow t h t hroughout t he Unit ed

t ot al physical volumes increased signifi cant ly as a

St at es and Canada. In 2000 our physical nat ural gas

direct result of EnronOnline.

volumes were up 77 percent to 24.7 billion cubic feet per day (Bcf /d). Physical pow er volumes w ere up 52

left page: Jeffrey K. Skilling President and CEO right page: Kenneth L. Lay Chairman

percent t o 579 million megaw at t -hours (M Wh). We are building a similar, large net w ork in Europe. In 2000 we marketed 3.6 Bcf/d of natural gas and 53 million M Wh in t his market , a vast increase over 1999. As market s open, w e t enaciously pursue t he dif f icult , early deals t hat break ground f or subsequent business. We are the only pan-European

EnronOnline has expanded t o include more t han

player, and w e are opt imizing our advant age t o conduct cross-border t ransact ions. We are ext ending Enron’s proven business

1,200 of our product s. It also has st reamlined our

approach t o ot her market s, and int egrat ing

back-offi ce processes, making our ent ire operat ion

EnronOnline int o all our businesses as an accelera-

more effi cient. It has reduced our overall transaction

t or. Our grow t h rat es are rising in areas such as

cost s by 75 percent and increased t he product ivit y

metals, forest products, weather derivatives and coal.

of our commercial t eam by fi ve-f old on average.

We expect t hese businesses t o cont ribut e t o earnings

We are not sit t ing st ill w it h t his import ant new

even more signifi cant ly in 2001.

business t ool — in Sept ember 2000 w e released

Enron Energy Services

EnronOnline 2.0, which added even more customer

Our ret ail unit is a t remendous business t hat

f unct ionalit y and cust omizat ion f eat ures and

experienced a break-out year in 2000. We signed

at t ract ed more cust omers.

cont ract s w it h a t ot al value of $16.1 billion of cus-

Enron Wholesale Services

t omers’ f ut ure energy expendit ures, almost double

The w holesale services business delivered

t he $8.5 billion signed in 1999. We recorded increas-

record physical volumes of 51.7 t rillion Brit ish

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 t o 32.4 TBt ue/d in 1999. As a result ,

Energy and f acilit ies management out sourcing is

ENRON ANNUAL REPORT 2000

EnronOnline has enabled us t o scale quickly, soundly and economically. Since it s int roduct ion,

now a proven concept , and w e’ve est ablished a

businesses and off er view ers at home an addit ional

profi t able deal fl ow, w hich includes ext ensions of

convenient w ay t o choose and receive ent ert ain-

contracts by many existing customers. Price volatility

ment. Enron provides the wholesale logistical services

in energy market s has draw n f resh at t ent ion t o our

t hat bridge t he gap bet w een cont ent providers and

capabilit ies, increasing demand f or our services. No

last -mile dist ribut ors. Full-lengt h movies-on-demand

ot her provider has t he skill, experience, dept h and

service has been successf ully t est ed in f our U.S.

versat ilit y t o off er bot h energy commodit y and

met ropolit an market s.

price risk management services, as w ell as energy

Enron Transportation Services

asset management and capit al solut ions. In 2001

The new name for our gas pipeline group accu-

w e expect t o close approximat ely $30 billion in

rately refl ects a cultural shift to add more innovative

new t ot al cont ract value, including business f rom

customer services to our effi cient pipeline operation.

our new est market , Europe.

To serve our cust omers more eff ect ively, w e are

Enron Broadband Services

increasingly incorporat ing t he w eb int o t hose rela-

We have creat ed a new market f or bandw idt h

tionships. Customers can go online to schedule nomi-

int ermediat ion w it h Enron Broadband Services. In

nations and handle inquiries, and they can transact

2000 w e complet ed 321 t ransact ions w it h 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

WHOLESALE SERVICES – PHYSICALVOLUMES (trillion British thermal units equivalent per day)

continued to provide strong earnings and cash fl ow

mediat ion capabilit ies t o include a broad range of

in 2000. Demand f or nat ural gas is at a high in t he

net w ork services, such as dark fi ber, circuit s, Int ernet

Unit ed St at es, and w e’re adding capacit y t o t ake

Prot ocol service and dat a st orage. Our opport unit ies

advantage of expansion opportunities in all markets.

are increasing commensurat ely.

New capacity is supported by long-term contracts.

f ield is net w ork connect ivit y — providing t he

ENRON ANNUAL REPORT 2000

t erpart ies. We are expanding our broadband int er-

Part of t he value w e bring t o t he broadband

ENRON ENERGY SERVICES – VALUE OF CONTRACTS ORIGINATED ($ in billions)

Strong Returns Enron is increasing earnings per share and

sw it ches, t he net w ork int elligence and t he int er-

cont inuing our st rong ret urns t o shareholders.

mediat ion skills t o enable t he ef f icient exchange

Recurring earnings per share have increased

of capacit y bet w een independent net w orks. We

st eadily since 1997 and w ere up 25 percent in

operat e 25 pooling point s t o connect independent

2000. The company’s t ot al ret urn t o shareholders

t hird-part ies — 18 in t he Unit ed St at es, six in

w as 89 percent in 2000, compared w it h a negat ive

Europe and one in Japan. At least 10 more are

9 percent ret urned by t he S&P 500. The 10-year

scheduled t o be complet ed in 2001.

ret urn t o Enron shareholders w as 1,415 percent

Enron also has developed a compelling

compared w it h 383 percent f or t he S&P 500.

commerical model t o deliver premium cont ent -on-

Enron hardly resembles t he company w e w ere

demand services via t he Enron Int elligent Net w ork.

in the early days. During our 15-year history, we have

Cont ent providers w ant t o ext end t heir est ablished

st ret ched ourselves beyond our ow n expect at ions.

We have met amorphosed f rom an asset -based

EnronOnline w ill accelerat e t heir grow t h. We plan

pipeline and pow er generat ing company t o a

t o leverage all of t hese compet it ive advant ages t o

market ing and logist ics company w hose biggest

creat e signifi cant value f or our shareholders.

asset s are it s w ell-est ablished business approach and it s innovat ive people. Our perf ormance and capabilit ies cannot be compared t o a t radit ional energy peer group. Our result s put us in t he t op t ier of t he w orld’s corpora-

Kennet h L. Lay

t ions. We have a proven business concept t hat is

Chairman

eminent ly scalable in our exist ing businesses and adapt able enough t o ext end t o new market s. As energy markets continue their transformat ion, and non-energy market s develop, w e are poised t o capt ure a good share of t he enormous

Jeff rey K. Skilling

opport unit ies t hey represent . We believe w holesale

President and

gas and pow er in Nort h America, Europe and Japan

Chief Execut ive Offi cer

380

391

236

351

59 23 3 98

ENRON TRANSPORTATION SERVICES REPORTED INCOME BEFORE INTEREST AND TAXES ($ in millions)

ENRON BROADBAND SERVICES – 2000 BANDWIDTH TRANSACTIONS

w ill grow f rom a $660 billion market t oday t o a $1.7 t rillion market over t he next several years. Ret ail energy services in t he Unit ed St at es and Europe have the potential to grow from $180 billion t oday t o $765 billion in t he not -so-dist ant f ut ure. Broadband’s prospect ive global grow t h is huge — it should increase f rom just $17 billion t oday t o $1.4 t rillion w it hin fi ve years. Taken t oget her, t hese market s present a $3.9 t rillion opport unit y f or Enron, and w e have just scrat ched t he surf ace. Add t o t hat t he ot her big st eel, coal and air-emissions credit s — and t he opport unit y rises by $830 billion t o reach nearly $4.7 t rillion. Our t alent ed people, global presence, fi nancial st rengt h and massive market know ledge have creat ed our sust ainable and unique businesses.

ENRON ANNUAL REPORT 2000

market s w e are pursuing — f orest product s, met als,

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.

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 M ANNUAL AKES MREPORT ARKETS2000

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.

Wholesale services is Enron’s largest and fastest

created liquidity on a scale never seen before. It is a dynamic business accelerat or: It t ook nearly a decade f or Enron’s daily gas t ransact ions t o reach

grow ing business, w it h sust ainable grow t h oppor-

13.9 Bcf in 1999. Just 12 mont hs lat er, EnronOnline

tunities in each of its markets. In 2000 income before

had helped t o pract ically double daily t ransact ions

int erest , minorit y int erest s and t axes (IBIT) rose 72

t o 24.7 Bcf .

percent t o $2.3 billion, w it h record physical energy

EnronOnline magnifi es t he success of our

volumes of 51.7 t rillion Brit ish t hermal unit s equiv-

exist ing business, w hich springs f rom t he scale and

alent per day (TBt ue/d) — a 59 percent increase

scope of our est ablished net w orks. We t ouch more

over 1999.

part s of Nort h America’s energy syst em t han any

For t he past fi ve years, w holesale services

ot her merchant , w it h access t o upw ards of 2,500

earnings have grow n at an average compounded

dist inct delivery point s each day. The w idespread

grow t h rat e of 48 percent annually, and our com-

delivery opt ions and possibilit ies of our net w ork

pet it ive posit ion is grow ing st ronger. Cust omers

give us a price and service advantage. Our networks

transact with Enron because we offer products and

and presence in nat ionw ide energy market s also

services f ew ot hers can mat ch. Wit h our fl exible

enable us to capture and distribute massive amounts

net w orks and unique capabilit ies in risk manage-

of inf ormat ion about real-t ime market supply and

ment and fi nance, w e deliver t he w idest range of

demand, grid const raint s and bot t lenecks. When

reliable logist ical solut ions at predict able prices.

t he market moves, w e are able t o conduct business

Enron delivers more than two times the natural gas and pow er volumes as does it s nearest energy

w hile compet it ors are st ill f act -fi nding. Our people also make a diff erence. We are

market ing compet it or. Our f ormidable lead comes

able to attract the best and the brightest and place

f rom our w illingness t o ent er market s early and

t hem in an ent repreneurial at mosphere in w hich

serve as a market -maker t o build liquidit y and price

t hey can t hrive. Wit h our int ellect ual capit al, w e

transparency. Breakthrough technology applications,

develop premium high-margin st ruct ured product s

such as EnronOnline, accelerat e our market penet ra-

t hat draw on our liquidit y and market know ledge.

t ion. These compet it ive advant ages have made us

A good example is t he gas-market ing-services hub

t he most successf ul energy market er in t he t w o

in Chicago w e launched w it h People’s Energy in

largest deregulating energy markets, North America

M arch 2000. Know n as Enovat e, t his vent ure opt i-

and Europe. We expect t o achieve a similar leader-

mizes People’s 30 Bcf a year of Chicago-area storage

ship posit ion as w e ext end our business approach

capacit y and relat ed t ransport at ion. It played a role

t o new regions, product s and indust ries.

in increasing our gas volumes in t he cent ral Unit ed

Our business has fl ourished w it h EnronOnline. Launched in November 1999, EnronOnline handled 548,000 t ransact ions in 2000 w it h a gross not ional

St at es by 156 percent , t he largest increase in our 2000 Nort h American physical volumes. We cont inually assess t he necessit y of adding

value of $336 billion. EnronOnline is unquest ionably

or ow ning asset s in a region. Somet imes it is less

t he largest w eb-based eCommerce sit e in t he w orld

expensive t o ow n an asset t han t o replicat e t he

and dw arf s all ot her energy market ing w eb sit es

asset in t he market t hrough cont ract ing and mar-

combined. By t he f ourt h quart er of 2000, it account -

ket -making. We are developing generat ion plant s

ed f or almost half of Enron’s t ransact ions over all

t o sell merchant pow er t o high-demand market s,

business unit s. EnronOnline has pushed product ivit y

including proposed f acilit ies in Calif ornia, Florida,

through the roof: Transactions per commercial person

Texas, Louisiana and Georgia. But as liquidit y

rose t o 3,084 in 2000 f rom 672 in 1999. EnronOnline

increases, asset ow nership may no longer be neces-

Version 2.0, launched in Sept ember 2000, has attract-

sary. We plan t o sell Houst on Pipe Line Company,

ed more users w it h it s addit ional f unct ionalit y (see

and Louisiana Resources Company is now held by

“ EnronOnline” next page).

Bridgeline Holdings, L.P., a joint vent ure in w hich

Enron North America

Enron retains an interest. Additionally, in the second

In Nort h America, Enron’s physical nat ural gas

quart er of 2001 w e expect t o close t he sale of fi ve

volumes increased 77 percent t o 24.7 billion cubic

of t he six elect ricit y peaking generat ion unit s in

f eet per day (Bcf /d) in 2000 f rom 13.9 Bcf /d in 1999.

operat ion. The result is t he same earnings pow er

Pow er deliveries increased 52 percent t o 579 million

w it h less invest ed capit al.

megaw at t -hours (M Wh) f rom 381 million M Wh t he year bef ore. EnronOnline has been a runaw ay success in

M exico’s move t ow ard liberalizing it s energy market s should gain int ensit y and speed w it h it s new government . Increased cross-border elect ricit y

Nort h America. It account ed f or 74 percent of

t ransact ions bet w een M exico and t he Unit ed St at es

Nort h American volume t ransact ed in 2000, and

seem inevit able. Our act ivit ies in M exico seek t o

ENRON ANNUAL REPORT 2000

ENRON WHOLESALE SERVICES

opt imize bot h t he M exican elect ricit y market and

mediaries such as Enron t o hedge t heir f uel and

cross-border act ivit y bet w een t he t w o count ries.

pow er prices.

Enron also is active in South America, where

On t he Cont inent , our pow er volumes

w e ow n and develop asset s t o help creat e an

increased to 50 million MWh in 2000 from 7 million

energy net w ork.

M Wh in 1999. We are t ransact ing at all major

Enron Europe

count ry int erconnect ions, benef it ing f rom cross-

We are rapidly ext ending Enron’s market -

border opport unit ies. We closed our f irst -ever

making approach int o t he deregulat ing European

t ransact ion in France and are an act ive player in

market s, f ocusing on t he U.K., t he Cont inent and

Germany and Sw it zerland. We are beginning t o

t he Nordic region. The Cont inent is st ill in t he early

part ner w it h ut ilit ies t o of f er comprehensive port -

st ages of liberalizat ion. Alt hough t he European

f olio management services, such as our agreement

Union has mandated liberalization of the power and

t o purchase and dist ribut e pow er joint ly w it h Sw iss

nat ural gas market s, each count ry is responding at

Cit ypow er AG, w hich cont rols 19 percent of t he

its own pace. The velocity of transactions is rising on

Sw iss elect ricit y market .

t he Cont inent , how ever, and Enron expect s t o raise t he level of liquidit y t o make t he market s w ork. Our business t hroughout Europe is grow ing rapidly. Nat ural gas and pow er volumes more t han doubled t o 10.3 t rillion Brit ish t hermal unit s equiv-

EnronOnline

alent per day (TBt ue/d) in 2000 f rom 4.1 TBt ue/d in 1999. We enjoy several compet it ive advant ages in

EnronOnline successfully leverages Enron’s core

Europe: We are t he only pan-European player; w e

market-making capabilities, benefiting both our

have a proven business st rat egy; w e ent ered t he

customers and Enron. The web-based system

market early t o build a presence; and w e have

makes it easier to do business with Enron. It

at t ract ed a t alent ed and skilled local w orkf orce.

also accelerates the growth of Enron’s existing

Our cross-border capabilit ies are becoming

businesses and facilitates quick and efficient

increasingly import ant as market s int erconnect .

entry into new markets.

U.K. gas can now be t ransport ed t o Belgium, and subsequently to the rest of the Continent, giving us t he opport unit y t o develop innovat ive t ransact ions on bot h sides of t he border. The result ing increase in price volatility has nearly doubled U.K. gas prices, w hich, along w it h more volat ile elect ricit y prices ahead, has signifi cant ly improved demand f or t he U.K. risk management product s w e off er, bot h now and over t he long t erm. Just as in Nort h America, EnronOnline is increasing Enron’s reach and volumes in Europe and is a prime driver of liquidit y. It s simple con-

t han anyw here else in Europe, and t here are limit -

compet it ive prices and easy accessibilit y have w on

ed import and export capabilit ies. Enron is respond-

EnronOnline rapid accept ance.

ing t o t his opport unit y by developing a 1,200-

In t he U.K., pow er and gas volumes more t han doubled, w it h pow er rising t o 113 million M Wh in

ENRON ANNUAL REPORT 2000

2000, and gas volumes climbing 119 percent to reach

In Spain, elect ricit y demand is grow ing f ast er

t ract s, mult i-currency capabilit ies, t ransparent and

megaw at t plant in Arcos, sout h of Seville, t hat should close fi nancing in 2001. Cont inent al gas liquidit y is just st art ing t o

3.2 Bcf /d. Several market f act ors are likely t o creat e

increase. Our volumes grew t o 472 million cubic

more business f or us. The U.K.’s New Elect ricit y

f eet per day (M M cf /d) in 2000 f rom 53 M M cf /d in

Trading Agreement s, w hich replace t he exist ing

1999. While t he market is in it s early st ages, Enron

U.K. pow er pool, are scheduled t o be implement ed

has managed t o increase w eekly t ransact ions f rom

by t he second quart er of 2001. The agreement s

about 5 t o 100 over t he course of a year. In

w ill result in increased price volat ilit y, and Enron

Oct ober w e init iat ed t he f irst gas supply deal in

is w ell-posit ioned t o help cust omers manage t his

Germany t o t he local ut ilit ies of Heidelberg,

risk. Addit ionally, low er pow er prices are shrinking

Tuebingen and Bensheim. We also are delivering

prof it margins f or U.K. merchant pow er plant s,

nat ural gas t o some large users in t he Net herlands

w hich increasingly need t o t urn t o market int er-

and France.

opport unit ies t o support our market -making act ivi-

We cont inue t o set records in t he Nordic region, w here w e are t he largest pow er market er.

t ies, including inside-t he-f ence pow er generat ion.

Elect ricit y volumes increased nearly 150 percent

Under considerat ion are a number of sit es, w hich

t o reach 77 million M Wh in 2000 f rom 31 million

may be f ueled by gas, liquefi ed nat ural gas or coal.

M Wh in 1999. Enron’s Oslo of f ice also is now

Enron Australia

t he base of our European w eat her risk manage-

Enron’s market -making abilit y has been successf ully ext ended t o Aust ralia, w here Enron is a

As more Nordic companies out source energy

leading provider of logist ical solut ions in t he coun-

supply and management , Enron’s product s and serv-

t ry’s pow er market . During 2000 w e int roduced

ices — including advanced t echnology applicat ions

w eat her risk management product s in t he region,

— are eagerly sought . In December Enron ent ered

off ering t emperat ure-based product s f or Sydney,

int o a t w o-year port f olio management agreement

M elbourne, Hong Kong, Tokyo and Osaka. The

w it h UPM -Kymmene Corp., one of t he w orld’s

Sydney offi ce also provides a st rat egic plat f orm f or

largest f orest product s companies. Enron w ill assist

t he ext ension of Enron’s coal, met als 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 opt imizing it s Nordic pow er port -

band businesses, as w ell as providing support f or

f olio of approximat ely 14 t eraw at t hours.

Enron’s operat ions in t he Asia-Pacifi c region.

Enron Japan

Extending to New M arkets

Enron Japan f ormally opened it s Tokyo offi ce

Enron’s durable business approach, w hich has

in Oct ober 2000. Japan represent s an enormous

driven our success in t he nat ural gas and elect ricit y

opport unit y: It s elect ricit y rat es are t he highest in

market s, is eminent ly applicable t o ot her market s

t he w orld, and elect ricit y consumpt ion is second

and geographical regions. While w e are remaining

only t o t he Unit ed St at es. We have at t ract ed t op

f ocused on increasing earnings and opport unit ies

talent to develop wholesale and joint venture possi-

in gas and pow er, w e also are ext ending Enron’s

bilit ies, and have int roduced our fi rst product f or

met hod t o large, f ragment ed indust ries and prod-

large electricity users — three- to fi ve-year contracts

uct s, w here int ermediat ion can make market s

t hat w ill reduce elect ricit y bills immediat ely by up

more ef f icient and responsive t o cust omer needs.

t o 10 percent t he fi rst year, w it h t he possibilit y of

We expect t hese new businesses t o cont ribut e t o

f urt her reduct ions in subsequent years. Our fi rst

earnings in 2001.

cont ract s w ere signed in early 2001. Through joint vent ures w it h 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.

Coal int ermediat ion moved t o a new level in

a powerful team. Enron’s fi nancial resources and eCommerce abilities add a new dimension to MG’s

2000. The indust ry has been radically aff ect ed by t he

widespread physical merchant skills and excellent

w orldw ide deregulat ion of t he elect ricit y indust ry.

customer relationships. The early results are right on

Like nat ural-gas-f ueled generat ion, coal-burning

target, with physical volumes up 31 percent in 2000.

generat ors require fl exible t erms and risk-management prot ect ion. Enron is able t o provide unrivaled

Enron M et als opens an addit ional door t o large energy cust omers. Cominco Lt d., a zinc pro-

logist ical support . Our coal business has led us t o

ducer and an Enron M et als cust omer in Vancouver,

part icipat e in sea and land logist ics as w ell.

Brit ish Columbia, w orked w it h Enron t o halt zinc

Weather has never been bet t er f or us. Our

product ion f or six w eeks and sell it s pow er int o t he

w eat her risk management business is up about

Nort hw est ern pow er market , w here it w as needed.

fi ve-f old t o 1,629 t ransact ions in 2000 f rom 321

Enron Nort h America prot ect ed Cominco by st ruc-

t ransact ions t he year bef ore. As in all of our mar-

t uring a f ixed-price sw ap t o guarant ee t he sale

ket s, w e bring cross-commodit y capabilit ies t o our

price of t he pow er, and Enron M et als arranged t o

w eat her product s. For inst ance, w e closed a t hree-

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 precipit at ion t ransact ion t hat provides f inan-

Cominco’s obligat ions. Cominco’s prof it f rom t he

cial compensat ion linked t o nat ural gas prices if

deal exceeded t he annual prof it it makes f rom

precipit at ion f alls below a pre-det ermined mini-

producing zinc.

mum. The w eat her unit w orked w it h several ot her Enron groups t o t ransf er Enron’s risk, ult imat ely

ket pot ent ial. Enron has leveraged it s int ernal risk

t ransact ing w it h 10 ext ernal companies in t hree

management processes and syst ems t o creat e a real-

market s (nat ural gas, w eat her product s and insur-

t ime, market -based online credit evaluat ion syst em.

ance). The bundled end-product result ed in an

The idea is simple: Exist ing credit rat ings and scoring

ef f ect ive hedge f or t he cust omer.

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 port ion of t he zinc required t o f ulf ill

Enron Credit is a new business w it h st rong mar-

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 t ime t o credit event s. This means

7.5 TBt ue/d t o 240 cust omers in 46 count ries. We

credit ors must fi gure out t heir credit risk exposure

have int roduced t he f irst -ever 24x7 commodit y

on t heir ow n. Enron Credit post s t he cost of credit

market of a West Texas Intermediate crude product

as a simple int erest rat e f or more t han 10,000 com-

on EnronOnline, allowing our customers to respond

panies on it s w eb sit e, w w w.enroncredit .com. Enron

t o market -changing event s at any t ime, day or

Credit also gives corporat ions t he abilit y t o hedge

night . We also concluded our biggest physical jet

t heir credit risk via a bankrupt cy product .

f uel cont ract , providing 100,000 barrels f or one

year at t he fl exible and market -based prices t hat

cost s compet it ive w it h f ossil f uel-generat ion f or

t he cust omer needed.

t he fi rst t ime. This cost compet it iveness, t oget her

LNG. Enron is est ablishing a liquefi ed nat ural

w it h government policies support ing renew able

gas (LNG) net w ork t o creat e merchant LNG opport u-

energy in most key market s and grow ing consumer

nit ies and t o bring more gas t o areas of t he w orld

demand f or green energy, have f ueled 30 percent

t hat need it . Our LNG-relat ed asset s in operat ion

annual grow t h over t he past fi ve years.

and development in t he Caribbean and t he M iddle

Wit h f ocused eff ort s in t he w orld’s t hree key

East f orm part of t his net w ork. We source surplus

w ind pow er market s — Germany, Spain and t he

LNG f rom t he M iddle East and Asia and current ly

Unit ed St at es — Enron Wind complet ed 2000 w it h

market it in t he Unit ed St at es.

revenues of approximat ely $460 million. St rong

Forest Products. Enron has off ered pulp, paper

grow t h in bot h t he Unit ed St at es and Europe w ill

and lumber fi nancial product s f or several years, and

account f or a project ed sales increase of approxi-

now w e are market ing physical volumes. In 2000 w e

mat ely 100 percent in 2001.

acquired Garden St at e Paper Co., w hich gives us access t o 210,000 t ons of new sprint a year and f our recycling cent ers in key market s. In January 2001 w e agreed t o purchase a new sprint mill and relat ed asset s in Canada. Wit h t his acquisit ion, Enron w ill become t he sevent h-largest producer of new sprint in Nort h America, giving us t he physical liquidit y necessary t o quickly grow t his business. Enron’s Clickpaper.com™ is pow ered by t he EnronOnline plat f orm but is t ot ally cust omized f or t he f orest product s indust ry. It off ers more t han 100 fi nancial and physical product s and f eat ures new s and inf ormat ion t ailored specifi cally t o f orest product s indust ry cust omers. Steel. In some markets, such as steel, we believe w e can run our net w ork w it h minimal asset s. The indust ry current ly suff ers f rom overcapacit y, but lacks a market mechanism to effi ciently market the surplus. We w ill off er a core commodit y baseline product t hat can be indexed against almost all ot her product s in t his $330 billion indust ry. The out look is promising — w e have t ransact ed our f irst st eel sw ap. This year w e w ill build liquidit y, improve pricing ef f iciency and gain cont ract ual access t o t he physical product t o provide comprehensive logist ical support . Enron Global Assets Enron Global Asset s manages and opt imizes Enron’s asset s out side Nort h America and Europe. Enron has a solid port f olio of asset -based businesses. How ever, w it h t he higher ret urns available in t he company’s ot her businesses, w e expect t o divest some int erest s in a number of t hese asset s. The remaining asset businesses w ill cont inue t o f ocus on perf ormance and complement ing our marEnron Wind Corp. The economics of w ind pow er are more promising t han ever, creat ing signifi cant grow t h f or Enron Wind. Technological advancement s and low er cost s associat ed w it h t oday’s larger, more effi cient w ind t urbines have made w ind pow er

ENRON ANNUAL REPORT 2000

ket -making and services businesses.

ENRON ENERGY SERVICES Enron Energy Services is the retail arm of Enron, serving business users of energy in commercial and

versat ilit y t o provide a comprehensive solut ion t o address uncert ain, rapidly changing market s. Customer Relationships The core of Enron’s retail business is developing

indust rial sect ors. Our comprehensive energy out -

long-t erm, mult i-year relat ionships w it h our cus-

sourcing product has proven an except ionally

t omers. The value at cont ract signing is only a part

ef f ect ive w ay f or companies t o reduce t heir cost s,

of t he pot ent ial value t hat can be realized w hen

manage risks of energy price volat ilit y, improve

sat isfi ed cust omers seek t o add addit ional Enron

t heir energy inf rast ruct ure and f ocus resources

services t o t heir cont ract s.

on t heir core businesses. Enron Energy Services recorded it s fi rst prof -

Of t he $16.1 billion in t ot al cont ract value signed in 2000, approximately $3 billion came from

it able quart er as expect ed at t he end of 1999, and

expansions of exist ing cont ract relat ionships. For

cont inued t o grow rapidly t hrough 2000, w it h

example, in 1998, w e signed a fi ve-year, $250 million

increasing profi t s in all f our quart ers of 2000 and

cont ract w it h World Color Press, w hich lat er merged

aggregat e recurring income bef ore int erest and

w it h Quebecor Print ing. In 2000, based on Quebecor

taxes (IBIT) of $103 million for the year. The value of our cont ract s in 2000 t ot aled more t han $16 billion, increasing Enron Energy Services’ cumulat ive cont ract value t o more t han $30 billion since lat e 1997. This success refl ect s grow ing accept ance of Enron’s energy out sourcing product — accept ance

Measuring Performance

t hat has meant an increasing rat e of new cont ract -

Companies can’t improve what they can’t measure.

ing. Our ret ail energy success in 2000 also refl ect s

That’s why Enron has developed a state-of-the-art

our st rong emphasis on cont ract execut ion and

Performance Measurement Center (PMC) that moni-

implement at ion and on excellence in cust omer

tors, predicts and changes customer energy consump-

service. Additionally, 2000 was marked by increased

tion. Powered by a flexible Internet-based link that

act ivit y in Europe — an unt apped market f or

connects customers’ building controls to the PMC,

energy out sourcing.

and operated by a team of energy management pro-

We are posit ioned t o dramat ically increase our profi tability 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 t he st rong execut ion and ext ension of exist ing cont ract s. M arket Volatility The U.S. energy sect or experienced unprecedent ed challenge and opport unit y in 2000. In nat ional t erms, st eady movement t ow ard a f unct ioning deregulat ed energy market place cont inues. More than half the country’s population is scheduled to be able t o choose t heir elect ricit y supplier by

World’s sat isf act ion, t he relat ionship w as ext ended

2004. The ongoing energy crisis in Calif ornia has

and expanded t o a 10-year, $1 billion agreement

f ocused everyone’s at t ent ion on t he complexit ies

including not only commodit y supply, but also over-

of incomplet e deregulat ion, t he risks of unreliable

all energy management , including t he design and

supply and the costs of unmanaged energy demand.

implement at ion of improvement s in energy asset

Enron provides commercial and indust rial energy

inf rast ruct ure in more t han 60 f acilit ies operat ed

cust omers w it h t he solut ions t hey need, bringing

by Quebecor World.

reliabilit y and price-risk management t o a market ot herw ise f raught w it h uncert aint y. ENRON ANNUAL REPORT 2000

The volat ilit y of energy prices across t he coun-

We value our long-t erm cust omer relat ionships, and t he healt h of t hese relat ionships can’t be lef t t o luck, inst inct or vague impressions. Our

try has heightened the value of energy management

Cust omer Sat isf act ion Program cont inually cap-

and increased t he demand f or ret ail services. Wit h

t ures our perf ormance against expect at ions and

our series of capabilit ies — energy commodit y and

benchmarks t hose result s. Furt her, it is designed

price risk management capabilit ies, energy asset

t o ensure ident ifi cat ion and resolut ion — including

management and capit al solut ions — w e remain

prompt escalat ion t o t he execut ive level if needed

t he only fi rm w it h t he skill, experience, dept h and

— of any issue t hat might arise.

M edium-size Business M arket In t he fi rst t hree years of U.S. operat ion, Enron Energy Services has been squarely focused on Fortune 1000 cust omers. But U.K.-based Enron Direct has successf ully penet rat ed t he immense medium-size business market , proving t hat w e can sell energy t o smaller ent erprises in a t ruly open ret ail market . Since gaining regulatory approval in February 1999 t hrough t he end of 2000, Enron Direct has acquired more t han 130,000 gas and pow er customers, and continues to grow at a substantial rate. The profi t abilit y of t hese smaller account s comes f rom Enron’s long-t erm price risk management capabilit y and Enron Direct ’s low -cost sales channels. Our high expect at ions f or 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.

refl ect ed by t he rapid expansion of t he European operat ion. Enron Direct o already is act ive in M adrid, Spain, and similar businesses w ill be launched in ot her count ries as w ell. It is our st rong belief t hat Enron is uniquely posit ioned t o benefi t bot h in t he Unit ed St at es and Europe f rom t he w orld’s st eady shif t t ow ard deregulat ed energy market s. We w ill cont inue t o provide sensible market solut ions f or t he eff ect ive managedynamic global ret ail business t o drive company profi t s and sust ain our reput at ion f or innovat ion.

ENRON ANNUAL REPORT 2000

ment of energy cost s, and w ill cont inue t o build a

ENRON BROADBAND SERVICES Enron Broadband Services made excellent progress execut ing it s business plan in 2000. The

bandw idt h: dark fi ber, circuit s, Int ernet Prot ocol (IP) services (t ransport ing dat a packet s according t o IP st andards) and st orage capacit y. To dat e w e have t ransact ed w it h 45 count er-

build-out of Enron’s 18,000-mile global f iber

part ies, including U.S. and int ernat ional t elecom-

net w ork is near complet ion, bandw idt h int erme-

municat ions carriers, market ers and resellers and

diat ion t ransact ion volume is grow ing exponen-

net w ork service providers. In 2001 w e expect t o

t ially, and w e are t est ing t he f irst commercially

deliver 570,000 t erabyt es as w e grow bot h t he

sound premium cont ent -on-demand service.

breadt h and t he dept h of our net w ork and prod-

Clearly, t he Enron business model is w orking in

uct s. We off er 32 bandw idt h-relat ed product s on

t he broadband market .

EnronOnline.

Enron Broadband Services’ goals are t o: • Deploy t he most open, effi cient global broadband net w ork, t he Enron Int elligent Net w ork. • Be t he w orld’s largest market er of bandw idt h and

Enron’s abilit y t o provide bandw idt h-ondemand at specifi ed service levels and guarant eed delivery enables cust omers t o access capacit y w it hout necessarily building, buying or expanding t heir

net w ork services. • Be t he w orld’s largest provider of premium cont ent delivery services. The Enron Intelligent Netw ork We expect t o be t he f irst t o provide broad-

The Value of Bandw idth Intermediation

band connect ivit y on a global basis t hrough t he Enron Int elligent Net w ork (EIN). The EIN operat es

Enron’s bandwidth intermediation business gives the

as a “ net w ork of net w orks,” providing sw it ching

broadband industry new tools — standard contracts,

capacit y bet w een independent net w orks f or low -

liquidity, price transparency, connectivity, quick provi-

cost scalabilit y. We w ill cont inue t o add pooling

sioning and flexibility — to help industry participants

point s, w hich physically int erconnect t hird part ies’

optimize assets and opportunities.

net w orks and serve as ref erence point s f or bandw idt h cont ract s. We current ly operat e 25 pooling point s: 18 in t he Unit ed St at es, and one each in Tokyo, London, Brussels, Amst erdam, Paris, Dusseldorf and Frankf urt . We expect t o add at least 10 more in 2001. EIN’s embedded int elligence, provided by Enron’s propriet ary Broadband Operat ing Syst em (BOS), gives Enron unique, pow erf ul mult i-layer network control. The Enron BOS enables the EIN to: • Dynamically provision bandw idt h in real t ime. • Cont rol qualit y and access t o t he net w ork f or Int ernet Service Providers. • Cont rol and monit or applicat ions as t hey st ream over t he net w ork t o ensure qualit y and avoid

includes IP t ransport over land, under t he sea, and

congest ed rout es.

via sat ellit e, at bot h fi xed and peak-usage t erms.

ENRON ANNUAL REPORT 2000

The BOS aut omat es t he t ransact ion process

own networks. Our bundled intermediation package

For example, w e are w orking w it h i2 Technologies,

all t he w ay f rom t he init ial request f or capacit y t o

a global provider of int elligent eBusiness solut ions,

provisioning, elect ronic billing and f unds t ransf er.

t o connect w it h cust omers in six cit ies, including

Wit h t he BOS, Enron has creat ed t he f irst scalable,

f our overseas. i2 has provisioned local-loop and

f ully int egrat ed t ransact ion processing plat f orm

long-haul capacit y t hrough Enron, and has low -

f or delivering bandw idt h capacit y.

cost access t o our net w ork’s equipment as if it

Bandw idth Intermediation

w ere it s ow n, but it now has t he f lexibilit y t o

We exceeded our expect at ions by delivering more t han 72,000 t erabyt es of net w ork services in 2000, demonst rat ing rapidly grow ing indust ry

quickly add or discard capacit y as day-t o-day needs change. Data storage is a $30 billion-per-year business,

accept ance of our fl exible services. We are creat ing

and w e know cust omers w ould like t o purchase it

t he risk management building blocks t o manage

on an as-needed basis. In January 2001 w e com-

almost every element of t he net w ork in addit ion t o

plet ed our fi rst dat a st orage t ransact ions w it h a

leading provider of managed st orage services, St orageNet w orks, and a large ret ailer, Best Buy. Best Buy is buying off -sit e st orage capacit y t o save money and gain fl exibilit y t o accommodat e changing st orage needs. Content Services In April 2000 Enron signed an agreement w it h a U.S. video rent al ret ailer t o deliver movies over t he Enron Int elligent Net w ork. The t rial service is up and running in Seattle; Portland, Ore.; Salt Lake Cit y and New York Cit y. Addit ionally, w e have est ablished relat ionships w it h ot her high-visibilit y content providers. Over the next two or three years, w e plan t o deliver on-demand not only movies but sport s, educat ional cont ent , 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.

applicat ions not yet imagined. M arket Innovator Enron’s innovat ive approach is as valuable in broadband as it is in energy. Our proven int ermediat ion skills are creat ing new value f or t he indust ry and giving it a fl exibilit y it has never enjoyed. We have combined our business model w it h readily available t echnologies t o deliver premium cont ent over t he Enron Int elligent Net w ork in a very compart icular t echnology. We use t he best solut ion at t he best t ime f or our cust omers, delivering t he most reliable product at t he low est available cost in t he market place.

ENRON ANNUAL REPORT 2000

pelling commercial model. We are not t ied t o any

ENRON TRANSPORTATION SERVICES

needs. Nort hern Nat ural Gas, f or example, has used int errupt ible st orage product s t hat ext end it s capabilit y t o meet t he grow ing demand f or services t o

The Gas Pipeline Group f ormally changed it s

manage physical posit ions. Transw est ern Pipeline

name in Sept ember 2000 t o Enron Transport at ion

Company is off ering shippers increased service

Services t o emphasize it s abilit y t o deliver innovat ive

fl exibilit y by accessing t hird-part y st orage. Across

solut ions t o it s cust omers. These emerging services

all pipelines, w eb-based applicat ions have been

augment our core compet ency: operat ing int erst at e

int roduced t o allow cust omers t o bet t er manage

pipelines saf ely and effi cient ly. In 2000 w e cont inued

t ransact ions and allow t he pipelines t o maximize

our record of st rong ret urns w it h consist ent earnings

t heir capacit y of f erings. Nort hern Nat ural Gas,

and cash f low. Income bef ore int erest and t axes

Transwestern Pipeline and Florida Gas Transmission

reached $391 million, up f rom $380 million in 1999.

began t o sell available capacit y on EnronOnline

Cash f low f rom operat ions rose t o $415 million

in 2000 t o give cust omers t he convenience of

in 2000 f rom $370 million in 1999. Throughput

eCommerce t ransact ing (see “ Purchasing Capacit y

remained relat ively unchanged in 2000 at 9.13

Through EnronOnline” on t his 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 f eet per day (Bcf /d), compared t o 9.18 Bcf /d t he previous year.

ENRON ANNUAL REPORT 2000

Together, our interstate pipelines span approxi-

Northern Natural Gas Nort hern Nat ural Gas, Enron’s largest pipeline, has approximat ely 16,500 miles of pipeline ext end-

mat ely 25,000 miles w it h a peak capacit y of 9.8

ing f rom t he Permian Basin in Texas t o t he Great

Bcf /d. We t ransport 15 percent of U.S. nat ural gas

Lakes, providing ext ensive access t o major ut ilit ies

demand. We connect t o t he major supply basins in

and indust rials in t he upper M idw est . The pipeline

t he Unit ed St at es and Canada, and w e cont inue t o

has market area peak capacit y of 4.3 Bcf /d. It int er-

increase capacit y f rom t hose basins t o our major

connect s w it h major pipelines, including Great

market s. We have added 840 million cubic f eet per

Lakes, Transw est ern, El Paso, Nort hern Border and

day (M M cf /d) over t he past t w o years, and nearly 1

Trailblazer, t o off er excellent nort hern, sout hern

Bcf /d is scheduled t o ent er service in t he next t hree

and w est ern fl ow capabilit ies. Ninet y-fi ve percent

years. At t he same t ime, our expense per M M cf /d

of market area capacit y is cont ract ed t hrough 2003.

has declined by 26 percent f rom 1992 t o t oday. Enron Transport at ion Services pipelines have

M arket area demand is expect ed t o increase considerably w it h t he development of approximat ely

brought t o market a variet y of new product s and

2,000 megaw at t s of gas-fi red generat ion over t he

services specif ically t ailored t o address cust omer

next t hree years. The pipeline has developed innova-

t ive and fl exible services t o meet t he t ransport at ion,

under long-t erm agreement s w it h an average t erm

st orage and balancing needs of pow er producers. It

of six years. It s Project 2000 ext ension — 34 miles of

complet ed const ruct ion in Oct ober 2000 of a link t o

pipe f rom M anhat t an, Illinois, t o a point near Nort h

445 megaw at t s of peaking pow er operat ed by Great

Hayden, Indiana — w ill provide 544 M M cf /d t o

River Energy in M innesot a. The link w ill t ransport up

indust rial market s in Indiana w it h a t arget ed in-

t o 120 M M cf /d of gas.

service dat e of lat e 2001.

Transw estern Pipeline Transw est ern operat es approximat ely 2,500

Lat e in 2000, Nort hern Border Pipeline set t led it s rat e case, allow ing it t o sw it ch f rom a cost -of -

miles of pipe w it h 1.7 Bcf /d of peak capacit y. Wit h

service tariff to a stated-rate tariff, which will provide

pipeline originat ing in t he San Juan, Permian and

rate certainty to customers, increase competitiveness

Anadarko Basins, Transw est ern can move gas east

and allow fl exibility in services provided.

to Texas or west to the California border. To respond

Nort hern Border Part ners also ow ns int erest s

to increased gas demand in California, Transwestern

in gat hering syst ems in t he Pow der River and Wind

Pipeline added compressor f acilit ies near Gallup,

River Basins in Wyoming, and recently signed a letter

New M exico, in M ay 2000 t o increase mainline

of int ent t o purchase Bear Paw LLC, w hich has

capacit y by 140 M M cf /d t o t he Calif ornia border.

ext ensive gat hering and processing operat ions in

The new capacit y is complet ely subscribed under

t he Pow der River Basin and t he Willist on Basin.

long-term contracts. In 2000 the pipeline also added

The part nership also ow ns Black M esa Pipeline, a

several major int erconnect s t o t ap int o grow ing

273-mile coal-w at er slurry pipeline running f rom

market s east of Calif ornia.

Kayent a, Arizona, t o M ohave Pow er St at ion in

The Transw est ern syst em is f ully subscribed f or w est ern deliveries t hrough December 2005 and f or east ern deliveries t hrough December 2002. The sys-

Laughlin, Nevada. Portland General Electric The sale of Port land General Elect ric (PGE) t o

t em has t he pot ent ial t o quickly increase t hroughput

Sierra Pacifi c Resources has been delayed by t he

capacit y. An expansion project is expect ed t o be fi led

eff ect of recent event s in Calif ornia and Nevada on

t his year and complet ed in 2002.

t he buyer. In 2000 t he Port land, Oregon-based elec-

Florida Gas Transmission

t ricit y ut ilit y perf ormed w ell in t he f ace of regional

Florida Gas Transmission serves t he rapidly

wholesale price volatility. IBIT rose approximately 12

grow ing Florida peninsula and connect s w it h 10

percent to $341 million. Total electricity sales reached

major pipelines. It has maint ained a compet it ive

38.4 million megaw at t -hours (M Wh) compared t o

posit ion by st aging expansions t o keep pace w it h

31.9 million M Wh in 1999. We w ill cont inue t o drive

demand as it grow s. Wit h current peak capacit y

perf ormance w hile w e pursue t he ut ilit y’s sale.

of 1.5 Bcf /d, Florida Gas Transmission w ill add 600 M M cf /d of capacit y w hen it s 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 Oct ober 1, 2000, and t he remainder is scheduled t o go int o service in M ay 2001. The 400MMcf/d Phase V expansion has received preliminary approval f rom t he Federal Energy Regulat ory Commission and is expect ed t o be complet ed in April 2002. The 4,795-mile pipeline current ly is evaluat ing supply connect ions t o t w o proposed liquefi ed nat ural gas f acilit ies. Northern Border Partners, L.P. Nort hern Border Part ners, L.P. is a publicly t raded part nership (NYSE: NBP), of w hich Enron Partners owns a 70 percent general partner interest in Nort hern Border Pipeline, w hich ext ends 1,214 miles f rom t he Canadian border in M ont ana t o Illinois. The pipeline, a low -cost link bet w een Canadian reserves and t he M idw est market , has a peak capacit y of 2.4 Bcf /d and is f ully cont ract ed

ENRON ANNUAL REPORT 2000

is t he largest general part ner. Nort hern Border

FINANCIAL REVIEW

CONTENTS 21 M A NA GEM ENT’ S DISCUSSION A ND A NA LYSIS OF FINA NCIA L CONDITION A ND RESULTS OF OPERATIONS 27 FINA NCIA L RISK M A NA GEM ENT 29 INFORM ATION REGA RDING FORWA RDLOOKING STATEM ENTS 29 M A NA GEM ENT’ S RESPONSIBILITY FOR FINA NCIA L REPORTING 30 REPORTS OF INDEPENDENT PUBLIC A CCOUNTA NTS 31 ENRON CORP. A ND SUBSIDIA RIES CONSOLIDATED INCOM E STATEM ENT

ENRON ANNUAL REPORT 2000

31 ENRON CORP. A ND SUBSIDIA RIES CONSOLIDATED STATEM ENT OF COM PREHENSIVE INCOM E

32 ENRON CORP. A ND SUBSIDIA RIES CONSOLIDATED BA LA NCE SHEET 34 ENRON CORP. A ND SUBSIDIA RIES CONSOLIDATED STATEM ENT OF CA SH FLOW S 35 ENRON CORP. A ND SUBSIDIA RIES CONSOLIDATED STATEM ENT OF CHA NGES IN SHA REHOLDERS’ EQUITY 36 ENRON CORP. A ND SUBSIDIA RIES NOTES TO THE CONSOLIDATED FINA NCIA L STATEM ENTS 52 SELECTED FINA NCIA L A ND CREDIT INFORM ATION (UNA UDITED)

The f ollow ing review of t he result s of operat ions and fi nancial condit ion of Enron Corp. and it s subsidiaries and af f iliat es (Enron) should be read in conjunct ion w it h t he Consolidat ed Financial St at ement s.

RESULTS OF OPERATIONS Consolidated Net Income Enron’s net income f or 2000 w as $979 million compared t o $893 million in 1999 and $703 million in 1998. It ems impact ing comparabilit y are discussed in t he respect ive segment result s. Net income bef ore it ems impact ing comparabilit y w as $1,266 million, $957 million and $698 million, respect ively, in 2000, 1999 and 1998. Enron’s business is divided int o f ive segment s and Explorat ion and Product ion (Enron Oil & Gas Company) t hrough August 16, 1999 (see Not e 2 t o t he Consolidat ed Financial St at ement s). Enron’s operat ing segment s include: Transport at ion and Dist ribut ion. Transport at ion and Dist ribut ion consist s of Enron Transport at ion Services and Port land General. Transport at ion Services includes Enron’s int erst at e nat ural gas pipelines, primarily Nort hern Nat ural Gas Company (Nort hern), Transw est ern Pipeline Company (Transw est ern), Enron’s 50% int erest in Florida Gas Transmission Company (Florida Gas) and Enron’s int erest s in Nort hern Border Part ners, L.P. and EOTT Energy Part ners, L.P. (EOTT). Wholesale Services. Wholesale Services includes Enron’s w holesale businesses around t he w orld. Wholesale Services operat es in developed market s such as Nort h America and Europe, as w ell as developing or new ly deregulat ing market s including Sout h America, India and Japan. Ret ail Energy Services. Enron, t hrough it s subsidiary Enron Energy Services, LLC (Energy Services), is ext ending it s energy expert ise and capabilit ies t o end-use ret ail cust omers in t he indust rial and commercial business sect ors t o manage t heir energy requirement s and reduce t heir t ot al energy cost s. Broadband Services. Enron’s broadband services business (Broadband Services) provides cust omers w it h a single source f or broadband services, including bandw idt h int ermediat ion and t he delivery of premium cont ent . Corporat e and Ot her. Corporat e and Ot her includes Enron’s invest ment in Azurix Corp. (Azurix), w hich provides w at er and w ast ew at er services, result s of Enron Renew able Energy Corp. (EREC), w hich develops and const ruct s w ind-generat ed pow er project s, and t he operat ions of Enron’s met hanol and M TBE plant s as w ell as overall corporat e act ivit ies of Enron.

Net income includes t he f ollow ing: (In millions) Af t er-t ax result s bef ore it ems impact ing comparabilit y

2000

1999

1998

$1,266

$ 957

$ 698

It ems impact ing comparabilit y: (a) Charge to refl ect impairment by Azurix (326) Gain on TNPC, Inc. (The New Power Company), net 39 Gains on sales of subsidiary st ock M TBE-relat ed charges Cumulat ive eff ect of account ing changes Net income $ 979

345 (278)

45 (40)

(131) $ 893

$ 703

(a) Tax affected at 35%, except where a specific tax rate applied.

Dilut ed earnings per share of common st ock w ere as f ollow s:

Dilut ed earnings per share (a): Af t er-t ax result s bef ore it ems impact ing comparabilit y

2000

1999

1998

$ 1.47

$ 1.18

$ 1.00

It ems impact ing comparabilit y: Charge to refl ect impairment by Azurix (0.40) Gain on The New Power Company, net 0.05 Gains on sales of subsidiary st ock M TBE-relat ed charges Cumulat ive eff ect of account ing changes Dilut ed earnings per share $ 1.12

0.45 (0.36)

0.07 (0.06)

(0.17) $ 1.10

$ 1.01

(a) Restated to reflect the two-for-one stock split effective August 13, 1999.

Income Before Interest, Minority Interests and Income Taxes The f ollow ing t able present s income bef ore int erest , minorit y int erest s and income t axes (IBIT) f or each of Enron’s operat ing segment s (see Not e 20 t o t he Consolidat ed Financial St at ement s): (In millions) Transport at ion and Dist ribut ion: Transport at ion Services Port land General Wholesale Services Ret ail Energy Services Broadband Services Explorat ion and Product ion Corporat e and Ot her Income bef ore int erest , minorit y int erest s and t axes

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 Transport at ion Services. The f ollow ing t able summarizes t ot al volumes t ransport ed by each of Enron’s int erst at e nat ural gas pipelines.

Tot al volumes t ransport ed (BBt u/d) (a) Nort hern Nat ural Gas Transw est ern Pipeline Florida Gas Transmission Nort hern 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

Signifi cant component s of IBIT are as f ollow s: (In millions) Net revenues Operat ing expenses Depreciat ion and amort izat ion Equit y earnings Ot her, net Income bef ore int erest and t axes

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 Transport at ion Services increased $24 million (4% ) during 2000 and declined $14 million (2% ) during 1999 as compared t o 1998. In 2000, Transport at ion Services’ int erst at e pipelines produced st rong fi nancial result s. The volumes t ransport ed by Transw est ern increased 13 percent in 2000 as compared t o 1999. Nort hern’s 2000 gross margin w as comparable t o 1999 despit e an 8 percent decline in volumes t ransport ed. Net revenues in 2000 w ere f avorably impact ed by t ransport at ion revenues f rom Transw est ern’s Gallup, New M exico expansion and by sales f rom Nort hern’s gas st orage invent ory. The decrease in net revenue in 1999 compared t o 1998 w as primarily due t o t he expirat ion, in Oct ober 1998, of cert ain t ransit ion cost recovery surcharges, part ially off set by a Nort hern sale of gas st orage invent ory in 1999.

Operating Expenses Operat ing expenses, including depreciat ion and amort izat ion, of Transport at ion Services increased $17 million (5% ) during 2000 primarily as a result of higher overhead cost s relat ed t o inf ormat ion t echnology and employee benef it s. Operat ing expenses decreased $16 million (5% ) during 1999 primarily as a result of t he expirat ion of cert ain t ransit ion cost recovery surcharges w hich had been recovered t hrough revenues.

Equity Earnings Equit y in earnings of unconsolidat ed equit y af fi liat es increased $25 million and $6 million in 2000 and 1999, respectively. The increase in equit y earnings in 2000 as compared t o 1999 primarily relat es t o Enron’s invest ment in Florida Gas. The increase in earnings in 1999 as compared t o 1998 w as primarily a result of higher earnings f rom Nort hern Border Pipeline and EOTT.

Other, Net Ot her, net decreased $21 million in 2000 as compared t o 1999 af t er increasing $21 million in 1999 as compared t o 1998. Included in 2000 w ere gains relat ed t o an energy commodit y cont ract and t he sale of compressor-relat ed equipment , w hile t he 1999 amount included int erest income earned in connect ion w it h t he fi nancing of an acquisit ion by EOTT. The 1998 amount included gains f rom t he sale of an int erest in an equit y invest ment , subst ant ially off set by charges relat ed t o lit igat ion.

ENRON ANNUAL REPORT 2000

Port land General. Port land General realized IBIT as f ollow s:

(In millions) Revenues Purchased pow er and f uel Operat ing expenses Depreciat ion and amort izat ion Ot her, net Income bef ore int erest and t axes

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 signifi cant 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 pow er and f uel cost s, decreased $5 million in 1999 as compared t o 1998. Revenues increased primarily as a result of an increase in t he number of cust omers served by Port land General. Higher purchased pow er and f uel cost s, w hich increased 42 percent in 1999, off set t he increase in revenues. Ot her income, net increased $31 million in 1999 as compared t o 1998 primarily as a result of a gain recognized on t he sale of cert ain asset s. In 1999, Enron ent ered int o an agreement t o sell Port land General Elect ric Company t o Sierra Pacifi c Resources. See Not e 2 t o t he Consolidat ed Financial St at ement s. St at ist ics f or Port land General are as f ollow s:

Elect ricit y sales (t housand M Wh) (a) Resident ial Commercial Indust rial Tot al ret ail Wholesale Tot al elect ricit y sales Resource mix Coal Combust ion t urbine Hydro Tot al generat ion Firm purchases Secondary purchases Tot al 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) Generat ion 14.5 Firm purchases 34.9 Secondary purchases 123.6 Tot al average variable pow er 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 Transport at ion Services is expect ed t o provide st able earnings and cash fl ow s during 2001. The f our major nat ural gas pipelines have st rong compet it ive posit ions in t heir respect ive market s as a result of effi cient operat ing pract ices, compet it ive rat es and f avorable market condit ions. Enron Transport at ion Services expect s t o cont inue t o pursue demand-driven expansion opport unit ies. Florida Gas expect s t o complet e an expansion t hat w ill increase t hroughput by 198 million cubic f eet per day (M M cf /d) by mid-2001. Florida Gas has received preliminary approval f rom t he Federal Energy Regulat ory Commission f or an expansion of 428 M M cf /d, expect ed t o be complet ed by early 2003, and is also pursuing an expansion of 150 M M cf /d t hat is expect ed t o be complet ed in mid-2003. Transw est ern complet ed an expansion of 140 M M cf /d in M ay 2000 and is pursuing an expansion of 50 M M cf /d t hat is expect ed t o be complet ed in 2001

Wholesale Services Enron builds it s w holesale businesses t hrough t he creat ion of net w orks involving select ive asset ow nership, cont ract ual access t o t hird-part y asset s and market -making act ivit ies. Each market in w hich Wholesale Services operat es ut ilizes t hese component s in a slight ly diff erent manner and is at a diff erent st age of development . This net w ork st rat egy has enabled Wholesale Services t o est ablish a leading posit ion in it s market s. Wholesale Services’ act ivit ies are cat egorized int o t w o business lines: (a) Commodit y Sales and Services and (b) Asset s and Invest ment s. Act ivit ies may be int egrat ed int o a bundled product off ering f or Enron’s cust omers. Wholesale Services manages it s port f olio of cont ract s and asset s in order t o maximize value, minimize t he associat ed risks and provide overall liquidit y. In doing so, Wholesale Services uses port f olio and risk management disciplines, including off set t ing or hedging t ransact ions, t o manage exposures t o market price movement s (commodit ies, int erest rat es, f oreign currencies and equit ies). Addit ionally, Wholesale Services manages it s liquidit y and exposure t o t hird-part y credit risk t hrough monet izat ion of it s cont ract port f olio or t hird-part y insurance cont ract s. Wholesale Services also sells int erest s in cert ain invest ment s and ot her asset s t o improve liquidit y and overall ret urn, t he t iming of w hich is dependent on market condit ions and management ’s expect at ions of t he invest ment ’s value. The f ollow ing t able refl ect s IBIT f or each business line: (In millions) Commodit y sales and services Asset s and invest ment s Unallocat ed expenses Income bef ore int erest , minorit y int erest s and t axes

2000 $1,630 889 (259)

1999 $ 628 850 (161)

1998 $411 709 (152)

$2,260

$1,317

$968

The f ollow ing discussion analyzes t he cont ribut ions t o IBIT f or each business line. Commodit y Sales and Services. Wholesale Services provides reliable commodit y delivery and predict able pricing t o it s cust omers t hrough f orw ards and ot her cont ract s. This market making act ivit y includes t he purchase, sale, market ing and delivery of nat ural gas, elect ricit y, liquids and ot her commodit ies, as w ell as t he management of Wholesale Services’ ow n port f olio of cont ract s. Cont ract s associat ed w it h t his act ivit y are account ed f or using t he mark-t o-market met hod of account ing. See Not e 1 t o t he Consolidat ed Financial St at ement s. Wholesale Services’ market -making act ivit y is f acilit at ed t hrough a net w ork of capabilit ies including select ive asset ow nership. Accordingly, cert ain asset s involved in t he delivery of t hese services are included in t his business (such as int rast at e nat ural gas pipelines, gas st orage f acilit ies and cert ain elect ric generat ion asset s).

Wholesale Services market s, t ransport s and provides energy commodit ies as refl ect ed in t he f ollow ing t able (including int ercompany amount s):

Physical volumes (BBt ue/d) (a)(b) Gas: Unit ed St at es Canada Europe and Ot her Transport at ion volumes Tot al gas volumes Crude oil and Liquids Elect ricit y (c) Tot al physical volumes (BBt ue/d) Elect ricit y volumes (t housand M Wh) Unit ed St at es Europe and Ot her Tot al Financial set t lement s (not ional, BBt ue/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 f rom commodit y sales and services increased $1.0 billion (160% ) in 2000 as compared t o 1999. Increased profi t s f rom Nort h American gas and pow er market ing operat ions, European pow er market ing operat ions as w ell as t he value of new businesses, such as pulp and paper, cont ribut ed t o t he earnings grow t h of Enron’s commodit y sales and services business. Cont inued market leadership in t erms of volumes t ransact ed, signifi cant increases in nat ural gas prices and price volat ilit y in bot h t he gas and pow er market s w ere t he key cont ribut ors t o increased profi t s in t he gas and pow er int ermediat ion businesses. In lat e 1999, Wholesale Services launched an Int ernet -based eCommerce syst em, EnronOnline, w hich allow s w holesale cust omers t o view Enron’s real t ime pricing and t o complet e commodit y t ransact ions w it h Enron as principal, w it h no direct int eract ion. In it s f irst f ull year of operat ion, EnronOnline posit ively impact ed w holesale volumes, w hich increased 59 percent over 1999 levels. Earnings f rom commodit y sales and services increased $217 million (53% ) in 1999 as compared t o 1998, refl ect ing st rong result s f rom t he int ermediat ion businesses in bot h Nort h America and Europe, w hich include delivery of energy commodit ies and associat ed risk management product s. Wholesale Services also successf ully managed it s overall port f olio of cont ract s, part icularly in minimizing credit exposures ut ilizing t hird-part y cont ract s. New product off erings in coal and pulp and paper market s also added f avorably t o t he result s. Asset s and Invest ment s. Enron’s Wholesale businesses make invest ment s in various energy and cert ain relat ed asset s as a part of it s net w ork st rat egy. Wholesale Services eit her purchases t he asset f rom a t hird part y or develops and const ruct s t he asset . In most cases, Wholesale Services operat es and manages such asset s. Earnings f rom t hese invest ment s principally result f rom operat ions of t he asset s or sales of ow nership int erest s. Addit ionally, Wholesale Services invest s in debt and equit y securit ies of energy and t echnology-relat ed businesses, w hich may also ut ilize Wholesale Services’ product s and services. Wit h t hese merchant invest ment s, Enron’s inf luence is much more limit ed relat ive t o asset s Enron develops or const ruct s. Earnings f rom t hese act ivit ies, w hich are account ed f or on a f air value basis and are included in revenues, result f rom changes in t he market value of t he securit ies. Wholesale Services uses risk

ENRON ANNUAL REPORT 2000

and an addit ional expansion of up t o 150 M M cf /d t hat is expect ed 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 Border Pipeline in Montana. In 2001, Port land General ant icipat es purchased pow er and f uel cost s t o remain at hist orically high levels. Port land General has submit t ed a request w it h t he OPUC t o recover t he ant icipat ed cost increase t hrough a rat e adjust ment .

management disciplines, including hedging t ransact ions, t o manage t he impact of market price movement s on it s merchant invest ment s. See Not e 4 t o t he Consolidat ed Financial St at ement s f or a summary of t hese invest ment s. Earnings f rom asset s and invest ment s increased $39 million (5% ) in 2000 as compared t o 1999 as a result of an increase in t he value of Wholesale Services’ merchant invest ment s, part ially off set by low er gains f rom sales of energy asset s. Earnings f rom asset operat ions w ere comparable t o 1999 levels. Earnings f rom merchant invest ment s w ere posit ively impact ed by pow er-relat ed and energy invest ment s, part ially off set by t he decline in value of t echnology-relat ed and cert ain energy-int ensive indust ry invest ment s. Gains on sales of energy asset s in 2000 included t he monet izat ion of cert ain European energy operat ions. Earnings f rom asset s and invest ment s increased $141 million (20% ) in 1999 as compared t o 1998. During 1999, earnings f rom Wholesale Services’ energy-relat ed asset s increased, refl ect ing t he operat ion of t he Dabhol Pow er Plant in India, ow nership in Elekt ro Elet ricidade e Serviços S.A. (Elekt ro), a Brazilian elect ric ut ilit y, and asset s in various ot her developing market s. Wholesale Services’ merchant invest ment s increased in value during t he year due t o t he expansion int o cert ain t echnology-relat ed invest ment s, part ially off set by a decline in t he value of cert ain energy invest ment s. In addit ion, Wholesale Services’ 1999 earnings increased due t o development and const ruct ion act ivit ies, w hile gains on sales of energy asset s declined. Unallocat ed Expenses. Net unallocat ed expenses such as syst ems expenses and perf ormance-relat ed cost s increased in 2000 due t o grow t h of Wholesale Services’ exist ing businesses and cont inued expansion int o new market s.

ENRON ANNUAL REPORT 2000

Outlook

In 2000, Wholesale Services reinf orced it s leading posit ions in t he nat ural gas and pow er market s in bot h Nort h America and Europe. In t he coming year, Wholesale Services plans t o cont inue t o expand and refi ne it s exist ing energy net w orks and t o ext end it s proven business model t o new market s and indust ries. In 2001, Wholesale Services plans t o cont inue t o fi ne-t une it s already successf ul exist ing energy net w orks. In Nort h America, Enron expect s t o complet e t he sale of fi ve of it s peaking pow er plant s locat ed in t he M idw est and it s int rast at e nat ural gas pipeline. In each case, market condit ions, such as increased liquidit y, have diminished t he need t o ow n physical asset s. For energy net w orks in ot her geographical areas w here liquidit y may be an issue, Enron w ill evaluat e w het her it s exist ing net w ork w ill benefi t f rom addit ional physical asset s. The exist ing net w orks in Nort h America and Europe should cont inue t o provide opport unit ies f or sust ained volume grow t h and increased profi t s. The combination of knowledge gained in building networks in key energy markets and the application of new technology, such as EnronOnline, is expect ed t o provide t he basis t o extend Wholesale Services’ business model to new markets and industries. In key international markets, where deregulation is underway, Enron plans to build energy networks by using the optimum combination of acquiring or constructing physical assets and securing contractual access to third-party assets. Enron also plans to replicate its business model to new industrial markets such as metals, pulp, paper and lumber, coal and steel. Enron expects to use its eCommerce platform, EnronOnline, to accelerate the penetration into these industries. Earnings f rom Wholesale Services are dependent on t he originat ion and complet ion of t ransact ions, some of w hich are individually signifi cant and w hich are impact ed by market condit ions, t he regulat ory environment and cust omer relat ionships. Wholesale Services’ t ransact ions have hist orically been based on

a diverse product port f olio, providing a solid base of earnings. Enron’s st rengt hs, including it s abilit y t o ident if y and respond t o cust omer needs, access t o ext ensive physical asset s and it s int egrat ed product off erings, are import ant drivers of t he expect ed cont inued earnings grow t h. In addit ion, signifi cant earnings are expect ed f rom Wholesale Services’ commodit y port f olio and invest ment s, w hich are subject t o market fl uct uat ions. Ext ernal f act ors, such as t he amount of volat ilit y in market prices, impact t he earnings opport unit y associat ed w it h Wholesale Services’ business. Risk relat ed t o t hese act ivit ies is managed using nat urally off set t ing t ransact ions and hedge t ransact ions. The eff ect iveness of Enron’s risk management act ivit ies can have a mat erial impact on f ut ure earnings. See “ Financial Risk M anagement ” f or a discussion of market risk relat ed t o Wholesale Services.

Retail Energy Services Energy Services sells or manages t he delivery of nat ural gas, elect ricit y, liquids and ot her commodit ies t o indust rial and commercial cust omers locat ed in Nort h America and Europe. Energy Services also provides out sourcing solut ions t o cust omers f or f ull energy management . This int egrat ed product includes t he management of commodit y delivery, energy inf ormat ion and energy asset s, and price risk management act ivit ies. The commodit y port ion of t he cont ract s associat ed w it h t his business are account ed f or under t he mark-t o-market met hod of account ing. See Not e 1 t o t he Consolidat ed Financial St at ement s. (In millions) Revenues Cost of sales Operat ing expenses Depreciat ion and amort izat ion Equit y losses Ot her, net IBIT bef ore it ems impact ing comparabilit y It ems impact ing comparabilit y: Gain on The New Pow er Company st ock issuance Ret ail Energy Services charges Income (loss) bef ore int erest , minorit y int erest s and t axes

2000 $4,615 4,028 449 38 (60) 63

1999 $1,807 1,551 308 29 13

103

(68)

121 (59) $ 165

(68)

1998 $1,072 955 210 31 (2) 7 (119)

$ (119)

Operating Results Revenues and gross margin increased $2,808 million and $331 million, respect ively, in 2000 compared t o 1999, primarily result ing f rom execut ion of commit ment s on it s exist ing cust omer base, long-t erm energy cont ract s originat ed in 2000 and t he increase in t he value of Energy Services’ cont ract port f olio. Operat ing expenses increased as a result of cost s incurred in building t he capabilit ies t o deliver services on exist ing cust omer cont ract s and in building Energy Services’ out sourcing business in Europe. Ot her, net in 2000 consist ed primarily of gains associat ed w it h t he securit izat ion of non-merchant equit y inst rument s. Equit y losses refl ect Energy Services’ port ion of losses of The New Pow er Company. It ems impact ing comparabilit y in 2000 included a pre-t ax gain of $121 million relat ed t o t he issuance of common st ock by The New Pow er Company and a charge of $59 million relat ed t o t he w rit e-off of cert ain inf ormat ion t echnology and ot her cost s. The New Pow er Company, w hich is approximat ely 45 percent ow ned by Enron, w as f ormed t o provide elect ricit y and nat ural gas t o resident ial and small commercial cust omers in deregulat ed energy market s in t he Unit ed St at es.

During 2001, Energy Services ant icipat es cont inued grow t h in t he demand f or ret ail energy out sourcing solut ions. Energy Services w ill deliver t hese services t o it s exist ing cust omers, w hile cont inuing t o expand it s commercial and indust rial cust omer base f or t ot al energy out sourcing. Energy Services also plans t o cont inue int egrat ing it s service delivery capabilit ies, ext end it s business model t o relat ed market s and off er new product s.

to manage their bandwidth needs. The availability of Enron’s bandwidth intermediation products and prices on EnronOnline are expected to favorably impact the volume of transactions. In 2001, Broadband Services expects to continue to expand the commercial roll-out of it s cont ent service off erings including video-ondemand. Enron expects the volume of content delivered over its network to increase as more content delivery contracts are signed and as more distribution partner locations are connected.

Broadband Services

Corporate and Other

In implement ing Enron’s net w ork st rat egy, Broadband Services is const ruct ing t he Enron Int elligent Net w ork, a nat ionw ide fi ber-opt ic net w ork t hat consist s of bot h fi ber deployed by Enron and acquired capacit y on non-Enron net w orks and is managed by Enron’s Broadband Operat ing Syst em sof t w are. Enron is ext ending it s market -making and risk management skills f rom it s energy business t o develop t he bandw idt h int ermediat ion business t o help cust omers manage unexpect ed fl uct uat ion in t he price, supply and demand of bandw idt h. Enron’s bandw idt h-ondemand plat f orm allow s delivery of high-bandw idt h media-rich cont ent such as video st reaming, high capacit y dat a t ransport and video conf erencing. Broadband Services also makes invest ment s in companies w it h relat ed t echnologies and w it h t he pot ent ial f or capit al appreciat ion. Earnings f rom t hese merchant invest ment s, w hich are account ed f or on a f air value basis and are included in revenues, result f rom changes in t he market value of t he securit ies. Broadband Services uses risk management disciplines, including hedging t ransact ions, t o manage t he impact of market price movement s on it s merchant invest ment s. Broadband Services also sells int erest s in cert ain invest ment s and ot her asset s t o improve liquidit y and overall ret urn, t he t iming of w hich is dependent on market condit ions and management ’s expect at ions of t he invest ment ’s value. The component s of Broadband Services’ businesses include t he development and const ruct ion of t he Enron Int elligent Net w ork, sales of excess fi ber and sof t w are, bandw idt h int ermediat ion and t he delivery of cont ent . Signifi cant component s of Broadband Services’ result s are as f ollow s:

Signifi cant component s of Corporat e and Ot her’s IBIT are as f ollow s: (In millions) IBIT bef ore it ems impact ing comparabilit y

2000

1999

1998

$(289)

$ (17)

$ 7

It ems impact ing comparabilit y: Charge t o refl ect impairment by Azurix (326) Gains on exchange and sales of Enron Oil & Gas Company (EOG) stock Charge t o refl ect impairment of M TBE asset s and losses on cont ract ed M TBE product ion Loss bef ore int erest , minorit y int erest s and t axes $(615)

454

(441)

(61)

(4)

$(32)

Broadband Services recognized a loss before interest, minority interests and taxes of $60 million in 2000. Gross margin included earnings from sales of excess fi ber capacity, a signifi cant increase in the market value of Broadband Services’ merchant investments and the monetization of a portion of Enron’s broadband content delivery platform. Expenses incurred during the period include expenses related to building the business and depreciation and amortization.

Result s f or Corporat e and Ot her in 2000 refl ect operat ing losses f rom Enron’s invest ment in Azurix (excluding t he impairment s discussed below ) and increased inf ormat ion t echnology, employee compensat ion and corporat e-w ide expenses. Result s f or Corporat e and Ot her in 1999 w ere impact ed by higher corporat e expenses, part ially off set by increased earnings f rom EREC result ing f rom increased sales volumes f rom it s German manuf act uring subsidiary and f rom t he complet ion and sale of cert ain domest ic w ind project s. Enron also recognized higher earnings relat ed t o Azurix. Result s in 1998 w ere f avorably impact ed by increases in t he market value of cert ain corporat e-managed fi nancial inst rument s, part ially off set by higher corporat e expenses. It ems impact ing comparabilit y in 2000 included a $326 million charge refl ect ing Enron’s port ion of impairment s recorded by Azurix relat ed t o asset s in Argent ina. It ems impact ing comparabilit y in 1999 included a pre-t ax gain of $454 million on t he exchange and sale of Enron’s int erest in EOG (see Not e 2 t o t he Consolidat ed Financial St at ement s) and a $441 million pre-t ax charge f or t he impairment of it s M TBE asset s (see Not e 17 t o t he Consolidat ed Financial St at ement s). During 1998, Enron recognized a pre-t ax gain of $22 million on t he delivery of 10.5 million shares of EOG st ock held by Enron as repayment of mandat orily exchangeable debt . Enron also recorded a $61 million charge t o refl ect losses on cont ract ed M TBE product ion.

Outlook

Interest and Related Charges, Net

Broadband Services is extending Enron’s proven business model to the communications industry. In 2001, Enron expects to further develop the Enron Intelligent Network, a global broadband network with broad connectivity potential to both buyers and sellers of bandwidth through Enron’s pooling points. In addition, Enron expects to further deploy its proprietary Broadband Operating System across the Enron Intelligent Network, enabling Enron to manage bandwidth capacity independent of owning the underlying fi ber. Broadband Services expects its intermediation transaction level to increase signifi cantly in 2001 as more market participants connect to the pooling points and transact with Enron

Int erest and relat ed charges, net of int erest capit alized w hich t ot aled $38 million, $54 million and $66 million f or 2000, 1999 and 1998, respect ively, increased t o $838 million in 2000 f rom $656 million in 1999 and $550 million in 1998. The increase in 2000 as compared t o 1999 w as primarily a result of increased long-t erm debt levels, increased average short -t erm borrow ings, short -t erm debt assumed as a result of t he acquisit ion of M G plc and higher int erest rat es in t he U.S. The increase w as part ially off set by t he replacement of debt relat ed t o a Brazilian subsidiary w it h low er int erest rat e debt .

(In millions) Gross margin Operat ing expenses Depreciat ion and amort izat ion Ot her, net Loss before interest, minority interests and taxes

2000 $318 305 77 4 $ (60)

ENRON ANNUAL REPORT 2000

Outlook

The increase in 1999 as compared t o 1998 w as primarily due t o debt issuances and debt relat ed t o a Brazilian subsidiary, part ially off set by a decrease in debt relat ed t o EOG f ollow ing t he sale and exchange of Enron’s int erest s in August 1999. See Not e 2 t o t he Consolidat ed Financial St at ement s.

Minority Interests M inorit y int erest s include t he f ollow ing: (In millions) Elekt ro (a) M ajorit y-ow ned limit ed liabilit y company and limit ed part nerships Enron Oil & Gas Company Ot her Tot al

2000 $ 33

1999 $ 39

1998 $ -

105 16 $154

71 2 23 $135

24 53 $77

(a) Relates to the respective parents of Elektro, which had minority shareholders in 2000 and 1999. See Note 8 to the Consolidated Financial Statements.

Minority interests include Elektro beginning January 1, 1999, a majority-owned limited liability company and majority-owned limited partnerships since their formation during 1998 through 2000 and EOG until the exchange and sale of Enron’s interests in August 1999 (see Note 2 to the Consolidated Financial Statements).

Income Tax Expense Income t ax expense increased in 2000 as compared t o 1999 primarily as a result of increased earnings, decreased equit y earnings and decreased t ax benefi t s relat ed t o t he f oreign t ax rat e diff erent ial, part ially off set by an increase in t he diff erences bet w een t he book and t ax basis of cert ain asset s and st ock sales. Income t ax expense decreased in 1999 compared t o 1998 primarily as a result of increased equit y earnings, t ax benefi t s relat ed t o t he f oreign t ax rat e diff erent ial and t he audit set t lement relat ed t o M ont hly Income Pref erred Shares, part ially off set by increased earnings.

Cumulative Effect of Accounting Changes In 1999, Enron recorded an af t er-t ax charge of $131 million t o refl ect t he init ial adopt ion (as of January 1, 1999) of t w o new account ing pronouncement s, t he AICPA St at ement of Posit ion 98-5 (SOP 98-5), “ Report ing on t he Cost s of St art -Up Act ivit ies,” and t he Emerging Issues Task Force Issue No. 98-10, “ Account ing f or Cont ract s Involved in Energy Trading and Risk M anagement Act ivit ies.” The 1999 charge w as primarily relat ed t o t he adopt ion of SOP 98-5.

ENRON ANNUAL REPORT 2000

NEW ACCOUNTING PRONOUNCEMENTS

In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, “ Account ing f or Derivat ive Inst rument s and Hedging Activities,” which was subsequently amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 must be applied to all derivative instruments and certain derivative instruments embedded in hybrid instruments and requires that such instruments be recorded in the balance sheet either as an asset or liability measured at its fair value through earnings, with special accounting allowed for certain qualifying hedges. Enron will adopt SFAS No. 133 as of January 1, 2001. Due to the adoption of SFAS No. 133, Enron will recognize an after-tax non-cash loss of approximately $5 million in earnings and an after-tax non-cash gain in “ Other Comprehensive Income,” a component of shareholders’ equity, of approximately $22 million from the cumulative effect of a change in accounting principle. Enron will also reclassify $532 million from “ Long-Term Debt” to “ Other Liabilities” due to the adoption.

The t ot al impact of Enron’s adopt ion of SFAS No. 133 on earnings and on “ Ot her Comprehensive Income” is dependent upon cert ain pending int erpret at ions, w hich are current ly under considerat ion, including t hose relat ed t o “ normal purchases and normal sales” and infl at ion escalat ors included in cert ain cont ract payment provisions. The int erpret at ions of t hese issues, and ot hers, are current ly under considerat ion by t he FASB. While t he ult imat e conclusions reached on int erpret at ions being considered by t he FASB could impact t he eff ect s of Enron’s adopt ion of SFAS No. 133, Enron does not believe t hat such conclusions w ould have a mat erial eff ect on it s current est imat e of t he impact of adopt ion.

FINANCIAL CONDITION Cash Flows (In millions) Cash provided by (used in): Operat ing act ivit ies Invest ing act ivit ies Financing act ivit ies

2000 $ 4,779 (4,264) 571

1999 $ 1,228 (3,507) 2,456

1998 $ 1,640 (3,965) 2,266

Net cash provided by operat ing act ivit ies increased $3,551 million in 2000, primarily refl ect ing decreases in w orking capit al, posit ive operat ing result s and a receipt of cash associat ed w it h t he assumpt ion of a cont ract ual obligat ion. Net cash provided by operat ing act ivit ies decreased $412 million in 1999, primarily refl ect ing increases in w orking capit al and net asset s f rom price risk management act ivit ies, part ially off set by increased earnings and higher proceeds f rom sales of merchant asset s and invest ment s. The 1998 amount refl ect s posit ive operat ing cash fl ow f rom Enron’s major business segment s, proceeds f rom sales of int erest s in energy-relat ed merchant asset s and cash f rom t iming and ot her changes relat ed t o Enron’s commodit y port f olio, part ially off set by new invest ment s in merchant asset s and invest ment s. Net cash used in invest ing act ivit ies primarily refl ect s capit al expendit ures and equit y invest ment s, w hich t ot al $3,314 million in 2000, $3,085 million in 1999 and $3,564 million in 1998, and cash used f or business acquisit ions. See “ Capit al Expendit ures and Equit y Invest ment s” below and see Not e 2 t o t he Consolidat ed Financial St at ement s f or cash used f or business acquisit ions. Part ially off set t ing t hese uses of cash w ere proceeds f rom sales of non-merchant asset s, including cert ain equit y inst rument s by Energy Services and an int ernat ional pow er project , w hich t ot aled $494 million in 2000. Proceeds f rom non-merchant asset sales w ere $294 million in 1999 and $239 million in 1998. Cash provided by fi nancing act ivit ies in 2000 included proceeds f rom t he issuance of subsidiary equit y and t he issuance of common st ock relat ed t o employee benefi t plans, part ially off set by payment s of dividends. Cash provided by fi nancing act ivit ies in 1999 included proceeds f rom t he net issuance of short - and long-t erm debt , t he issuance of common st ock and t he issuance of subsidiary equit y, part ially off set by payment s of dividends. Cash provided by fi nancing act ivit ies in 1998 included proceeds f rom t he net issuance of short - and long-t erm debt , t he issuance of common st ock and t he sale of a minorit y int erest in a subsidiary, part ially off set by payment s of dividends.

Capital Expenditures and Equity Investments

CAPITALIZATION

Capit al expendit ures by operat ing segment are as f ollow s:

1999 $ 316 1,216 64 226 541 $2,363

1998 $ 310 706 75 690 124 $1,905

Capit al expendit ures increased $18 million in 2000 and $458 million in 1999 as compared t o t he previous year. Capit al expendit ures in 2000 primarily relat e t o const ruct ion of pow er plant s t o ext end Wholesale Services’ net w ork and fi ber opt ic net w ork inf rast ruct ure f or Broadband Services. During 1999, Wholesale Services expendit ures increased due primarily t o const ruct ion of domest ic and int ernat ional pow er plant s. The 1999 increase in Corporat e and Ot her refl ect s t he purchase of cert ain previously leased M TBE-relat ed asset s. Cash used f or invest ment s in equit y affi liat es by t he operat ing segment s is as f ollow s: (In millions) Transport at ion and Dist ribut ion Wholesale Services Corporat e and Ot her Tot al

2000 $ 1 911 21 $933

1999 $ 712 10 $722

1998 27 703 929 $1,659

Equity investments in 2000 relate primarily to capital invested for the ongoing construction, by a joint venture, of a power plant in India as well as other international investments. Equity investments in 1999 relate primarily to an investment in a joint venture that holds gas distribution and related businesses in South Korea and the power plant project in India. The level of spending f or capit al expendit ures and equit y invest ment s w ill vary depending upon condit ions in t he energy and broadband market s, relat ed economic condit ions and ident if ied opport unit ies. M anagement expect s t hat t he capit al spending program w ill be f unded by a combinat ion of int ernally generat ed f unds, proceeds f rom disposit ions of select ed asset s and short - and long-t erm borrow ings.

Working Capital At December 31, 2000, Enron had w orking capit al of $2.0 billion. If a w orking capit al defi cit should occur, Enron has credit f acilit ies in place t o f und w orking capit al requirement s. At December 31, 2000, t hose credit lines provided f or up t o $4.2 billion of commit t ed and uncommit t ed credit , of w hich $290 million w as out st anding. Cert ain of t he credit agreement s cont ain pref unding covenant s. How ever, such covenant s are not expect ed t o rest rict Enron’s access t o f unds under t hese agreement s. In addit ion, Enron sells commercial paper and has agreement s t o sell t rade account s receivable, t hus providing fi nancing t o meet seasonal w orking capit al needs. M anagement believes t hat t he sources of f unding described above are suffi cient t o meet short - and long-t erm liquidit y needs not met by cash fl ow s f rom operat ions.

Tot al capit alizat ion at December 31, 2000 w as $25.0 billion. Debt as a percent age of t ot al capit alizat ion increased t o 40.9 percent at December 31, 2000 as compared t o 38.5 percent at December 31, 1999. The increase in t he rat io primarily refl ect s increased debt levels and t he impact on t ot al equit y of t he decline in t he value of t he Brit ish pound st erling. This w as part ially off set by t he issuances, in 2000, of Enron common st ock and t he cont ribut ion of common shares (see Not e 16 t o t he Consolidat ed Financial St at ement s). The issuances of Enron common st ock primarily relat ed t o t he acquisit ion of a minorit y shareholder’s int erest in Enron Energy Services, LLC and t he exercise of employee st ock opt ions. Enron is a part y t o cert ain fi nancial cont ract s w hich cont ain provisions f or early set t lement in t he event of a signifi cant market price decline in w hich Enron’s common st ock f alls below cert ain levels (prices ranging f rom $28.20 t o $55.00 per share) or if t he credit rat ings f or Enron’s unsecured, senior long-t erm debt obligat ions f all below invest ment grade. The impact of t his early set t lement could include t he issuance of addit ional shares of Enron common st ock. Enron’s senior unsecured long-t erm debt is current ly rat ed BBB+ by St andard & Poor’s Corporat ion and Fit ch IBCA and Baa1 by M oody’s Invest or Service. Enron’s cont inued invest ment grade st at us is crit ical t o t he success of it s w holesale businesses as w ell as it s abilit y t o maint ain adequat e liquidit y. Enron’s management believes it w ill be able t o maint ain it s credit rat ing.

Financial Risk Management Wholesale Services off ers price risk management services primarily relat ed t o commodit ies associat ed w it h t he energy sect or (nat ural gas, elect ricit y, crude oil and nat ural gas liquids). Energy Services and Broadband Services also off er price risk management services t o t heir cust omers. These services are provided t hrough a variet y of fi nancial inst rument s including f orw ard cont ract s, w hich may involve physical delivery, sw ap agreement s, w hich may require payment s t o (or receipt of payment s f rom) count erpart ies based on t he diff erent ial bet w een a fi xed and variable price f or t he commodit y, opt ions and ot her cont ract ual arrangement s. Int erest rat e risks and f oreign currency risks associat ed w it h t he f air value of Wholesale Services’ commodit ies port f olio are managed using a variet y of fi nancial inst rument s, including fi nancial f ut ures, sw aps and opt ions. On a much more limit ed basis, Enron’s ot her businesses also ent er int o fi nancial inst rument s such as f orw ards, sw aps and ot her cont ract s primarily f or t he purpose of hedging t he impact of market fl uct uat ions on asset s, liabilit ies, product ion or ot her cont ract ual commit ment s. Changes in t he market value of t hese hedge t ransact ions are def erred unt il t he gain or loss is recognized on t he hedged it em. Enron manages market risk on a port f olio basis, subject t o paramet ers est ablished by it s Board of Direct ors. M arket risks are monit ored by an independent risk cont rol group operat ing separat ely f rom t he unit s t hat creat e or act ively manage t hese risk exposures t o ensure compliance w it h Enron’s st at ed risk management policies. ENRON ANNUAL REPORT 2000

2001 (In millions) Est imat e 2000 Transport at ion and Dist ribut ion $ 140 $ 270 Wholesale Services 570 1,280 Ret ail Energy Services 50 70 Broadband Services 700 436 Explorat ion and Product ion Corporat e and Ot her 40 325 Tot al $1,500 $2,381

Market Risk The use of fi nancial instruments by Enron’s businesses may expose Enron to market and credit risks resulting from adverse changes in commodity and equity prices, interest rates and foreign exchange rates. For Enron’s businesses, the major market risks are discussed below: Commodit y Price Risk. Commodit y price risk is a consequence of providing price risk management services to customers. As discussed above, Enron actively manages this risk on a portfolio basis to ensure compliance with Enron’s stated risk management policies. Interest Rate Risk. Interest rate risk is also a consequence of providing price risk management services to customers and having variable rate debt obligations, as changing interest rates impact the discounted value of future cash fl ows. Enron utilizes forwards, futures, swaps and options to manage its interest rate risk. Foreign Currency Exchange Rat e Risk. Foreign currency exchange rat e risk is t he result of Enron’s int ernat ional operat ions and price risk management services provided t o it s w orldw ide cust omer base. The primary purpose of Enron’s f oreign currency hedging act ivit ies is t o prot ect against t he volat ilit y associat ed w it h f oreign currency purchase and sale t ransact ions. Enron primarily ut ilizes f orw ard exchange cont ract s, f ut ures and purchased opt ions t o manage Enron’s risk profi le. Equit y Risk. Equit y risk arises f rom Enron’s part icipat ion in invest ment s. Enron generally manages t his risk by hedging specifi c invest ment s using f ut ures, f orw ards, sw aps and opt ions. Enron evaluat es, measures and manages t he market risk in it s invest ment s on a daily basis ut ilizing value at risk and ot her met hodologies. The quant ifi cat ion of market risk using value at risk provides a consist ent measure of risk across diverse market s and product s. The use of t hese met hodologies requires a number of key assumpt ions including t he select ion of a confi dence level f or expect ed losses, t he holding period f or liquidat ion and t he t reat ment of risks out side t he value at risk met hodologies, including liquidit y risk and event risk. Value at risk represent s an est imat e of reasonably possible net losses in earnings t hat w ould be recognized on it s invest ment s assuming hypot het ical movement s in f ut ure market rat es and no change in posit ions. Value at risk is not necessarily indicat ive of act ual result s w hich may occur.

ENRON ANNUAL REPORT 2000

Value at Risk

Enron has perf ormed an ent it y-w ide value at risk analysis of virt ually all of Enron’s fi nancial inst rument s, including price risk management act ivit ies and merchant invest ment s. Value at risk incorporat es numerous variables t hat could impact t he f air value of Enron’s invest ment s, including commodit y prices, int erest rat es, f oreign exchange rat es, equit y prices and associat ed volat ilit ies, as w ell as correlat ion w it hin and across t hese variables. Enron est imat es value at risk f or commodit y, int erest rat e and f oreign exchange exposures using a model based on M ont e Carlo simulat ion of delt a/gamma posit ions w hich capt ures a signifi cant port ion of t he exposure relat ed t o opt ion posit ions. The value at risk f or equit y exposure discussed above is based on J.P. M organ’s RiskM et rics™ approach. Bot h value at risk met hods ut ilize a one-day holding period and a 95% confi dence level. Cross-commodit y correlat ions are used as appropriat e. The use of value at risk models allow s management t o aggregat e risks across t he company, compare risk on a consist ent basis and ident if y t he drivers of risk. Because of t he inherent limit at ions t o value at risk, including t he use of delt a/gamma approximat ions t o value opt ions, subject ivit y in t he choice of liquidat ion period and reliance on hist orical dat a t o calibrat e t he models, Enron relies on value at risk as only one component in it s risk cont rol process. In addit ion t o using value at risk measures,

Enron perf orms regular st ress and scenario analyses t o est imat e t he economic impact of sudden market moves on t he value of it s port f olios. The result s of t he st ress t est ing, along w it h t he prof essional judgment of experienced business and risk managers, are used t o supplement t he value at risk met hodology and capt ure addit ional market -relat ed risks, including volat ilit y, liquidit y and event , concent rat ion and correlat ion risks. The f ollow ing t able illust rat es t he value at risk f or each component of market risk: December 31,

Year ended December 31, 2000 High

(In millions)

Trading Market Risk: Commodity price (b) Interest rate Foreign currency exchange rate Equity (c)

Low

Average (a) Valuat ion (a) Valuat ion (a)

2000

1999

$66 -

$21 -

$50 -

$81 -

$23 -

2 -

1 2

2 1

5 2

2 -

8 7

4 3

8 6

10 7

4 5

Non-Trading Market Risk (d): Commodity price Interest rate Foreign currency exchange rate Equity

(a) The average value presents a twelve month average of the month-end values. The high and low valuations for each market risk component represent the highest and lowest month-end value during 2000. (b) In 2000, increased natural gas prices combined with increased price volatility in power and gas markets caused Enron’s value at risk to increase significantly. (c) Enron’s equity trading market risk primarily relates to merchant investments (see Note 4 to the Consolidated Financial Statements). In 2000, the value at risk model utilized for equity trading market risk was refined to more closely correlate with the valuation methodologies used for merchant activities. (d) Includes only the risk related to the financial instruments that serve as hedges and does not include the related underlying hedged item.

Accounting Policies Accounting policies for price risk management and hedging activities are described in Note 1 to the Consolidated Financial Statements.

Management’s Responsibility for Financial Reporting

This Report includes f orw ard-looking st at ement s w it hin t he meaning of Sect ion 27A of t he Securit ies Act of 1933 and Sect ion 21E of t he Securit ies Exchange Act of 1934. All st at ement s ot her t han st at ement s of hist orical f act s cont ained in t his document are f orw ard-looking st at ement s. Forw ard-looking st at ement s include, but are not limit ed t o, st at ement s relat ing t o expansion opport unit ies f or t he Transport at ion Services, ext ension of Enron’s business model t o new market s and indust ries, demand in t he market f or broadband services and high bandw idt h applicat ions, t ransact ion volumes in t he U.S. pow er market , commencement of commercial operat ions of new pow er plant s and pipeline project s, complet ion of t he sale of cert ain asset s and grow t h in t he demand f or ret ail energy out sourcing solut ions. When used in t his document , t he w ords “ ant icipat e,” “ believe,” “ est imat e,” “ expect s,” “ int end,” “ may,” “ project ,” “ plan,” “ should” and similar expressions are int ended t o be among t he st at ement s t hat ident if y f orw ard-looking st at ement s. Alt hough Enron believes t hat it s expect at ions refl ect ed in t hese f orw ardlooking st at ement s are based on reasonable assumpt ions, such st at ement s involve risks and uncert aint ies and no assurance can be given t hat act ual result s w ill be consist ent w it h t hese f orw ardlooking st at ement s. Import ant f act ors t hat could cause act ual result s t o diff er mat erially f rom t hose in t he f orw ard-looking st at ement s herein include success in market ing nat ural gas and pow er t o w holesale cust omers; t he abilit y of Enron t o penet rat e new ret ail nat ural gas and elect ricit y market s (including energy out sourcing market s) in t he Unit ed St at es and f oreign jurisdict ions; development of Enron’s broadband net w ork and cust omer demand f or int ermediat ion and cont ent services; t he t iming, ext ent and market eff ect s of deregulat ion of energy market s in t he Unit ed St at es, including t he current energy market condit ions in Calif ornia, and in f oreign jurisdict ions; ot her regulat ory development s in t he Unit ed St at es and in f oreign count ries, including t ax legislat ion and regulat ions; polit ical development s in f oreign count ries; t he ext ent of eff ort s by government s t o privat ize nat ural gas and elect ric ut ilit ies and ot her indust ries; t he t iming and ext ent of changes in commodit y prices f or crude oil, nat ural gas, elect ricit y, f oreign currency and int erest rat es; t he ext ent of success in acquiring oil and gas propert ies and in discovering, developing, producing and market ing reserves; t he t iming and success of Enron’s eff ort s t o develop int ernat ional pow er, pipeline and ot her inf rast ruct ure project s; t he eff ect iveness of Enron’s risk management act ivit ies; t he abilit y of count erpart ies t o fi nancial risk management inst rument s and ot her cont ract s w it h Enron t o meet t heir fi nancial commit ment s t o Enron; and Enron’s abilit y t o access t he capit al market s and equit y market s during t he periods covered by t he f orw ard-looking st at ement s, w hich w ill depend on general market condit ions and Enron’s abilit y t o maint ain t he credit rat ings f or it s unsecured senior long-t erm debt obligat ions.

The f ollow ing fi nancial st at ement s of Enron Corp. and subsidiaries (collect ively, Enron) w ere prepared by management , w hich is responsible f or t heir int egrit y and object ivit y. The st at ement s have been prepared in conf ormit y w it h generally accept ed account ing principles and necessarily include some amount s t hat are based on t he best est imat es and judgment s of management . The syst em of int ernal cont rols of Enron is designed t o provide reasonable assurance as t o t he reliabilit y of fi nancial st at ement s and t he prot ect ion of asset s f rom unaut horized acquisit ion, use or disposit ion. This syst em is augment ed by w rit t en policies and guidelines and t he caref ul select ion and t raining of qualifi ed personnel. It should be recognized, how ever, t hat t here are inherent limit at ions in t he eff ect iveness of any syst em of int ernal cont rol. Accordingly, even an eff ect ive int ernal cont rol syst em can provide only reasonable assurance w it h respect t o t he preparat ion of reliable fi nancial st at ement s and saf eguarding of asset s. Furt her, because of changes in condit ions, int ernal cont rol syst em eff ect iveness may vary over t ime. Enron assessed it s int ernal cont rol syst em as of December 31, 2000, 1999 and 1998, relat ive t o current st andards of cont rol crit eria. Based upon t his assessment , management believes t hat it s syst em of int ernal cont rols w as adequat e during t he periods t o provide reasonable assurance as t o t he reliabilit y of fi nancial st at ement s and t he prot ect ion of asset s against unaut horized acquisit ion, use or disposit ion. Art hur Andersen LLP w as engaged t o audit t he fi nancial st at ement s of Enron and issue report s t hereon. Their audit s included developing an overall underst anding of Enron’s account ing syst ems, procedures and int ernal cont rols and conduct ing t est s and ot her audit ing procedures suffi cient t o support t heir opinion on t he fi nancial st at ement s. Art hur Andersen LLP w as also engaged t o examine and report on management ’s assert ion about t he eff ect iveness of Enron’s syst em of int ernal cont rols. The Report s of Independent Public Account ant s appear in t his Annual Report . The adequacy of Enron’s fi nancial cont rols and t he account ing principles employed in fi nancial report ing are under t he general oversight of t he Audit Commit t ee of Enron Corp.’s Board of Direct ors. No member of t his commit t ee is an offi cer or employee of Enron. The independent public account ant s have direct access t o t he Audit Commit t ee, and t hey meet w it h t he commit t ee f rom t ime t o t ime, w it h and w it hout fi nancial management present , t o discuss account ing, audit ing and fi nancial report ing mat t ers.

ENRON ANNUAL REPORT 2000

Information Regarding Forward-Looking Statements

Reports Of Independent Public Accountants To t he Shareholders and Board of Direct ors of Enron Corp.:

To t he Shareholders and Board of Direct ors of Enron Corp.:

We have examined management ’s assert ion t hat t he syst em of int ernal cont rol of Enron Corp. (an Oregon corporat ion) and subsidiaries as of December 31, 2000, 1999 and 1998 w as adequat e t o provide reasonable assurance as t o t he reliabilit y of fi nancial st at ement s and t he prot ect ion of asset s f rom unaut horized acquisit ion, use or disposit ion, included in t he accompanying report on M anagement ’s Responsibilit y f or Financial Report ing. M anagement is responsible f or maint aining eff ect ive int ernal cont rol over t he reliabilit y of fi nancial st at ement s and t he prot ect ion of asset s against unaut horized acquisit ion, use or disposit ion. Our responsibilit y is t o express an opinion on management ’s assert ion based on our examinat ion. Our examinat ions w ere made in accordance w it h at t est at ion st andards est ablished by t he American Inst it ut e of Cert ifi ed Public Account ant s and, accordingly, included obt aining an underst anding of t he syst em of int ernal cont rol, t est ing and evaluat ing t he design and operat ing eff ect iveness of t he syst em of int ernal cont rol and such ot her procedures as w e considered necessary in t he circumst ances. We believe t hat our examinat ions provide a reasonable basis f or our opinion. Because of inherent limit at ions in any syst em of int ernal cont rol, errors or irregularit ies may occur and not be det ect ed. Also, project ions of any evaluat ion of t he syst em of int ernal cont rol t o f ut ure periods are subject t o t he risk t hat t he syst em of int ernal cont rol may become inadequat e because of changes in condit ions, or t hat t he degree of compliance w it h t he policies or procedures may det eriorat e. In our opinion, management ’s assert ion t hat t he syst em of int ernal cont rol of Enron Corp. and it s subsidiaries as of December 31, 2000, 1999 and 1998 w as adequat e t o provide reasonable assurance as t o t he reliabilit y of fi nancial st at ement s and t he prot ect ion of asset s f rom unaut horized acquisit ion, use or disposit ion is f airly st at ed, in all mat erial respect s, based upon current st andards of cont rol crit eria.

We have audit ed t he accompanying consolidat ed balance sheet of Enron Corp. (an Oregon corporat ion) and subsidiaries as of December 31, 2000 and 1999, and t he relat ed consolidat ed st at ement s of income, comprehensive income, cash fl ow s and changes in shareholders’ equit y f or each of t he t hree years in t he period ended December 31, 2000. These fi nancial st at ement s are t he responsibilit y of Enron Corp.’s management . Our responsibilit y is t o express an opinion on t hese fi nancial st at ement s based on our audit s. We conduct ed our audit s in accordance w it h audit ing st andards generally accept ed in t he Unit ed St at es. Those st andards require t hat w e plan and perf orm t he audit t o obt ain reasonable assurance about w het her t he fi nancial st at ement s are f ree of mat erial misst at ement . An audit includes examining, on a t est basis, evidence support ing t he amount s and disclosures in t he f inancial st at ement s. An audit also includes assessing t he account ing principles used and signif icant est imat es made by management , as w ell as evaluat ing t he overall fi nancial st at ement present at ion. We believe t hat our audit s provide a reasonable basis f or our opinion. In our opinion, t he fi nancial st at ement s ref erred t o above present f airly, in all mat erial respect s, t he fi nancial posit ion of Enron Corp. and subsidiaries as of December 31, 2000 and 1999, and t he result s of t heir operat ions, cash fl ow s and changes in shareholders’ equit y f or each of t he t hree years in t he period ended December 31, 2000, in conf ormit y w it h account ing principles generally accept ed in t he Unit ed St at es. As discussed in Not e 18 t o t he consolidat ed fi nancial st at ement s, Enron Corp. and subsidiaries changed it s met hod of account ing f or cost s of st art -up act ivit ies and it s met hod of account ing f or cert ain cont ract s involved in energy t rading and risk management act ivit ies in t he fi rst quart er of 1999.

Art hur Andersen LLP Art hur Andersen LLP

ENRON ANNUAL REPORT 2000

Houst on, Texas February 23, 2001

Enron Corp. and Subsidiaries Consolidated Income Statement (In millions, except per share amount s) Revenues Nat ural gas and ot her product s Elect ricit y M et als Ot her Tot al revenues

2000

Year ended December 31, 1999

1998

$ 50,500 33,823 9,234 7,232 100,789

$19,536 15,238 5,338 40,112

$13,276 13,939 4,045 31,260

94,517 3,184 855 280 98,836

34,761 3,045 870 193 441 39,310

26,381 2,473 827 201 29,882

Operating Income

1,953

802

1,378

Other Income and Deductions Equit y in earnings of unconsolidat ed equit y affi liat es Gains on sales of non-merchant asset s Gains on t he issuance of st ock by TNPC, Inc. Int erest income Ot her income, net Income Before Interest, M inority Interests and Income Taxes

87 146 121 212 (37) 2,482

309 541 162 181 1,995

97 56 88 (37) 1,582

838 77 154 434 979 979

656 76 135 104 1,024 (131) 893

550 77 77 175 703 703

Costs and Expenses Cost of gas, elect ricit y, met als and ot her product s Operat ing expenses Depreciat ion, deplet ion and amort izat ion Taxes, ot her t han income t axes Impairment of long-lived asset s Tot al cost s and expenses

Int erest and relat ed charges, net Dividends on company-obligat ed pref erred securit ies of subsidiaries M inorit y int erest s Income t ax expense Net income bef ore cumulat ive eff ect of account ing changes Cumulat ive eff ect of account ing changes, net of t ax Net Income Pref erred st ock dividends Earnings on Common Stock Earnings Per Share of Common Stock Basic Bef ore cumulat ive eff ect of account ing changes Cumulat ive eff ect of account ing changes Basic earnings per share Dilut ed Bef ore cumulat ive eff ect of account ing changes Cumulat ive eff ect of account ing changes Dilut ed earnings per share Average Number of Common Shares Used in Computation Basic Dilut ed

$ $ $ $

83 896

66 827

1.22 1.22

1.36 (0.19) $ 1.17

1.12 1.12

736 814

1.27 (0.17) $ 1.10 705 769

17 686

1.07 1.07 1.01 1.01 642 695

(In millions) Net Income Ot her comprehensive income: Foreign currency t ranslat ion adjust ment and ot her Total Comprehensive Income

2000 979

Year ended December 31, 1999 $ 893

1998 $ 703

(307) 672

(579) $ 314

(14) $ 689

The accompanying notes are an integral part of these consolidated financial statements.

ENRON ANNUAL REPORT 2000

Enron Corp. and Subsidiaries Consolidated Statement of Comprehensive Income

Enron Corp. and Subsidiaries Consolidated Balance Sheet December 31, (In millions, except shares) ASSETS

2000

1999

Current Assets Cash and cash equivalent s

$ 1,374

288

Trade receivables (net of allow ance f or doubt f ul account s of $133 and $40, respect ively) Ot her receivables Asset s f rom price risk management act ivit ies Invent ories

10,396

3,030

1,874

518

12,018

2,205

953

598

Deposit s

2,433

Ot her

1,333

535

30,381

7,255

Invest ment s in and advances t o unconsolidat ed equit y affi liat es

5,294

5,036

Asset s f rom price risk management act ivit ies

8,988

2,929

Tot al current asset s Investments and Other Assets

Goodw ill

3,638

2,799

Ot her

5,459

4,681

23,379

15,445

Nat ural gas t ransmission

6,916

6,948

Elect ric generat ion and dist ribut ion

4,766

3,552

Fiber-opt ic net w ork and equipment

839

379

Const ruct ion in progress

682

1,120

Tot al invest ment s and ot her asset s Property, Plant and Equipment, at cost

Ot her Less accumulat ed depreciat ion, deplet ion and amort izat ion Propert y, plant and equipment , net Total Assets

ENRON ANNUAL REPORT 2000

The accompanying notes are an integral part of these consolidated financial statements.

2,256

1,913

15,459

13,912

3,716

3,231

11,743

10,681

$65,503

$33,381

December 31, LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Account s payable Liabilit ies f rom price risk management act ivit ies Short -t erm debt Cust omers’ deposit s Ot her Tot al current liabilit ies Long-Term Debt Deferred Credits and Other Liabilities Def erred income t axes Liabilit ies f rom price risk management act ivit ies Ot her Tot al def erred credit s and ot her liabilit ies

2000

1999

$ 9,777 10,495 1,679 4,277 2,178 28,406

$ 2,154 1,836 1,001 44 1,724 6,759

8,550

7,151

1,644 9,423 2,692 13,759

1,894 2,990 1,587 6,471

2,414

2,430

904

1,000

124

130

1,000

8,348 3,226 (1,048) (32) (148) 11,470

6,637 2,698 (741) (49) (105) 9,570

Commitments and Contingencies (Notes 13, 14 and 15)

Company-Obligated Preferred Securities of Subsidiaries Shareholders’ Equity Second pref erred st ock, cumulat ive, no par value, 1,370,000 shares aut horized, 1,240,933 shares and 1,296,184 shares issued, respect ively M andat orily Convert ible Junior Pref erred St ock, Series B, no par value, 250,000 shares issued Common st ock, no par value, 1,200,000,000 shares aut horized, 752,205,112 shares and 716,865,081 shares issued, respect ively Ret ained earnings Accumulat ed ot her comprehensive income Common st ock held in t reasury, 577,066 shares and 1,337,714 shares, respect ively Rest rict ed st ock and ot her Tot al shareholders’ equit y Total Liabilities and Shareholders’ Equity

$65,503

$33,381

ENRON ANNUAL REPORT 2000

M inority Interests

Enron Corp. and Subsidiaries Consolidated Statement of Cash Flows (In millions) Cash Flow s From Operating Activities Reconciliation of net income to net cash provided by operating activities Net income Cumulat ive eff ect of account ing changes Depreciat ion, deplet ion and amort izat ion Impairment of long-lived asset s (including equit y invest ment s) Def erred income t axes Gains on sales of non-merchant asset s Changes in component s of w orking capit al Net asset s f rom price risk management act ivit ies M erchant asset s and invest ment s: Realized gains on sales Proceeds f rom sales Addit ions and unrealized gains Ot her operat ing act ivit ies Net Cash Provided by Operating Activities Cash Flow s From Investing Activities Capit al expendit ures Equit y invest ment s Proceeds f rom sales of non-merchant asset s Acquisit ion of subsidiary st ock Business acquisit ions, net of cash acquired (see Not e 2) Ot her invest ing act ivit ies Net Cash Used in Investing Activities Cash Flow s From Financing Activities Issuance of long-t erm debt Repayment of long-t erm debt Net increase (decrease) in short -t erm borrow ings Net issuance (redempt ion) of company-obligat ed pref erred securit ies of subsidiaries Issuance of common st ock Issuance of subsidiary equit y Dividends paid Net disposit ion of t reasury st ock Ot her fi nancing act ivit ies Net Cash Provided by Financing Activities Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year Changes in Components of Working Capital Receivables Invent ories Payables Ot her Tot al

ENRON ANNUAL REPORT 2000

The accompanying notes are an integral part of these consolidated financial statements.

2000

979 855 326 207 (146) 1,769 (763)

Year ended December 31, 1999

893 131 870 441 21 (541) (1,000) (395)

1998

703 827 87 (82) (233) 350

(104) 1,838 (1,295) 1,113 4,779

(756) 2,217 (827) 174 1,228

(628) 1,434 (721) (97) 1,640

(2,381) (933) 494 (485) (777) (182) (4,264)

(2,363) (722) 294 (311) (405) (3,507)

(1,905) (1,659) 239 (180) (104) (356) (3,965)

3,994 (2,337) (1,595)

1,776 (1,837) 1,565

1,903 (870) (158)

(96) 307 500 (523) 327 (6) 571

852 568 (467) 139 (140) 2,456

8 867 828 (414) 13 89 2,266

1,086 288 $ 1,374

177 111 288

$(8,203) 1,336 7,167 1,469 $ 1,769

$ (662) (133) (246) 41 $(1,000)

(59) 170 111

$(1,055) (372) 433 761 $ (233)

Enron Corp. and Subsidiaries Consolidated Statement of Changes in Shareholdersâ&#x20AC;&#x2122; Equity (In millions, except per share amount s; shares in t housands) Cumulative Second Preferred Convertible Stock Balance, beginning of year Exchange of convert ible pref erred st ock f or common st ock Balance, end of year M andatorily Convertible Junior Preferred Stock, Series B Balance, beginning of year Issuances Balance, end of year Common Stock Balance, beginning of year Exchange of convert ible pref erred st ock f or common st ock Issuances relat ed t o benefi t and dividend reinvest ment plans Sales of common st ock Issuances of common st ock in business acquisit ions (see Not e 2) Ot her Balance, end of year Retained Earnings Balance, beginning of year Net income Cash dividends Common st ock ($0.5000, $0.5000 and $0.4812 per share in 2000, 1999 and 1998, respect ively) Cumulat ive Second Pref erred Convert ible St ock ($13.652, $13.652 and $13.1402 per share in 2000, 1999 and 1998, respect ively) Series A and B Pref erred St ock Balance, end of year Accumulated Other Comprehensive Income Balance, beginning of year Translat ion adjust ment s and ot her Balance, end of year Treasury Stock Balance, beginning of year Shares acquired Exchange of convert ible pref erred st ock f or common st ock Issuances relat ed t o benefi t and dividend reinvest ment plans Issuances of t reasury st ock in business acquisit ions Balance, end of year Restricted Stock and Other Balance, beginning of year Issuances relat ed t o benefi t and dividend reinvest ment plans Balance, end of year Total Shareholdersâ&#x20AC;&#x2122; Equity

2000 Shares Amount 1,296 (55) 1,241

$ $

130 (6) 124

1999 Shares Amount 1,320 (24) 1,296

$ 132 (2) $ 130 $ 1,000 $1,000

1998 Shares Amount 1,338 (18) 1,320

250 250

$ 1,000 $ 1,000

250 250

716,865 1,509

$ 6,637 6

671,094 465

28,100 -

966 -

10,054 27,600

258 839

34,500

45 836

5,731 752,205

409 330 $ 8,348

7,652 716,865

250 174 $6,637

671,094

19 $5,117

$ 2,698 979

636,594 -

$2,226 893

$ $

$4,224 (7)

$1,852 703

(368)

(355)

(312)

(17) (66) $ 3,226

(17) (49) $2,698

(17) $2,226

$ (162) (579) $ (741)

$ (148) (14) $ (162)

(741) (307) $ (1,048) (1,338) (3,114) 3,875 (577)

$5,117 (1)

$ 134 (2) $ 132

$ $

(49) (234) 251 (32)

(105) (43) $ (148) $11,470

(9,334) (1,845) 181 9,660 (1,338)

$ (195) (71) 4 213 $ (49) $

(70) (35) $ (105) $9,570

(14,102) (2,236) 486 6,426 92 (9,334)

$ (269) (61) 9 124 2 $ (195) $ (175) 105 $ (70) $7,048

ENRON ANNUAL REPORT 2000

The accompanying notes are an integral part of these consolidated financial statements.

Enron Corp. and Subsidiaries Notes to the Consolidated Financial Statements 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation Policy and Use of Estimates The account ing and fi nancial report ing policies of Enron Corp. and it s subsidiaries conf orm t o generally accept ed account ing principles and prevailing indust ry pract ices. The consolidat ed fi nancial st at ement s include t he account s of all subsidiaries cont rolled by Enron Corp. af t er t he eliminat ion of signifi cant int ercompany account s and t ransact ions. The preparat ion of fi nancial st at ement s in conf ormit y w it h generally accept ed account ing principles requires management t o make est imat es and assumpt ions t hat af f ect t he report ed amount s of asset s and liabilit ies and disclosure of cont ingent asset s and liabilit ies at t he dat e of t he fi nancial st at ement s and t he report ed amount s of revenues and expenses during t he report ing period. Act ual result s could diff er f rom t hose est imat es. “ Enron” is used f rom t ime t o t ime herein as a collect ive ref erence t o Enron Corp. and it s subsidiaries and affi liat es. The businesses of Enron are conduct ed by it s subsidiaries and affi liat es w hose operat ions are managed by t heir respect ive offi cers.

Cash Equivalents Enron records as cash equivalent s all highly liquid short -t erm invest ment s w it h original mat urit ies of t hree mont hs or less.

Inventories Inventories consist primarily of commodities, priced at market as such inventories are used in trading activities.

Depreciation, Depletion and Amortization The provision f or depreciat ion and amort izat ion w it h respect t o operat ions ot her t han oil and gas producing act ivit ies is comput ed using t he st raight -line or regulat orily mandat ed met hod, based on est imat ed economic lives. Composit e depreciat ion rat es are applied t o f unct ional groups of propert y having similar economic charact erist ics. The cost of ut ilit y propert y unit s ret ired, ot her t han land, is charged t o accumulat ed depreciat ion. Provisions f or depreciat ion, deplet ion and amort izat ion of proved oil and gas propert ies are calculat ed using t he unit s-of product ion met hod.

Income Taxes Enron account s f or income t axes using an asset and liabilit y approach under w hich def erred asset s and liabilit ies are recognized based on ant icipat ed f ut ure t ax consequences at t ribut able t o diff erences bet w een fi nancial st at ement carrying amount s of asset s and liabilit ies and t heir respect ive t ax bases (see Not e 5).

ENRON ANNUAL REPORT 2000

Earnings Per Share

Basic earnings per share is comput ed based upon t he w eight ed-average number of common shares out st anding during t he periods. Dilut ed earnings per share is comput ed based upon t he w eight ed-average number of common shares out st anding plus t he assumed issuance of common shares f or all pot ent ially dilut ive securit ies. All share and per share amount s have been adjust ed t o refl ect t he August 13, 1999 t w o-f or-one st ock split . See Not e 11 f or a reconciliat ion of t he basic and dilut ed earnings per share comput at ions.

Accounting for Price Risk Management Enron engages in price risk management act ivit ies f or bot h t rading and non-t rading purposes. Inst rument s ut ilized in connect ion w it h t rading act ivit ies are account ed f or using t he markt o-market met hod. Under t he mark-t o-market met hod of account ing, f orw ards, sw aps, opt ions, energy t ransport at ion cont ract s ut ilized f or t rading act ivit ies and ot her inst rument s w it h t hird part ies are refl ect ed at f air value and are show n as “ Asset s and Liabilit ies f rom Price Risk M anagement Act ivit ies” in t he Consolidat ed Balance Sheet . These act ivit ies also include t he commodit y risk management component embedded in energy out sourcing cont ract s. Unrealized gains and losses f rom new ly originat ed cont ract s, cont ract rest ruct urings and t he impact of price movement s are recognized as “ Ot her Revenues.” Changes in t he asset s and liabilit ies f rom price risk management act ivit ies result primarily f rom changes in t he valuat ion of t he port f olio of cont ract s, new ly originat ed t ransact ions and t he t iming of set t lement relat ive t o t he receipt of cash f or cert ain cont ract s. The market prices used t o value t hese t ransact ions refl ect management ’s best est imat e considering various f act ors including closing exchange and over-t he-count er quot at ions, t ime value and volat ilit y f act ors underlying t he commit ment s. Financial inst rument s are also ut ilized f or non-t rading purposes t o hedge t he impact of market fl uct uat ions on asset s, liabilit ies, product ion and ot her cont ract ual commit ment s. Hedge account ing is ut ilized in non-t rading act ivit ies w hen t here is a high degree of correlat ion bet w een price movement s in t he derivat ive and t he it em designat ed as being hedged. In inst ances w here t he ant icipat ed correlat ion of price movement s does not occur, hedge account ing is t erminat ed and f ut ure changes in t he value of t he fi nancial inst rument s are recognized as gains or losses. If t he hedged it em is sold, t he value of t he fi nancial inst rument is recognized in income. Gains and losses on fi nancial inst rument s used f or hedging purposes are recognized in t he Consolidat ed Income St at ement in t he same manner as t he hedged it em. The cash fl ow impact of fi nancial inst rument s is refl ect ed as cash f low s f rom operat ing act ivit ies in t he Consolidat ed St at ement of Cash Flow s. See Not e 3 f or f urt her discussion of Enron’s price risk management act ivit ies.

Accounting for Development Activity Development cost s relat ed t o project s, including cost s of f easibilit y st udies, bid preparat ion, permit t ing, licensing and cont ract negot iat ion, are expensed as incurred unt il t he project is est imat ed t o be probable. At t hat t ime, such cost s are capit alized or expensed as incurred, based on t he nat ure of t he cost s incurred. Capit alized development cost s may be recovered t hrough reimbursement s f rom joint vent ure part ners or ot her t hird part ies, or classifi ed as part of t he invest ment and recovered t hrough t he cash fl ow s f rom t hat project . Accumulat ed capit alized project development cost s are ot herw ise expensed in t he period t hat management det ermines it is probable t hat t he cost s w ill not be recovered.

Environmental Expenditures Expenditures that relate to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Environmental expenditures relating to current or future revenues are expensed or capitalized as appropriate based on the nature of the costs incurred. Liabilities are recorded when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated.

Direct costs of materials and services consumed in developing or obtaining software, including payroll and payroll-related costs for employees who are directly associated with and who devote time to the software project are capitalized. Costs may begin to be capitalized once the application development stage has begun. All other costs are expensed as incurred. Enron amortizes the costs on a st raight -line basis over t he usef ul lif e of t he sof t w are. Impairment is evaluated based on changes in the expected usefulness of the software. At December 31, 2000 and 1999, Enron has capitalized, net of amortization, $381 million and $240 million, respectively, of software costs covering numerous systems, including trading and settlement, accounting, billing, and upgrades.

Investments in Unconsolidated Affiliates Invest ment s in unconsolidat ed affi liat es are account ed f or by t he equit y met hod, except f or cert ain invest ment s result ing f rom Enron’s merchant invest ment act ivit ies w hich are included at market value in “ Ot her Invest ment s” in t he Consolidat ed Balance Sheet . See Not es 4 and 9. Where acquired asset s are account ed f or under t he equit y met hod based on t emporary cont rol, earnings or losses are recognized only f or t he port ion of t he invest ment t o be ret ained.

Sale of Subsidiary Stock Enron account s f or t he issuance of st ock by it s subsidiaries in accordance w it h t he Securit ies and Exchange Commission’s St aff Account ing Bullet in (SAB) 51. SAB 51 allow s f or Enron t o recognize a gain in t he amount t hat t he off ering price per share of a subsidiary’s st ock exceeds Enron’s carrying amount per share.

Foreign Currency Translation For int ernat ional subsidiaries, asset and liabilit y account s are t ranslat ed at year-end rat es of exchange and revenue and expenses are t ranslat ed at average exchange rat es prevailing during t he year. For subsidiaries w hose f unct ional currency is deemed t o be ot her t han t he U.S. dollar, t ranslat ion adjust ment s are included as a separat e component of ot her comprehensive income and shareholders’ equit y. Currency t ransact ion gains and losses are recorded in income. During 1999, t he exchange rat e f or t he Brazilian real t o t he U.S. dollar declined, result ing in a non-cash f oreign currency t ranslat ion adjust ment reducing t he value of Enron’s asset s and shareholders’ equit y by approximat ely $600 million.

Reclassifications Cert ain reclassifi cat ions have been made t o t he consolidat ed fi nancial st at ement s f or prior years t o conf orm w it h t he current present at ion.

BUSINESS ACQUISITIONS AND DISPOSITIONS

In 2000, Enron, t hrough a w holly-ow ned subsidiary, acquired all of t he out st anding common shares of M G plc, a leading independent int ernat ional met als market -making business t hat provides fi nancial and market ing services t o t he global met als indust ry, f or $413 million in cash and assumed debt of approximat ely $1.6 billion. In addit ion, Enron made ot her acquisit ions including a t echnology-relat ed company, a f acilit y maint enance company and all minorit y shareholders’ int erest s in Enron Energy Services, LLC and Enron Renew able Energy Corp. Enron issued 5.7 million shares of Enron common st ock, cont ribut ed common st ock and w arrant s of an unconsolidat ed equit y af fi liat e and paid cash in t hese t ransact ions.

On August 16, 1999, Enron exchanged approximat ely 62.3 million shares (approximat ely 75% ) of t he Enron Oil & Gas Company (EOG) common st ock it held f or all of t he st ock of EOGI-India, Inc., a subsidiary of EOG. Also in August 1999, Enron received net proceeds of approximat ely $190 million f or t he sale of 8.5 million shares of EOG common st ock in a public off ering and issued approximat ely $255 million of public debt t hat is exchangeable in July 2002 int o approximat ely 11.5 million shares of EOG common st ock. As a result of t he share exchange and share sale, Enron recorded a pre-t ax gain of $454 million ($345 million af t er t ax, or $0.45 per dilut ed share) in 1999. As of August 16, 1999, EOG is no longer included in Enron’s consolidat ed fi nancial st at ement s. EOGI-India, Inc. is included in t he consolidat ed f inancial st at ement s w it hin t he Wholesale Services segment f ollow ing t he exchange and sale. Enron account s f or it s oil and gas explorat ion and product ion act ivit ies under t he successf ul eff ort s met hod of account ing. In August 1998, Enron, t hrough a w holly-ow ned subsidiary, complet ed t he acquisit ion of a cont rolling int erest in Elekt ro Elet ricidade e Serviços S.A. (Elekt ro) f or approximat ely $1.3 billion. Elekt ro w as init ially account ed f or using t he equit y met hod based on t emporary cont rol. In 1999, af t er t he acquisit ion of addit ional int erest s, Elekt ro w as consolidat ed by Enron. Addit ionally, during 1999 and 1998, Enron acquired generat ion, nat ural gas dist ribut ion, renew able energy, t elecommunicat ions and energy management businesses f or cash, Enron and subsidiary st ock and not es. Enron has account ed f or t hese acquisit ions using t he purchase met hod of account ing as of t he eff ect ive dat e of each t ransact ion. Accordingly, t he purchase price of each t ransact ion has been allocat ed based upon t he est imat ed f air value of t he asset s and liabilit ies acquired as of t he acquisit ion dat e, w it h t he excess refl ect ed as goodw ill in t he Consolidat ed Balance Sheet . This and all ot her goodw ill is being amort ized on a st raight -line basis over 5 t o 40 years. Asset s acquired, liabilit ies assumed and considerat ion paid as a result of businesses acquired w ere as f ollow s:

(In millions) Fair value of asset s acquired, ot her t han cash Goodw ill Fair value of liabilit ies assumed Common st ock of Enron issued and equit y of an unconsolidat ed equit y affi liat e cont ribut ed Net cash paid

2000 $ 2,641 963 (2,418)

(409) 777

1999

1998(a)

$ 376 (71) 6

$ 269 94 (259)

$ 311

$ 104

(a) Excludes amounts related to the 1998 acquisition of Elektro.

On November 8, 1999, Enron announced t hat it had ent ered int o an agreement t o sell Enron’s w holly-ow ned elect ric ut ilit y subsidiary, Port land General Elect ric Company (PGE), t o Sierra Pacifi c Resources f or $2.1 billion. Sierra Pacifi c Resources w ill also assume approximat ely $1 billion in PGE debt and pref erred st ock. The t ransact ion has been delayed by t he eff ect of recent event s in Calif ornia and Nevada on t he buyer. Enron’s carrying amount of PGE as of December 31, 2000 w as approximat ely $1.6 billion. Income bef ore int erest , minorit y int erest and income t axes f or PGE w as $338 million, $298 million and $284 million f or 2000, 1999 and 1998, respect ively.

ENRON ANNUAL REPORT 2000

Computer Software

PRICE RISK MANAGEMENT ACTIVITIES AND FINANCIAL INSTRUMENTS

Fair Value. The f air value as of December 31, 2000 and t he average f air value of inst rument s relat ed t o price risk management act ivit ies held during t he year are set f ort h below :

Trading Activities Enron off ers price risk management services t o w holesale, commercial and indust rial cust omers t hrough a variet y of fi nancial and ot her inst rument s including f orw ard cont ract s involving physical delivery, sw ap agreement s, w hich require payment s t o (or receipt of payment s f rom) count erpart ies based on t he dif f erent ial bet w een a fi xed and variable price f or t he commodit y, opt ions and ot her cont ract ual arrangement s. Int erest rat e risks and f oreign currency risks associat ed w it h t he f air value of t he commodit y port f olio are managed using a variet y of fi nancial inst rument s, including fi nancial f ut ures.

(a) Computed using the ending balance at each month-end.

The income bef ore int erest , t axes and cert ain unallocat ed expenses arising f rom price risk management act ivit ies f or 2000 w as $1,899 million.

Fixed Price Payor

Securit izat ions. From t ime t o t ime, Enron sells int erest s in cert ain of it s fi nancial asset s. Some of t hese sales are complet ed in securit izat ions, in w hich Enron concurrent ly ent ers int o sw aps associat ed w it h t he underlying asset s w hich limit s t he risks assumed by t he purchaser. Such sw aps are adjust ed t o f air value using quot ed market prices, if available, or est imat ed f air value based on management ’s best est imat e of t he present value of f ut ure cash f low. These sw aps are included in Price Risk M anagement act ivit ies above as equit y invest ment s. During 2000, gains f rom sales represent ing securit izat ions w ere $381 million and proceeds w ere $2,379 million ($545 million of t he proceeds relat ed t o sales t o Whit ew ing Associat es, L.P. (Whit ew ing)). See Not es 4 and 9. Purchases of securit ized merchant f inancial asset s t ot aled $1,184 million during 2000. Amount s primarily relat ed t o equit y int erest s.

Fixed Price M aximum Receiver Terms in Years

7,331 3,513 2,424

6,910 1,990 2,388

23 6 24

368 167

413 325

9 11

$4,732 $ 79 $2,998

$3,977 $ 465 $3,768

29 22 13

(a) Natural gas, crude oil and liquids and electricity volumes are in TBtue; metals, coal and pulp and paper volumes are in millions of metric tonnes; and bandwidth volumes are in thousands of terabytes. (b) The interest rate fixed price receiver includes the net notional dollar value of the interest rate sensitive component of the combined commodity portfolio. The remaining interest rate fixed price receiver and the entire interest rate fixed price payor represent the notional contract amount of a portfolio of various financial instruments used to hedge the net present value of the commodity portfolio. For a given unit of price protection, different financial instruments require different notional amounts. (c) Excludes derivatives on Enron common stock. See Notes 10 and 11.

Enron also has sales and purchase commit ment s associat ed w it h commodit y cont ract s based on market prices t ot aling 8,169 TBt ue, w it h t erms ext ending up t o 16 years, and 7.2 million met ric t onnes, w it h t erms ext ending up t o 5 years. Not ional amount s refl ect t he volume of t ransact ions but do not represent t he amount s exchanged by t he part ies t o t he fi nancial inst rument s. Accordingly, not ional amount s do not accurat ely measure Enron’s exposure t o market or credit risks. The maximum t erms in years det ailed above are not indicat ive of likely f ut ure cash fl ow s as t hese posit ions may be off set in t he market s at any t ime in response t o t he company’s price risk management needs t o t he ext ent available in t he market . The volumetric weighted average maturity of Enron’s fi xed price portfolio as of December 31, 2000 was approximately 1.5 years.

ENRON ANNUAL REPORT 2000

Average Fair Value for the Year Ended 12/ 31/ 00 (a) Assets Liabilities $ 5,525 $ 5,114 1,402 2,745 3,453 1,613 988 757 492 280 $11,860 $10,509

Not ional Amount s and Terms. The not ional amount s and t erms of t hese inst rument s at December 31, 2000 are show n below (dollars in millions):

Commodit ies(a) Nat ural gas Crude oil and liquids Elect ricit y M et als, coal and pulp and paper Bandw idt h Financial product s Int erest rat e (b) Foreign currency Equit y invest ment s(c)

(In millions) Nat ural gas Crude oil and liquids Elect ricit y Ot her commodit ies Equit y invest ment s Tot al

Fair Value as of 12/ 31/ 00 Assets Liabilities $10,270 $ 9,342 1,549 3,574 7,335 5,396 1,509 1,311 795 295 $21,458 $19,918

Credit Risk. In conjunct ion w it h t he valuat ion of it s fi nancial inst rument s, Enron provides reserves f or credit risks associat ed w it h such act ivit y. Credit risk relat es t o t he risk of loss t hat Enron w ould incur as a result of nonperf ormance by count erpart ies pursuant t o t he t erms of t heir cont ract ual obligat ions. Enron maint ains credit policies w it h regard t o it s count erpart ies t hat management believes signifi cant ly minimize overall credit risk. These policies include an evaluat ion of pot ent ial count erpart ies’ fi nancial condit ion (including credit rat ing), collat eral requirement s under cert ain circumst ances and t he use of st andardized agreement s w hich allow f or t he net t ing of posit ive and negat ive exposures associat ed w it h a single count erpart y. Enron also minimizes t his credit exposure using monet izat ion of it s cont ract port f olio or t hird-part y insurance cont ract s.

2000 Investment Grade (a) $ 5,050 $ 4,677 4,145

(In millions) Total Gas and elect ric ut ilit ies 5,327 Energy market ers 6,124 Financial inst it ut ions 4,917 Independent pow er producers 672 791 Oil and gas producers 1,308 2,804 Indust rials 607 1,138 Ot her 256 357 Tot al $16,715 21,458 Credit and ot her reserves (452) Asset s f rom price risk management act ivit ies(b) $21,006 (c)

1999 Invest ment Grade (a) Tot al $1,461 $1,510 544 768 1,016 1,273 471 379 336 59 $4,266

641 688 524 67 5,471 (337) $5,134

(a) “ Investment Grade” is primarily determined using publicly available credit ratings along with consideration of cash, standby letters of credit, parent company guarantees and property interests, including oil and gas reserves. Included in “ Investment Grade” are counterparties with a minimum Standard & Poor’s or Moody’s rating of BBB- or Baa3, respectively. (b) One and two customers’ exposures, respectively, at December 31, 2000 and 1999 comprise greater than 5% of Assets From Price Risk Management Activities and are included above as Investment Grade. (c) At December 31, 2000, Enron held collateral of approximately $5.5 billion, which consists substantially of cash deposits shown as “ Customers’ Deposits” on the balance sheet.

This concent rat ion of count erpart ies may impact Enron’s overall exposure t o credit risk, eit her posit ively or negat ively, in t hat t he count erpart ies may be similarly aff ect ed by changes in economic, regulat ory or ot her condit ions. Based on Enron’s policies, it s exposures and it s credit reserves, Enron does not ant icipat e a mat erially adverse eff ect on fi nancial posit ion or result s of operat ions as a result of count erpart y nonperf ormance. During 2000, t he Calif ornia pow er market w as signifi cant ly impact ed by t he increase in w holesale pow er prices. Calif ornia cust omer rat es are current ly f rozen, requiring t he ut ilit ies t o fi nance t he majorit y of t heir pow er purchases. If w holesale prices remain at t he current levels and no regulat ory relief or legislat ive assist ance is obt ained, cert ain Calif ornia ut ilit ies may need t o seek bankrupt cy prot ect ion. During 2000, Enron ent ered int o w holesale pow er t ransact ions w it h Calif ornia ut ilit ies, including t heir nonregulat ed pow er market ing affi liat es. Enron has provided credit reserves relat ed t o such act ivit ies based on Enron’s net posit ion w it h each Calif ornia ut ilit y. Due t o t he uncert aint ies surrounding t he Calif ornia pow er sit uat ion, management cannot predict t he ult imat e out come but believes t hese mat t ers w ill not have a mat erial adverse impact on Enron’s fi nancial condit ion.

Non-Trading Activities Enron also ent ers int o fi nancial inst rument s such as sw aps and ot her cont ract s primarily f or t he purpose of hedging t he impact of market fl uct uat ions on asset s, liabilit ies, product ion or ot her cont ract ual commit ment s. Energy Commodit y Price Sw aps. At December 31, 2000, Enron w as a part y t o energy commodit y price sw aps covering 18.6 TBt u, 29.9 TBt u and 0.5 TBt u of nat ural gas f or t he years 2001, 2002 and 2003, respect ively, and 0.3 million barrels of crude oil f or t he year 2001. Int erest Rat e Sw aps. At December 31, 2000, Enron had ent ered int o int erest rat e sw ap agreement s w it h an aggregat e not ional principal amount of $1.0 billion t o manage int erest rat e exposure. These sw ap agreement s are scheduled t o t ermi-

nat e $0.4 billion in 2001 and $0.6 billion in t he period 2002 t hrough 2010. Foreign Currency Cont ract s. At December 31, 2000, f oreign currency cont ract s w it h a not ional principal amount of $1.4 billion w ere out st anding. These cont ract s w ill expire $1.0 billion in 2001 and $0.4 billion in t he period 2002 t hrough 2006. Equit y Cont ract s. At December 31, 2000, Enron had ent ered int o Enron common st ock sw aps, w it h an aggregat e not ional amount of $121 million, t o hedge cert ain incent ive-based compensat ion plans. Such cont ract s w ill expire in 2001. Credit Risk. While not ional amount s are used t o express t he volume of various fi nancial inst rument s, t he amount s pot ent ially subject t o credit risk, in t he event of nonperf ormance by t he t hird part ies, are subst ant ially smaller. Forw ards, f ut ures and ot her cont ract s are ent ered int o w it h count erpart ies w ho are equivalent t o invest ment grade. Accordingly, Enron does not ant icipat e any mat erial impact t o it s fi nancial posit ion or result s of operat ions as a result of nonperf ormance by t he t hird part ies on fi nancial inst rument s relat ed t o non-t rading act ivit ies.

Financial Instruments The carrying amounts and estimated fair values of Enron’s fi nancial instruments, excluding trading activities, at December 31, 2000 and 1999 were as follows: 2000 1999 Carrying Estimated Carrying Est imat ed Amount Fair Value Amount Fair Value

(In millions) Short - and long-t erm debt (Not e 7) $10,229 Company-obligat ed pref erred securit ies of subsidiaries (Not e 10) 904 Energy commodit y price sw aps Int erest rat e sw aps Foreign currency contracts Equit y cont ract s 15

$10,217

$8,152

$8,108

920

1,000

937

68 1 94 15

(3) (55) 4

Enron uses t he f ollow ing met hods and assumpt ions in est imat ing f air values: (a) short - and long-t erm debt - t he carrying amount of variable-rat e debt approximat es f air value, t he f air value of market able debt is based on quot ed market prices and t he f air value of ot her debt is based on t he discount ed present value of cash fl ow s using Enron’s current borrow ing rat es; (b) company-obligat ed pref erred securit ies of subsidiaries - t he f air value is based on quot ed market prices, w here available, or based on t he discount ed present value of cash fl ow s using Enron’s current borrow ing rat es if not publicly t raded; and (c) energy commodit y price sw aps, int erest rat e sw aps, f oreign currency cont ract s and equit y cont ract s - est imat ed f air values have been det ermined using available market dat a and valuat ion met hodologies. Judgment is necessarily required in int erpret ing market dat a and t he use of diff erent market assumpt ions or est imat ion met hodologies may aff ect t he est imat ed f air value amount s. The f air market value of cash and cash equivalent s, t rade and ot her receivables, account s payable and invest ment s account ed f or at f air value are not mat erially diff erent f rom t heir carrying amount s. Guarant ees of liabilit ies of unconsolidat ed ent it ies and residual value guarant ees have no carrying value and f air values w hich are not readily det erminable (see Not e 15).

ENRON ANNUAL REPORT 2000

The count erpart ies associat ed w it h asset s f rom price risk management act ivit ies as of December 31, 2000 and 1999 are summarized as f ollow s:

MERCHANT ACTIVITIES

An analysis of the composition of Enron’s merchant investments and energy assets at December 31, 2000 and 1999 is as follows: December 31, 2000 1999

(In millions) M erchant invest ment s(a) Energy Energy-int ensive indust ries Technology-relat ed Ot her M erchant asset s(b) Independent pow er plant s Nat ural gas t ransport at ion

Tot al

$137 63 99 302 601

$ 516 218 11 341 1,086

53 36 89

152 35 187

$690

$1,273

(a) Investments are recorded at fair value in “ Other Assets” with changes in fair value reflected in “ Other Revenues.” (b) Amounts represent Enron’s investment in unconsolidated equity affiliates with operating earnings reflected in “Equity in Earnings of Unconsolidated Equity Affiliates.”

Enron provides capital primarily to energy and technologyrelat ed businesses seeking debt or equit y fi nancing. The merchant invest ment s made by Enron and cert ain of it s unconsolidat ed affi liat es (see Not e 9) are carried at f air value and include public and privat e equit y, government securit ies w it h mat urit ies of more t han 90 days, debt and int erest s in limit ed part nerships. The valuat ion met hodologies ut ilize market values of publicly-t raded securit ies, independent appraisals and cash fl ow analyses. Also included in Enron’s w holesale business are invest ment s in merchant asset s such as pow er plant s and nat ural gas pipelines, primarily held t hrough equit y met hod invest ment s. Some of t hese asset s w ere developed, const ruct ed and operat ed by Enron. The merchant asset s are not expect ed t o be long-t erm, int egrat ed component s of Enron’s energy net w orks. For t he years ended December 31, 2000, 1999 and 1998, respect ively, pre-t ax gains f rom sales of merchant asset s and invest ment s t ot aling $104 million, $756 million and $628 million are included in “ Ot her Revenues,” and proceeds w ere $1,838 million, $2,217 million and $1,434 million.

INCOME TAXES The components of income before income taxes are as follows:

(In millions) Unit ed St at es Foreign

2000 $ 640 773 $1,413

1999 $ 357 771 $1,128

1998 $197 681 $878

Tot al income t ax expense is summarized as f ollow s:

ENRON ANNUAL REPORT 2000

(In millions) Payable current ly Federal St at e Foreign

Payment def erred Federal St at e Foreign Tot al income t ax expense (a)

2000

1999

1998

$112 22 93 227

$ 29 6 48 83

$ 30 8 50 88

13 14 180 207 $434

(159) 23 157 21 $104

(14) 11 90 87 $175

(a) See Note 11 for tax benefits related to stock options exercised by employees reflected in shareholders’ equity.

The diff erences bet w een t axes comput ed at t he U.S. f ederal st at ut ory t ax rat e and Enron’s eff ect ive income t ax rat e are as f ollow s:

St at ut ory f ederal income t ax provision Net st at e income t axes Foreign t ax rat e diff erent ial Equit y earnings Basis and st ock sale diff erences Goodw ill amort izat ion Audit set t lement relat ed t o M ont hly Income Pref erred Shares Ot her

2000

1999

1998

35.0% 2.5 (2.4) 5.3 (11.9) 1.6

35.0% 1.8 (7.0) (10.1) (10.8) 1.6

35.0% 1.7 0.8 (4.3) (14.2) 2.0

0.6 30.7%

(1.8) 0.5 9.2%

(1.0) 20.0%

The principal component s of Enron’s net def erred income t ax liabilit y are as f ollow s:

(In millions) Def erred income t ax asset s Alt ernat ive minimum t ax credit carryf orw ard Net operat ing loss carryf orw ard Ot her Def erred income t ax liabilit ies Depreciat ion, deplet ion and amort izat ion Price risk management act ivit ies Ot her Net def erred income t ax liabilit ies(a)

December 31, 2000 1999 $ 254 369 189 812

$ 220 1,302 188 1,710

1,813 (182) 963 2,594 $1,782

1,807 1,133 782 3,722 $2,012

(a) Includes $138 million and $118 million in other current liabilities for 2000 and 1999, respectively.

Enron has an alt ernat ive minimum t ax (AM T) credit carryf orw ard of approximat ely $254 million w hich can be used t o off set regular income t axes payable in f ut ure years. The AM T credit has an indefi nit e carryf orw ard period. Enron has a net operat ing loss carryf orw ard applicable t o U.S. subsidiaries of approximat ely $65 million, w hich w ill begin t o expire in 2011. Enron has a net operat ing loss carryf orw ard applicable t o non-U.S. subsidiaries of approximat ely $1.2 billion, of w hich $1.0 billion can be carried f orw ard indefi nit ely. The remaining $200 million expires bet w een t he years 2001 and 2010. Def erred t ax asset s have been recognized on t he $65 million domest ic loss and $1.0 billion of t he f oreign losses. U.S. and f oreign income t axes have been provided f or earnings of f oreign subsidiary companies t hat are expect ed t o be remit t ed t o t he U.S. Foreign subsidiaries’ cumulat ive undist ribut ed earnings of approximat ely $1.8 billion are considered t o be permanent ly reinvest ed out side t he U.S. and, accordingly, no U.S. income t axes have been provided t hereon. In t he event of a dist ribut ion of t hose earnings in t he f orm of dividends, Enron may be subject t o bot h f oreign w it hholding t axes and U.S. income t axes net of allow able f oreign t ax credit s.

SUPPLEMENTAL CASH FLOW INFORMATION

Detailed information on long-term debt is as follows:

Cash paid f or income t axes and int erest expense, including f ees incurred on sales of account s receivable, is as f ollow s: (In millions) Income t axes (net of ref unds) Int erest (net of amount s capit alized)

2000 $ 62 834

1999 $ 51 678

1998 $ 73 585

Non-Cash Activity In 2000, Enron acquired all minorit y shareholders’ int erest s in Enron Energy Services, LLC and ot her businesses w it h Enron common st ock. See Not e 2. In 2000 and 1999, Enron ent ered int o various t ransact ions w it h relat ed part ies, w hich result ed in an exchange of asset s and an increase in common st ock of $171 million in 2000. See Not e 16. In 2000, a part nership in w hich Enron w as a limit ed part ner made a liquidat ing dist ribut ion t o Enron result ing in a non-cash increase in current asset s of $220 million, a decrease of $20 million in non-current asset s and an increase in current liabilit ies of $160 million. During 2000 and 1999, Enron received t he right s t o specifi c t hird-part y fi ber-opt ic cable in exchange f or t he right s on specifi c fi ber-opt ic cable held f or sale by Enron. These exchanges result ed in non-cash increases in asset s of $69 million and $111 million, respect ively. During 1999, Enron issued approximat ely 7.6 million shares of common st ock in connect ion w it h t he acquisit ion, by an unconsolidat ed equit y affi liat e, of int erest s in t hree pow er plant s in New Jersey. In December 1998, Enron ext inguished it s 6.25% Exchangeable Not es w it h 10.5 million shares of EOG common st ock.

CREDIT FACILITIES AND DEBT

Enron has credit facilities with domestic and foreign banks which provide for an aggregate of $1.4 billion in long-term committed credit, of which $150 million relates to Portland General, and $2.4 billion in short-term committed credit. Expiration dates of the committed facilities range from February 2001 to May 2005. Interest rates on borrowings are based upon the London Interbank Offered Rate, certifi cate of deposit rates or other shortterm interest rates. Certain credit facilities contain covenants which must be met to borrow funds. Such debt covenants are not anticipated to materially restrict Enron’s ability to borrow funds under such facilities. Compensating balances are not required, but Enron is required to pay a commitment or facility fee. At December 31, 2000, $290 million was outstanding under these facilities. Enron has also entered into agreements which provide for uncommitted lines of credit totaling $420 million at December 31, 2000. The uncommitted lines have no stated expiration dates. Neither compensating balances nor commitment fees are required, as borrowings under the uncommitted credit lines are available subject to agreement by the participating banks. At December 31, 2000, no amounts were outstanding under the uncommitted lines. In addition to borrowing from banks on a short-term basis, Enron and certain of its subsidiaries sell commercial paper to provide fi nancing for various corporate purposes. As of December 31, 2000 and 1999, short-term borrowings of $15 million and $330 million, respectively, and long-term debt due within one year of $1,303 million and $670 million, respectively, have been reclassifi ed as long-term debt based upon the availability of committed credit facilities with expiration dates exceeding one year and management’s intent to maintain such amounts in excess of one year. Weight ed average int erest rat es on short -t erm debt out st anding at December 31, 2000 and 1999 were 6.9% and 6.4%, respectively.

(In millions) Enron Corp. Senior debent ures 6.75% t o 8.25% due 2005 t o 2012 Not es payable(a) 7.00% exchangeable not es due 2002 6.40% t o 9.88% due 2001 t o 2028 Float ing rat e not es due 2000 t o 2005 Ot her Nort hern Nat ural Gas Company Not es payable 6.75% t o 7.00% due 2005 t o 2011 Transw est ern Pipeline Company Not es payable 9.20% due 2004 Port land General First mort gage bonds 6.47% t o 9.46% due 2000 t o 2023 Pollut ion cont rol bonds Various rat es due 2010 t o 2033 Ot her Ot her Amount reclassifi ed f rom short -t erm debt Unamort ized debt discount and premium Tot al long-t erm debt

December 31, 2000 1999

$ 262

$ 318

532 4,416 92 242

239 4,114 79 34

500

328

373

200 282 414 1,318 (47) $8,550

200 129 204 1,000 (54) $7,151

(a) Includes debt denominated in foreign currencies of approximately $955 million and $525 million, respectively, at December 31, 2000 and 1999. Enron has entered into derivative transactions to hedge interest rate and foreign currency exchange fluctuations associated with such debt. See Note 3.

The indent ure securing Port land General’s First M ort gage Bonds const it ut es a direct fi rst mort gage lien on subst ant ially all elect ric ut ilit y propert y and f ranchises, ot her t han expressly except ed propert y. The aggregat e annual mat urit ies of long-t erm debt out st anding at December 31, 2000 w ere $2,112 million, $750 million, $852 million, $646 million and $1,592 million f or 2001 t hrough 2005, respect ively. In February 2001, Enron issued $1.25 billion zero coupon convertible senior notes that mature in 2021. The notes carry a 2.125 percent yield to maturity with an aggregate face value of $1.9 billion and may be converted, upon certain contingencies being met, into Enron common stock at an initial conversion premium of 45 percent.

MINORITY INTERESTS

Enron’s minorit y int erest s at December 31, 2000 and 1999 include t he f ollow ing: (In millions) M ajorit y-ow ned limit ed liabilit y company and limit ed part nerships Elekt ro (a) Ot her

2000

1999

$1,759 462 193 $2,414

$1,773 475 182 $2,430

(a) Relates to the respective parents of Elektro, which had minority shareholders in 2000 and 1999.

Enron has formed separate limited partnerships and a limited liability company with third-party investors for various purposes. These ent it ies are included in Enron’s consolidat ed fi nancial st at ement s, w it h t he t hird-part y invest ors’ int erest s refl ect ed in “ M inorit y Int erest s” in t he Consolidat ed Balance Sheet . In Oct ober 2000, Enron cont ribut ed approximat ely $1.0 billion of net asset s t o a w holly-ow ned limit ed liabilit y company. A t hird part y cont ribut ed $500 million f or a pref erred membership

ENRON ANNUAL REPORT 2000

int erest in t he limit ed liabilit y company. The cont ribut ion by t he t hird part y w as invest ed in highly liquid invest ment grade securit ies (including Enron not es) and short -t erm receivables. At December 31, 2000, t he majorit y-ow ned limit ed liabilit y company held net asset s of $1.0 billion. During 1999, t hird-part y invest ors cont ribut ed cash and merchant invest ment s t ot aling $1.0 billion t o Enron-sponsored ent it ies t o invest in highly liquid invest ment grade securit ies (including Enron not es) and short -t erm receivables. The merchant invest ment s, t ot aling $500 million, w ere sold prior t o December 31, 1999. During 2000, Enron acquired a port ion of t he minorit y shareholder’s int erest f or $485 million. In 1998, Enron f ormed a w holly-ow ned limit ed part nership f or t he purpose of holding $1.6 billion of asset s cont ribut ed by Enron. That part nership cont ribut ed $850 million of asset s and a t hird part y cont ribut ed $750 million t o a second new ly-f ormed limit ed part nership. The asset s held by t he w holly-ow ned limit ed part nership represent collat eral f or a $750 million not e receivable held by t he second limit ed part nership. In 2000 and 1999, t he w holly-ow ned and second limit ed part nerships sold asset s valued at approximat ely $152 million and $460 million, respect ively, and invest ed t he proceeds in Enron not es. Absent cert ain def ault s or ot her specifi ed event s, Enron has t he opt ion t o acquire t he minorit y holders’ int erest s in t hese part nerships. Enron has t he opt ion t o acquire t he minorit y holder’s int erest in t he limit ed liabilit y company af t er November 2002. If Enron does not acquire t he minorit y holders’ int erest s bef ore December 2004 t hrough M ay 2009, or earlier upon cert ain specifi ed event s, t he minorit y int erest holders may cause t he ent it ies t o liquidat e t heir asset s and dissolve. In 2000, as part of a rest ruct uring, Jacaré Elect rical Dist ribut ion Trust (Jacaré) sold a 47 percent int erest in Enron Brazil Pow er Holdings V Lt d, a subsidiary t hat holds it s invest ment in Elekt ro, t o Whit ew ing f or approximat ely $460 million. See Not e 9. The proceeds w ere used t o acquire t he original minorit y shareholder’s int erest in Jacaré. In 2000, Enron acquired all minorit y shareholders’ int erest s in Enron Energy Services, LLC and Enron Renew able Energy Corp. See Not e 2.

Summarized combined fi nancial inf ormat ion of Enron’s unconsolidat ed affi liat es is present ed below :

(a) Enron recognized revenues from transactions with unconsolidated equity affiliates of $510 million in 2000, $674 million in 1999 and $563 million in 1998.

UNCONSOLIDATED EQUITY AFFILIATES

Enron’s invest ment in and advances t o unconsolidat ed affi liat es w hich are account ed f or by t he equit y met hod is as f ollow s:

(In millions) Azurix Corp. Bridgeline Holdings Cit rus Corp. Dabhol Pow er Company Joint Energy Development Invest ment s L.P. (JEDI) (b) Joint Energy Development Invest ment s II L.P. (JEDI II) (b) SK – Enron Co. Lt d. Transport adora de Gas del Sur S.A. Whit ew ing Associat es, L.P. (b) ENRON ANNUAL REPORT 2000

Ot her

Net Vot ing Int erest (a) 34% 40% 50% 50% 50% 50% 50% 35% 50%

December 31, 2000 1999 $ 325 $ 762 229 530 480 693 466 399

211

220 162 258 269 479 452 558 662 1,603 1,572 $5,294(c) $5,036 (c)

(a) Certain investments have income sharing ratios which differ from Enron’s voting interests. (b) JEDI and JEDI II account for their investments at fair value. Whitewing accounts for certain of its investments at fair value. These affiliates held fair value investments totaling $1,823 million and $1,128 million, respectively, at December 31, 2000 and 1999. (c) At December 31, 2000 and 1999, the unamortized excess of Enron’s investment in unconsolidated affiliates was $182 million and $179 million, respectively, which is being amortized over the expected lives of the investments.

Enron’s equit y in earnings (losses) of unconsolidat ed equit y affi liat es is as f ollow s: (In millions) Azurix Corp.(a) Cit rus Corp. Dabhol Pow er Company Joint Energy Development Invest ment s L.P. Joint Energy Development Invest ment s II, L.P. TNPC, Inc. (The New Pow er Company) Transport adora de Gas del Sur S.A. Whit ew ing Associat es, L.P. Ot her

2000 $(428) 50 51 197 58 (60) 38 58 123 $ 87

1999 $ 23 25 30

1998 $ 6 23 -

(45)

92 32 9 87 $309

(4) 36 81 $ 97

(a) During the fourth quarter of 2000, Azurix Corp. (Azurix) impaired the carrying value of its Argentine assets, resulting in a charge of approximately $470 million. Enron’s portion of the charge was $326 million.

December 31, 2000 1999

(In millions) Balance sheet Current asset s(a) Propert y, plant and equipment , net Ot her noncurrent asset s Current liabilit ies(a) Long-t erm debt (a)

$ 5,884 14,786 13,485 4,739 9,717 6,148 13,551

Ot her noncurrent liabilit ies Ow ners’ equit y

$ 3,168 14,356 9,459 4,401 8,486 2,402 11,694

(a) Includes $410 million and $327 million receivable from Enron and $302 million and $84 million payable to Enron at December 31, 2000 and 1999, respectively.

(In millions) Income st at ement (a) Operat ing revenues Operat ing expenses Net income Dist ribut ions paid t o Enron

2000

1999

1998

$15,903 14,710 586 137

$11,568 9,449 1,857 482

$8,508 7,244 142 87

In 2000 and 1999, Enron sold approximat ely $632 million and $192 million, respect ively, of merchant invest ment s and ot her asset s t o Whit ew ing. Enron recognized no gains or losses in connect ion w it h t hese t ransact ions. Addit ionally, in 2000, ECT M erchant Invest ment s Corp., a w holly-ow ned Enron subsidiary, cont ribut ed t w o pools of merchant invest ment s t o a limit ed part nership t hat is a subsidiary of Enron. Subsequent t o t he cont ribut ions, t he part nership issued part nership int erest s represent ing 100% of t he benefi cial, economic int erest s in t he t w o asset pools, and such int erest s w ere sold f or a t ot al of $545 million t o a limit ed liabilit y company t hat is a subsidiary of Whit ew ing. See Not e 3. These ent it ies are separat e legal ent it ies f rom Enron and have separat e asset s and liabilit ies. In 2000 and 1999, t he Relat ed Part y, as described in Not e 16, cont ribut ed $33 million and $15 million, respect ively, of equit y t o Whit ew ing. In 2000, Whit ew ing cont ribut ed $7.1 million t o a part nership f ormed by Enron, Whit ew ing and a t hird part y. Subsequent ly, Enron sold a port ion of it s int erest in t he part nership t hrough a securit izat ion. See Not e 3. In 2000, The New Pow er Company sold w arrant s convert ible int o common st ock of The New Pow er Company f or $50 million t o t he Relat ed Part y (described in Not e 16). From t ime t o t ime, Enron has ent ered int o various administ rat ive service, management , const ruct ion, supply and operat ing

PREFERRED STOCK

Preferred Stock Enron has authorized 16,500,000 shares of preferred stock, no par value. At December 31, 2000, Enron had outstanding 1,240,933 shares of Cumulative Second Preferred Convertible Stock (the Convertible Preferred Stock), no par value. The Convertible Preferred Stock pays dividends at an amount equal to the higher of $10.50 per share or the equivalent dividend that would be paid if shares of the Convertible Preferred Stock were converted to common stock. Each share of the Convertible Preferred Stock is convertible at any time at the option of the holder thereof into 27.304 shares of Enron’s common stock, subject to certain adjustments. The Convertible Preferred Stock is currently subject to redemption at Enron’s option at a price of $100 per share plus accrued dividends. During 2000, 1999 and 1998, 55,251 shares, 23,664 shares and 17,797 shares, respectively, of the Convertible Preferred Stock were converted into common stock. In 1999, all out st anding shares of Series A Pref erred St ock held by Whit ew ing w ere exchanged f or 250,000 shares of Enron M andat orily Convert ible Junior Pref erred St ock, Series B (Series B Pref erred St ock). Also in 1999, Enron ent ered int o a Share Set t lement Agreement under w hich Enron could be obligat ed, under cert ain circumst ances, t o deliver addit ional shares of common st ock or Series B Pref erred St ock t o Whit ew ing f or t he amount t hat t he market price of t he convert ed Enron common shares is less t han $28 per share. In 2000, Enron increased t he st rike price in t he Share Set t lement Agreement t o $48.55 per share in exchange f or an addit ional capit al cont ribut ion in Whit ew ing by t hird-part y invest ors. The number of shares of Series B Pref erred St ock aut horized equals t he number of shares necessary t o sat isf y Enron’s obligat ion under t he Share Set t lement Agreement . Absent cert ain def ault s or ot her specifi ed event s, Enron has t he opt ion t o acquire t he t hird-part y invest ors’ int erest s. If Enron does not acquire t he t hird-part y invest ors’ int erest s bef ore January 2003, or earlier upon cert ain specifi ed event s, Whit ew ing may liquidat e it s asset s and dissolve. At December 31, 2000, Enron had out st anding 250,000 shares of Series B Pref erred St ock w it h a liquidat ion value of $1.0 billion. The Series B Pref erred St ock pays semi-annual cash dividends at an annual rat e of 6.50% . Each share of Series B Pref erred St ock is mandat orily convert ible int o 200 shares of Enron common st ock on January 15, 2003 or earlier upon t he occurrence of cert ain event s. In connect ion w it h t he 1998 fi nancial rest ruct uring (yielding proceeds of approximat ely $1.2 billion) of Enron’s invest ment in Azurix, Enron commit t ed t o cause t he sale of Enron convert ible pref erred st ock, if cert ain debt obligat ions of t he relat ed ent it y w hich acquired an int erest in Azurix, are def ault ed upon, or in cert ain event s, including, among ot her t hings, Enron’s credit rat ings f all below specifi ed levels. If t he sale of t he convert ible pref erred st ock is not suffi cient t o ret ire such obligat ions, Enron w ould be liable f or t he short f all. Such obligat ions w ill mat ure in December 2001. The number of common shares issuable upon conversion is based on f ut ure common st ock prices.

Company-Obligated Preferred Securities of Subsidiaries Summarized inf ormat ion f or Enron’s company-obligat ed pref erred securit ies of subsidiaries is as f ollow s:

(In millions, except per share amount s and shares) Enron Capit al LLC 8% Cumulat ive Guarant eed M ont hly Income Pref erred Shares (8,550,000 shares) (a)

December 31, 2000 1999

Liquidat ion Value Per Share

$214

$ 214

$ 25

Enron Capit al Trust I 8.3% Trust Originat ed Pref erred Securit ies (8,000,000 pref erred securit ies) (a)

200

Enron Capit al Trust II 8 1/8% Trust Originat ed Pref erred Securit ies (6,000,000 pref erred securit ies) (a)

150

200

1,000

105

1,000

Enron Equit y Corp. 8.57% Preferred Stock (880 shares) (a) 7.39% Preferred Stock (150 shares) (a)(c)

88 15

100,000 100,000

Enron Capit al Resources, L.P. 9% Cumulat ive Pref erred Securit ies, Series A (3,000,000 pref erred securit ies) (a)

57 $904

58 $1,000

Enron Capit al Trust III Adjust able-Rat e Capit al Trust Securit ies (200,000 pref erred securit ies) LNG Pow er II L.L.C. 6.74% Preference Units (105,000 shares) (b)

Ot her

(a) Redeemable under certain circumstances after specified dates. (b) Initial rate is 6.74% increasing to 7.79%. (c) Mandatorily redeemable in 2006.

ENRON ANNUAL REPORT 2000

agreement s w it h it s unconsolidat ed equit y affi liat es. Enron’s management believes t hat it s exist ing agreement s and t ransact ions are reasonable compared t o t hose w hich could have been obt ained f rom t hird part ies.

COMMON STOCK

Derivative Instruments

Earnings Per Share The comput at ion of basic and dilut ed earnings per share is as f ollow s:

(In millions, except per share amount s) Numerat or: Basic Income bef ore cumulat ive eff ect of account ing changes Pref erred st ock dividends: Second Pref erred St ock Series A Pref erred St ock Series B Pref erred St ock Income available to common shareholders before cumulative effect of account ing changes Cumulat ive eff ect of account ing changes Income available t o common shareholders Dilut ed Income available to common shareholders before cumulative effect of account ing changes Eff ect of assumed conversion of dilut ive securit ies(a): Second Pref erred St ock Income bef ore cumulat ive eff ect of account ing changes Cumulat ive eff ect of account ing changes Income available to common shareholders after assumed conversions Denominat or: Denominat or f or basic earnings per share - w eight ed-average shares Eff ect of dilut ive securit ies: Pref erred st ock St ock opt ions Dilut ive pot ent ial common shares Denominator for diluted earnings per share - adjusted weighted-average shares and assumed conversions Basic earnings per share: Bef ore cumulat ive eff ect of account ing changes Cumulat ive eff ect of account ing changes Basic earnings per share Dilut ed earnings per share: Bef ore cumulat ive eff ect of account ing changes Cumulat ive eff ect of account ing changes Dilut ed earnings per share

Year Ended December 31, 2000 1999 1998

$ 979

$1,024

$ 703

(17) (66)

(17) (30) (19)

(17) -

896

958

686

(131)

$ 896

$ 827

$ 686

$ 896

$ 958

$ 686

913

975

703

(131)

$ 913

$ 844

$ 703

736

705

642

35 43 78

36 28 64

36 17 53

814

769

695

$1.22

$ 1.36

$1.07

$1.22

(0.19) $ 1.17

$1.07

$1.12

$ 1.27

$1.01

$1.12

(0.17) $ 1.10

$1.01

ENRON ANNUAL REPORT 2000

(a) The Series A Preferred Stock and the Series B Preferred Stock were not included in the calculation of diluted earnings per share because conversion of these shares would be antidilutive.

At December 31, 2000, Enron had derivat ive inst rument s (excluding amount s disclosed in Not e 10) on 54.8 million shares of Enron common st ock, of w hich approximat ely 12 million shares are w it h JEDI and 22.5 million are w it h relat ed part ies (see Not e 16), at an average price of $67.92 per share on w hich Enron w as a fi xed price payor. Shares pot ent ially deliverable t o count erpart ies under t he cont ract s are assumed t o be out st anding in calculat ing dilut ed earnings per share unless t hey are ant idilut ive. At December 31, 2000, t here w ere out st anding non-employee opt ions t o purchase 6.4 million shares of Enron common st ock at an exercise price of $19.59 per share.

Stock Option Plans Enron applies Account ing Principles Board (APB) Opinion 25 and relat ed int erpret at ions in account ing f or it s st ock opt ion plans. In accordance w it h APB Opinion 25, no compensat ion expense has been recognized f or t he fi xed st ock opt ion plans. Compensat ion expense charged against income f or t he rest rict ed st ock plan f or 2000, 1999 and 1998 w as $220 million, $131 million and $58 million, respect ively. Had compensat ion cost f or Enron’s st ock opt ion compensat ion plans been det ermined based on t he f air value at t he grant dat es f or aw ards under t hose plans, Enron’s net income and earnings per share w ould have been $886 million ($1.09 per share basic, $1.01 per share dilut ed) in 2000, $827 million ($1.08 per share basic, $1.01 per share dilut ed) in 1999 and $674 million ($1.02 per share basic, $0.97 per share dilut ed) in 1998. The f air value of each opt ion grant is est imat ed on t he dat e of grant using t he Black-Scholes opt ion-pricing model w it h w eight ed-average assumpt ions f or grant s in 2000, 1999 and 1998, respect ively: (i) dividend yield of 2.4% , 2.4% and 2.5% ; (ii) expect ed volat ilit y of 22.3% , 20.0% and 18.3% ; (iii) risk-f ree int erest rat es of 5.8% , 5.6% and 5.0% ; and (iv) expect ed lives of 3.2 years, 3.7 years and 3.8 years. Enron has f our fi xed opt ion plans (t he Plans) under w hich opt ions f or shares of Enron’s common st ock have been or may be grant ed t o offi cers, employees and non-employee members of t he Board of Direct ors. Opt ions grant ed may be eit her incent ive st ock opt ions or nonqualifi ed st ock opt ions and are grant ed at not less t han t he f air market value of t he st ock at t he t ime of grant . Under t he Plans, Enron may grant opt ions w it h a maximum t erm of 10 years. Opt ions vest under varying schedules.

Summarized inf ormat ion f or Enron’s Plans is as f ollow s: 2000

(Shares in t housands) Out st anding, beginning of year Grant ed Exercised (a) Forf eit ed Expired Out st anding, end of year Exercisable, end of year Available f or grant , end of year (b) Weight ed average f air value of opt ions grant ed

1999 Weighted Average Exercise Price

Shares 93,531 39,167 (32,235) (4,358) (42) 96,063 46,755 22,066

$26.74 70.02 24.43 35.68 23.75 $44.24 $29.85

Shares 79,604 35,118 (19,705) (1,465) (21) 93,531 52,803 24,864

$13.35

1998 Weight ed Average Exercise Price $19.60 37.49 18.08 24.51 18.79 $26.74 $22.56

Shares 78,858 15,702 (13,072) (1,498) (386) 79,604 45,942 10,498

$ 7.24

Weight ed Average Exercise Price $17.89 24.99 15.70 19.77 19.76 $19.60 $18.16 $ 4.20

(a) In 2000, Enron recorded tax benefits related to stock options exercised by employees of approximately $390 million reflected in shareholders’ equity. (b) Includes up to 20,707,969 shares, 22,140,962 shares and 10,497,670 shares as of December 31, 2000, 1999 and 1998, respectively, which may be issued either as restricted stock or pursuant to stock options.

The f ollow ing t able summarizes inf ormat ion about st ock opt ions out st anding at December 31, 2000 (shares in t housands):

Range of Exercise Prices $ 6.88 t o $ 20.00 20.06 t o 34.81 35.03 t o 47.31 50.48 t o 69.00 71.06 t o 86.63

Restricted Stock Plan Under Enron’s Restricted Stock Plan, participants may be granted stock without cost to the participant. The shares granted under this plan vest to the participants at various times ranging from immediate vesting to vesting at the end of a fi ve-year period. Upon vest ing, t he shares are released t o t he part icipant s. The f ollow ing summarizes shares of rest rict ed st ock under t his plan: (Shares in t housands) Out st anding, beginning of year Grant ed Released t o part icipant s Forf eit ed Out st anding, end of year Available f or grant , end of year Weight ed average f air value of rest rict ed st ock grant ed

2000 6,781 2,243 (2,201) (1,444) 5,379 20,708

1999 6,034 2,672 (1,702) (223) 6,781 22,141

1998 5,074 2,122 (1,064) (98) 6,034 10,498

$57.69

$37.38

$23.70

PENSION AND OTHER BENEFITS

Enron maint ains a ret irement plan (t he Enron Plan) w hich is a noncont ribut ory defi ned benefi t plan covering subst ant ially all employees in t he Unit ed St at es and cert ain employees in f oreign count ries. The benefi t accrual is in t he f orm of a cash balance of 5% of annual base pay. Port land General has a noncont ribut ory def ined benef it pension plan (t he Port land General Plan) covering subst ant ially all of it s employees. Benef it s under t he Port land General Plan are based on years of service, f inal average pay and covered compensat ion. Enron Facilit y Services has a noncont ribut ory defi ned benefi t pension plan (t he EFS Plan) covering subst ant ially all of it s

Options Exercisable Weighted Average Exercise Price $16.72 24.79 40.52 60.18 79.69 $44.24

Number Exercisable at 12/ 31/ 00 14,001 18,304 8,731 4,072 1,647 46,755

Weighted Average Exercise Price $16.54 24.13 40.27 61.81 72.36 $29.85

employees. Benefi t s under t he EFS Plan are based on years of service, fi nal average pay and covered compensat ion. Enron also maint ains a noncont ribut ory employee st ock ow nership plan (ESOP) w hich covers all eligible employees. Allocat ions t o individual employees’ ret irement account s w it hin t he ESOP off set a port ion of benefi t s earned under t he Enron Plan. All shares included in t he ESOP have been allocat ed t o t he employee account s. At December 31, 2000 and 1999, 12,600,271 shares and 17,241,731 shares, respect ively, of Enron common st ock w ere held by t he ESOP, a port ion of w hich may be used t o off set benefi t s under t he Enron Plan. Asset s of t he Enron Plan, t he Port land General Plan and t he EFS Plan are comprised primarily of equit y securit ies, fi xed income securit ies and t emporary cash invest ment s. It is Enron’s policy t o f und all pension cost s accrued t o t he ext ent required by f ederal t ax regulat ions. Enron provides cert ain post ret irement medical, lif e insurance and dent al benefi t s t o eligible employees and t heir eligible dependent s. Benefi t s are provided under t he provisions of cont ribut ory defi ned dollar benefi t plans. Enron is current ly f unding t hat port ion of it s obligat ions under t hese post ret irement benefi t plans w hich are expect ed t o be recoverable t hrough rat es by it s regulat ed pipelines and elect ric ut ilit y operat ions. Enron accrues these postretirement benefi t costs over the service lives of the employees expected to be eligible to receive such benefi ts. Enron is amortizing the transition obligation which existed at January 1, 1993 over a period of approximately 19 years. The f ollow ing t able set s f ort h inf ormat ion relat ed t o changes in t he benefi t obligat ions, changes in plan asset s, a reconciliat ion of t he f unded st at us of t he plans and component s of t he expense recognized relat ed t o Enron’s pension and ot her post ret irement plans:

ENRON ANNUAL REPORT 2000

Number Outstanding at 12/ 31/ 00 15,368 24,091 21,520 13,965 21,119 96,063

Options Outstanding Weighted Average Remaining Contractual Life 4.7 6.8 6.8 6.5 5.6 6.2

(In millions) Change in benefi t obligat ion Benefi t obligat ion, beginning of year Service cost Int erest cost Plan part icipant s’ cont ribut ions Plan amendment s Act uarial loss (gain) Acquisit ions and divest it ures Eff ect of curt ailment and set t lement s(a) Benefi t s paid Benefi t obligat ion, end of year Change in plan asset s Fair value of plan asset s, beginning of year (b) Act ual ret urn on plan asset s Acquisit ions and divest it ures Employer cont ribut ion Plan part icipant s’ cont ribut ions Benefi t s paid Fair value of plan asset s, end of year (b) Reconciliat ion of f unded st at us, end of year Funded st at us, end of year Unrecognized t ransit ion obligat ion (asset ) Unrecognized prior service cost Unrecognized net actuarial loss (gain) Prepaid (accrued) benefi t cost Weight ed-average assumpt ions at December 31 Discount rat e Expect ed ret urn on plan asset s (pre-t ax) Rat e of compensat ion increase

Pension Benefi ts Other Benefi ts 2000 1999 2000 1999

$708 33 53 9 -

$687 32 49 6 (51) 36

$120 $134 2 2 10 9 4 3 10 (12) -

(2) (8) (55) (43) $746 $708

(22) (16) $124 $120

$853 $774 41 80 37 19 5 (55) (43)

$ 68 $ 60 (4) 7 7 6 4 3 (11) (8)

$858

$ 64 $ 68

$112 (6) 25 55 $186

$853

$145 (13) 32 11 $175

7.75% 7.75% (c) (e)

ENRON ANNUAL REPORT 2000

44 12

48 14

(17) (29) $ (21) $ (19)

7.75% 7.75%

Components of net periodic benefi t cost Service cost $ 33 $ 32 Int erest cost 53 49 Expect ed ret urn on plan asset s (75) (70) Amort izat ion of t ransit ion obligat ion (asset ) (6) (6) Amort izat ion of prior service cost 5 5 Recognized net actuarial loss (gain) 3 Eff ect of curt ailment and set t lement s(a) (6) Net periodic benefi t cost $ 10 $ 7

$ (60) $ (52)

(d) (e)

2 $ 2 10 9 (4) (4) 4 1 (1)

4 1 -

6 $ 12 $ 18

(a) Represents one-time nonrecurring events including the exchange and sale of EOG (see Note 2) and certain employees ceasing participation in the Portland General Plan as a result of union negotiations. (b) Includes plan assets of the ESOP of $116 million and $121 million at December 31, 2000 and 1999, respectively. (c) Long-term rate of return on assets is assumed to be 10.5% for the Enron Plan, 9.0% for the Portland General Plan and 9.5% for the EFS Plan. (d) Long-term rate of return on assets is assumed to be 7.5% for the Enron assets and 9.5% for the Portland General assets. (e) Rate of compensation increase is assumed to be 4.0% for the Enron Plan, 4.0% to 9.5% for the Portland General Plan and 5.0% for the EFS Plan.

Included in t he above amount s are t he unf unded obligat ions f or t he supplement al execut ive ret irement plans. At bot h December 31, 2000 and 1999, t he project ed benefi t obligat ion f or t hese unf unded plans w as $56 million and t he f air value of asset s w as $1 million.

The measurement date of the Enron Plan and the ESOP is September 30, and the measurement date of the Portland General Plan, the EFS Plan and the postretirement benefi t plans is December 31. The funded status as of the valuation date of the Enron Plan, the Portland General Plan, the ESOP and the postretirement benefi t plans reconciles with the amount detailed above which is included in “ Other Assets” on the Consolidated Balance Sheet. For measurement purposes, 6% and 10% annual rat es of increase in t he per capit a cost of covered healt h care benefi t s w ere assumed f or t he period 2000 t o 2001 f or t he Enron and Port land General post ret irement plans, respect ively. The rat es w ere assumed t o decrease t o 5% by 2002 and 2010 f or t he Enron and Port land General post ret irement plans, respect ively. Assumed healt h care cost t rend rat es have a signifi cant eff ect on t he amount s report ed f or t he healt h care plans. A one-percent age point change in assumed healt h care cost t rend rat es w ould have t he f ollow ing eff ect s:

(In millions) Eff ect on t ot al of service and int erest cost component s Eff ect on post ret irement benefi t obligat ion

1-Percent age Point Increase

1-Percent age Point Decrease

$0.4

$(0.3)

$4.4

$(3.8)

Addit ionally, cert ain Enron subsidiaries maint ain various incent ive based compensat ion plans f or w hich part icipant s may receive a combinat ion of cash or st ock opt ions, based upon t he achievement of cert ain perf ormance goals.

RATES AND REGULATORY ISSUES

Rat es and regulat ory issues relat ed t o cert ain of Enron’s nat ural gas pipelines and it s elect ric ut ilit y operat ions are subject t o f inal det erminat ion by various regulat ory agencies. The domest ic int erst at e pipeline operat ions are regulat ed by t he Federal Energy Regulat ory Commission (FERC) and t he elect ric ut ilit y operat ions are regulat ed by t he FERC and t he Oregon Public Ut ilit y Commission (OPUC). As a result , t hese operat ions are subject t o t he provisions of St at ement of Financial Account ing St andards (SFAS) No. 71, “ Account ing f or t he Eff ect s of Cert ain Types of Regulat ion,” w hich recognizes t he economic eff ect s of regulat ion and, accordingly, Enron has recorded regulat ory asset s and liabilit ies relat ed t o such operat ions. The regulat ed pipelines operat ions’ net regulat ory asset s w ere $290 million and $250 million at December 31, 2000 and 1999, respect ively, and are expect ed t o be recovered over varying t ime periods. The elect ric ut ilit y operat ions’ net regulat ory asset s w ere $450 million and $494 million at December 31, 2000 and 1999, respect ively. Based on rat es in place at December 31, 2000, Enron est imat es t hat it w ill collect subst ant ially all of it s regulat ory asset s w it hin t he next 11 years.

Pipeline Operations On April 16, 1999, Nort hern Nat ural Gas Company (Nort hern) f iled an uncont est ed St ipulat ion and Agreement of Set t lement (Set t lement ) w it h t he FERC and an order approving t he Set t lement w as issued by t he FERC on June 18, 1999. The rat es ef f ect uat ed by Nort hern on November 1, 1999 remain in ef f ect . On M ay 1, 2000, Nort hern f iled t o implement an opt ional volumet ric f irm t hroughput service. An order approving such service w as issued November 8, 2000 w it h ef f ect iveness November 1, 2000; a rehearing request is pending. On November 1, 2000, Nort hern f iled t o increase it s rat es f or t he recovery of ret urn and t axes on it s Syst em Levelized Account .

On Oct ober 2, 2000 PGE fi led a rest ruct uring plan w it h t he OPUC t hat implement s t he provisions of t he St at e Senat e Bill SB1149, signed int o law in July 1999. The new law provides indust rial and commercial cust omers of invest or-ow ned ut ilit ies in t he st at e direct access t o compet ing energy suppliers by Oct ober 1, 2001. As fi led, PGE’s plan also proposes an increase in base rat es, w it h new t ariff s eff ect ive on Oct ober 1, 2001. PGE is a 67.5% ow ner of t he Trojan Nuclear Plant (Trojan). In Sept ember 2000, PGE ent ered int o an agreement w it h t he OPUC relat ed t o Trojan. See Not e 14. At December 31, 2000, PGE’s regulat ory asset relat ed t o recovery of Trojan decommissioning cost s f rom cust omers w as $190 million. Enron believes, based upon it s experience t o dat e and af t er considering appropriat e reserves t hat have been est ablished, t hat t he ult imat e resolut ion of pending regulat ory mat t ers w ill not have a mat erial impact on Enron’s fi nancial posit ion or result s of operat ions.

resolut ion of t hese mat t ers w ill not have a mat erial adverse eff ect on it s fi nancial posit ion or result s of operat ions. On November 21, 1996, an explosion occurred in or around t he Humbert o Vidal Building in San Juan, Puert o Rico. The explosion result ed in f at alit ies, bodily injuries and damage t o t he building and surrounding propert y. San Juan Gas Company, Inc. (San Juan Gas), an Enron affi liat e, operat ed a propane/air dist ribut ion syst em in t he vicinit y, but did not provide service t o t he building. Enron, San Juan Gas, f our affi liat es and t heir insurance carriers w ere named as def endant s, along w it h several t hird part ies, including The Puert o Rico Aqueduct and Sew er Aut horit y, Puert o Rico Telephone Company, Heat h Consult ant s Incorporat ed, Humbert o Vidal, Inc. and t heir insurance carriers, in numerous law suit s fi led in U.S. Dist rict Court f or t he Dist rict of Puert o Rico and t he Superior Court of Puert o Rico. These suit s seek damages f or w rongf ul deat h, personal injury, business int errupt ion and propert y damage allegedly caused by t he explosion. Af t er nearly f our years w it hout det ermining t he cause of t he explosion, all part ies have agreed not t o lit igat e f urt her t hat issue, but t o move t hese suit s t ow ard set t lement s or t rials t o det ermine w het her each plaint iff w as injured as a result of t he explosion and, if so, t he law f ul damages at t ribut able t o such injury. The def endant s have agreed on a f und f or set t lement s or fi nal aw ards. Numerous claims have been set t led. Alt hough no assurances can be given, Enron believes t hat t he ult imat e resolut ion of t hese mat t ers w ill not have a mat erial adverse eff ect on it s fi nancial posit ion or result s of operat ions.

Trojan Investment Recovery

Electric Utility Operations

LITIGATION AND OTHER CONTINGENCIES

Enron is a part y t o various claims and lit igat ion, t he signifi cant it ems of w hich are discussed below. Alt hough no assurances can be given, Enron believes, based on it s experience t o dat e and af t er considering appropriat e reserves t hat have been est ablished, t hat t he ult imat e resolut ion of such it ems, individually or in t he aggregat e, w ill not have a mat erial adverse impact on Enron’s fi nancial posit ion or result s of operat ions.

Litigation In 1995, several part ies (t he Plaint iff s) fi led suit in Harris Count y Dist rict Court in Houst on, Texas, against Int rat ex Gas Company (Int rat ex), Houst on Pipe Line Company and Panhandle Gas Company (collect ively, t he Enron Def endant s), each of w hich is a w holly-ow ned subsidiary of Enron. The Plaint iff s w ere eit her sellers or royalt y ow ners under numerous gas purchase cont ract s w it h Int rat ex, many of w hich have t erminat ed. Early in 1996, t he case w as severed by t he Court int o t w o mat t ers t o be t ried (or ot herw ise resolved) separat ely. In t he fi rst mat t er, t he Plaint iff s alleged t hat t he Enron Def endant s commit t ed f raud and negligent misrepresent at ion in connect ion w it h t he “ Panhandle program,” a special market ing program est ablished in t he early 1980s. This case w as t ried in Oct ober 1996 and result ed in a verdict f or t he Enron Def endant s. In t he second mat t er, t he Plaint iff s allege t hat t he Enron Def endant s violat ed st at e regulat ory requirement s and cert ain gas purchase cont ract s by f ailing t o t ake t he Plaint iff s’ gas rat ably w it h ot her producers’ gas at cert ain t imes bet w een 1978 and 1988. The t rial court cert ifi ed a class act ion w it h respect t o rat abilit y claims. On M arch 9, 2000, t he Texas Supreme Court ruled t hat t he t rial court’s class cert ifi cat ion w as improper and remanded t he case t o t he t rial court . The Enron Def endant s deny t he Plaint iff s’ claims and have assert ed various affi rmat ive def enses, including t he st at ut e of limit at ions. The Enron Def endant s believe t hat t hey have st rong legal and f act ual def enses, and int end t o vigorously cont est t he claims. Alt hough no assurances can be given, Enron believes t hat t he ult imat e

In early 1993, PGE ceased commercial operat ion of t he Trojan nuclear pow er generat ing f acilit y. The OPUC grant ed PGE, t hrough a general rat e order, recovery of , and a ret urn on, 87 percent of it s remaining invest ment in Trojan. The OPUC’s general rate order related to Trojan has been subject to litigation in various state courts, including rulings by the Oregon Court of Appeals and petitions to the Oregon Supreme Court fi led by parties opposed to the OPUC’s order, including the Utility Reform Project (URP) and the Citizens Utility Board (CUB). In August 2000, PGE ent ered int o agreement s w it h CUB and t he st aff of t he OPUC t o set t le t he lit igat ion relat ed t o PGE’s recovery of it s invest ment in t he Trojan plant . Under t he agreement s, CUB agreed t o w it hdraw f rom t he lit igat ion and t o support t he set t lement as t he means t o resolve t he Trojan lit igat ion. The OPUC approved t he account ing and rat emaking element s of t he set t lement on Sept ember 29, 2000. As a result of t hese approvals, PGE’s invest ment in Trojan is no longer included in rat es charged t o cust omers, eit her t hrough a ret urn on or a ret urn of t hat invest ment . Collect ion of ongoing decommissioning cost s at Trojan is not aff ect ed by t he set t lement agreement s or t he Sept ember 29, 2000 OPUC order. Wit h CUB’s w it hdraw al, URP is t he one remaining signifi cant adverse part y in t he lit igat ion. URP has indicat ed t hat it plans t o cont inue t o challenge t he OPUC order allow ing PGE recovery of it s invest ment in Trojan. Enron cannot predict t he out come of t hese act ions. Alt hough no assurances can be given, Enron believes t hat t he ult imat e resolut ion of t hese mat t ers w ill not have a mat erial adverse eff ect on it s fi nancial posit ion or result s of operat ions.

Environmental Matters Enron is subject t o ext ensive f ederal, st at e and local environment al law s and regulat ions. These law s and regulat ions require expendit ures in connect ion w it h t he const ruct ion of new f acilit ies, t he operat ion of exist ing f acilit ies and f or remediat ion at various operat ing sit es. The implement at ion of t he Clean Air Act Amendment s is expect ed t o result in increased operat ing

ENRON ANNUAL REPORT 2000

On November 22, 2000, t he FERC issued an order approving t he rat es, subject t o ref und. On November 1, 2000, Transw est ern Pipeline Company implement ed a rat e escalat ion of set t led t ransport at ion rat es in accordance w it h it s M ay 1995 global set t lement , as amended in M ay 1996. On August 23, 1999, Transw est ern fi led f or a new service, Enhanced Firm Backhaul. An order by t he FERC w as issued February 23, 2000, approving t he service.

expenses. These increased operat ing expenses are not expect ed t o have a mat erial impact on Enron’s fi nancial posit ion or result s of operat ions. Enron’s nat ural gas pipeline companies conduct soil and groundw at er remediat ion on a number of t heir f acilit ies. Enron does not expect t o incur mat erial expendit ures in connect ion w it h soil and groundw at er remediat ion.

COMMITMENTS

Firm Transportation Obligations Enron has fi rm t ransport at ion agreement s w it h various joint vent ure and ot her pipelines. Under t hese agreement s, Enron must make specif ied minimum payment s each mont h. At December 31, 2000, t he est imat ed aggregat e amount s of such required f ut ure payment s w ere $91 million, $88 million, $89 million, $85 million and $77 million f or 2001 t hrough 2005, respect ively, and $447 million f or lat er years. The cost s recognized under fi rm t ransport at ion agreement s, including commodit y charges on act ual quant it ies shipped, t ot aled $68 million, $55 million and $30 million in 2000, 1999 and 1998, respect ively.

ENRON ANNUAL REPORT 2000

Other Commitments

Enron leases propert y, operat ing f acilit ies and equipment under various operat ing leases, cert ain of w hich cont ain renew al and purchase opt ions and residual value guarant ees. Fut ure commit ment s relat ed t o t hese it ems at December 31, 2000 w ere $123 million, $98 million, $69 million, $66 million and $49 million f or 2001 t hrough 2005, respect ively, and $359 million f or lat er years. Guarant ees under t he leases t ot al $556 million at December 31, 2000. Tot al rent expense incurred during 2000, 1999 and 1998 w as $143 million, $143 million and $147 million, respect ively. Enron has ent ered int o t w o development agreement s w hereby Enron is required t o manage const ruct ion of a cert ain number of pow er project s on behalf of t hird-part y ow ners. Under one development agreement , w here const ruct ion is expect ed t o be complet ed on or bef ore M arch 31, 2004, Enron has agreed t o ent er int o pow er off t ake agreement s f or varying port ions of t he off t ake f rom each f acilit y. Under bot h development agreement s, Enron maint ains purchase opt ions, w hich may be assigned t o a t hird part y. In addit ion t o t he purchase opt ion under t he ot her development agreement , Enron maint ains lease opt ions on t he pow er project s. If upon complet ion, w hich is expect ed t o occur on or bef ore August 31, 2002, Enron has f ailed t o exercise one of it s opt ions, Enron may part icipat e in t he remarket ing of t he pow er project s w hich Enron has guarant eed t he recovery of 89.9 percent of cert ain project cost s, of w hich approximat ely $140 million has been incurred t hrough December 31, 2000. Enron guarant ees t he perf ormance of cert ain of it s unconsolidat ed equit y affi liat es in connect ion w it h let t ers of credit issued on behalf of t hose ent it ies. At December 31, 2000, a t ot al of $264 million of such guarant ees w ere out st anding, including $103 million on behalf of EOTT Energy Part ners, L.P. (EOTT). In addit ion, Enron is a guarant or on cert ain liabilit ies of unconsolidat ed equit y affi liat es and ot her companies t ot aling approximat ely $1,863 million at December 31, 2000, including $538 million relat ed t o EOTT t rade obligat ions. The EOTT let t ers of credit and guarant ees of t rade obligat ions are secured by t he asset s of EOTT. Enron has also guarant eed $386 million in lease obligat ions f or w hich it has been indemnifi ed by an “ Invest ment Grade” company. M anagement does not consider it likely t hat Enron w ould be required t o perf orm or ot herw ise incur any loss-

es associat ed w it h t he above guarant ees. In addit ion, cert ain commit ment s have been made relat ed t o capit al expendit ures and equit y invest ment s planned in 2001. On December 15, 2000, Enron announced t hat it had ent ered int o an agreement w it h Azurix under w hich t he holders of Azurix’s approximat ely 39 million publicly t raded shares w ould receive cash of $8.375 in exchange f or each share. The agreement , w hich is subject t o t he approval of Azurix shareholders, is expect ed t o close in early 2001.

RELATED PARTY TRANSACTIONS

In 2000 and 1999, Enron ent ered int o t ransact ions w it h limit ed part nerships (t he Relat ed Part y) w hose general part ner’s managing member is a senior offi cer of Enron. The limit ed part ners of t he Relat ed Part y are unrelat ed t o Enron. M anagement believes t hat t he t erms of t he t ransact ions w it h t he Relat ed Part y w ere reasonable compared t o t hose w hich could have been negot iat ed w it h unrelat ed t hird part ies. In 2000, Enron ent ered int o t ransact ions w it h t he Relat ed Part y t o hedge cert ain merchant invest ment s and ot her asset s. As part of t he t ransact ions, Enron (i) cont ribut ed t o new ly-f ormed ent it ies (t he Ent it ies) asset s valued at approximat ely $1.2 billion, including $150 million in Enron not es payable, 3.7 million rest rict ed shares of out st anding Enron common st ock and t he right t o receive up t o 18.0 million shares of out st anding Enron common st ock in M arch 2003 (subject t o cert ain condit ions) and (ii) t ransf erred t o t he Ent it ies asset s valued at approximat ely $309 million, including a $50 million not e payable and an invest ment in an ent it y t hat indirect ly holds w arrant s convert ible int o common st ock of an Enron equit y met hod invest ee. In ret urn, Enron received economic int erest s in t he Ent it ies, $309 million in not es receivable, of w hich $259 million is recorded at Enron’s carryover basis of zero, and a special dist ribut ion f rom t he Ent it ies in t he f orm of $1.2 billion in not es receivable, subject t o changes in t he principal f or amount s payable by Enron in connect ion w it h t he execut ion of addit ional derivat ive inst rument s. Cash in t hese Ent it ies of $172.6 million is invest ed in Enron demand not es. In addit ion, Enron paid $123 million t o purchase share-set t led opt ions f rom t he Ent it ies on 21.7 million shares of Enron common st ock. The Ent it ies paid Enron $10.7 million t o t erminat e t he share-set t led opt ions on 14.6 million shares of Enron common st ock out st anding. In lat e 2000, Enron ent ered int o share-set t led collar arrangement s w it h t he Ent it ies on 15.4 million shares of Enron common st ock. Such arrangement s w ill be account ed f or as equit y t ransact ions w hen set t led. In 2000, Enron ent ered int o derivat ive t ransact ions w it h t he Ent it ies w it h a combined not ional amount of approximat ely $2.1 billion t o hedge cert ain merchant invest ment s and ot her asset s. Enron’s not es receivable balance w as reduced by $36 million as a result of premiums ow ed on derivat ive t ransact ions. Enron recognized revenues of approximat ely $500 million relat ed t o t he subsequent change in t he market value of t hese derivat ives, w hich off set market value changes of cert ain merchant invest ment s and price risk management act ivit ies. In addit ion, Enron recognized $44.5 million and $14.1 million of int erest income and int erest expense, respect ively, on t he not es receivable f rom and payable t o t he Ent it ies. In 1999, Enron ent ered int o a series of t ransact ions involving a t hird part y and t he Relat ed Part y. The eff ect of t he t ransact ions w as (i) Enron and t he t hird part y amended cert ain f orw ard cont ract s t o purchase shares of Enron common st ock, result ing in Enron having f orw ard cont ract s t o purchase Enron common shares at t he market price on t hat day, (ii) t he Relat ed Part y received 6.8 million shares of Enron common st ock subject t o cert ain rest rict ions and (iii) Enron received a not e receivable, w hich

ASSET IMPAIRMENT

In 1999, cont inued signifi cant changes in st at e and f ederal rules regarding t he use of M TBE as a gasoline addit ive have signifi cant ly impact ed Enron’s view of t he f ut ure prospect s f or t his business. As a result , Enron complet ed a reevaluat ion of it s posit ion and st rat egy w it h respect t o it s operat ed M TBE asset s w hich result ed in (i) t he purchase of cert ain previously-leased M TBE relat ed asset s, under provisions w it hin t he lease, in order t o f acilit at e f ut ure act ions, including t he pot ent ial disposal of such asset s and (ii) a review of all M TBE-relat ed asset s f or impairment considering t he recent adverse changes and t heir impact on recoverabilit y. Based on t his review and disposal discussions w it h market part icipant s, in 1999, Enron recorded a $441 million pre-t ax charge f or t he impairment of it s M TBE-relat ed asset s.

ACCOUNTING PRONOUNCEMENTS

Cumulative Effect of Accounting Changes In 1999, Enron recorded an af t er-t ax charge of $131 million t o refl ect t he init ial adopt ion (as of January 1, 1999) of t w o new account ing pronouncement s, t he AICPA St at ement of Posit ion 98-5 (SOP 98-5), “ Report ing on t he Cost s of St art -Up Act ivit ies” and t he Emerging Issues Task Force Issue No. 98-10, “ Account ing f or Cont ract s Involved in Energy Trading and Risk M anagement Act ivit ies.” The 1999 charge w as primarily relat ed t o t he adopt ion of SOP 98-5.

Recently Issued Accounting Pronouncements In 1998, t he Financial Account ing St andards Board (FASB) issued SFAS No. 133, “ Account ing f or Derivat ive Inst rument s and Hedging Act ivit ies,” w hich w as subsequent ly amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 must be applied t o all derivat ive inst rument s and cert ain derivat ive inst rument s embedded in hybrid inst rument s and requires t hat such inst rument s be recorded in t he balance sheet eit her as an asset or liabilit y measured at it s f air value t hrough earnings, w it h special account ing allow ed f or cert ain qualif ying hedges. Enron w ill adopt SFAS No. 133 as of January 1, 2001. Due t o t he adopt ion of SFAS No. 133, Enron w ill recognize an af t er-t ax non-cash loss of approximat ely $5 million in earnings and an af t er-t ax noncash gain in “ Ot her Comprehensive Income,” a component of shareholders’ equit y, of approximat ely $22 million f rom t he cumulat ive eff ect of a change in account ing principle. Enron w ill also reclassif y $532 million f rom “ Long-Term Debt ” t o “ Ot her Liabilit ies” due t o t he adopt ion. The t ot al impact of Enron’s adopt ion of SFAS No. 133 on earnings and on “ Ot her Comprehensive Income” is dependent upon cert ain pending int erpret at ions, w hich are current ly under considerat ion, including t hose relat ed t o “ normal purchases and normal sales” and infl at ion escalat ors included in cert ain cont ract payment provisions. The int erpret at ions of t hese issues, and ot hers, are current ly under considerat ion by t he FASB. While t he ult imat e conclusions reached on int erpret at ions being considered by t he FASB could impact t he eff ect s of Enron’s adopt ion of SFAS No. 133, Enron does not believe t hat such conclusions w ould have a mat erial eff ect on it s current est imat e of t he impact of adopt ion.

ENRON ANNUAL REPORT 2000

w as repaid in December 1999, and cert ain fi nancial inst rument s hedging an invest ment held by Enron. Enron recorded t he asset s received and equit y issued at est imat ed f air value. In connect ion w it h t he t ransact ions, t he Relat ed Part y agreed t hat t he senior offi cer of Enron w ould have no pecuniary int erest in such Enron common shares and w ould be rest rict ed f rom vot ing on mat t ers relat ed t o such shares. In 2000, Enron and t he Relat ed Part y ent ered int o an agreement t o t erminat e cert ain fi nancial inst rument s t hat had been ent ered int o during 1999. In connect ion w it h t his agreement , Enron received approximat ely 3.1 million shares of Enron common st ock held by t he Relat ed Part y. A put opt ion, w hich w as originally ent ered int o in t he fi rst quart er of 2000 and gave t he Relat ed Part y t he right t o sell shares of Enron common st ock t o Enron at a st rike price of $71.31 per share, w as t erminat ed under t his agreement . In ret urn, Enron paid approximat ely $26.8 million t o t he Relat ed Part y. In 2000, Enron sold a port ion of it s dark fi ber invent ory t o t he Relat ed Part y in exchange f or $30 million cash and a $70 million not e receivable t hat w as subsequent ly repaid. Enron recognized gross margin of $67 million on t he sale. In 2000, t he Relat ed Part y acquired, t hrough securit izat ions, approximat ely $35 million of merchant invest ment s f rom Enron. In addit ion, Enron and t he Relat ed Part y f ormed part nerships in w hich Enron cont ribut ed cash and asset s and t he Relat ed Part y cont ribut ed $17.5 million in cash. Subsequent ly, Enron sold a port ion of it s int erest in t he part nership t hrough securit izat ions. See Not e 3. Also, Enron cont ribut ed a put opt ion t o a t rust in w hich t he Relat ed Part y and Whit ew ing hold equit y and debt int erest s. At December 31, 2000, t he f air value of t he put opt ion w as a $36 million loss t o Enron. In 1999, t he Relat ed Part y acquired approximat ely $371 million of merchant asset s and invest ment s and ot her asset s f rom Enron. Enron recognized pre-t ax gains of approximat ely $16 million relat ed t o t hese t ransact ions. The Relat ed Part y also ent ered int o an agreement t o acquire Enron’s int erest s in an unconsolidat ed equit y affi liat e f or approximat ely $34 million.

QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quart erly fi nancial dat a is as f ollow s:

(In millions, except per share amount s) 2000 Revenues Income bef ore int erest , minorit y int erest s and income t axes Net income Earnings per share: Basic Dilut ed 1999 Revenues Income bef ore int erest , minorit y int erest s and income t axes Net income Earnings per share: Basic Dilut ed

First Quart er

Second Quart er

Third Quart er

Fourt h Quart er

$13,145

$16,886

$30,007

$40,751

$100,789

624 338

609 289

666 292

583 60

2,482 979

0.44 0.40

0.37 0.34

0.05 0.05

Tot al Year (a)

1.22 1.12

$ 7,632

$ 9,672

$11,835

$10,973

$ 40,112

533 122

469 222

520 290

473 259

1,995 893

0.17 0.16

0.29 0.27

0.38 0.35

0.33 0.31

1.17 1.10

(a) The sum of earnings per share for the four quarters may not equal earnings per share for the total year due to changes in the average number of common shares outstanding.

ENRON ANNUAL REPORT 2000

GEOGRAPHIC AND BUSINESS SEGMENT INFORMATION

Enron’s business is divided int o operat ing segment s, defi ned as component s of an ent erprise about w hich fi nancial inf ormat ion is available and evaluat ed regularly by t he chief operat ing decision maker, or decision-making group, in deciding how t o allocat e resources t o an individual segment and in assessing perf ormance of t he segment . Enron’s chief operat ing decisionmaking group is t he Offi ce of t he Chairman. Enron’s chief operat ing decision-making group evaluat es perf ormance and allocat es resources based on income bef ore int erest , minorit y int erest s and income t axes (IBIT) as w ell as on net income. Cert ain cost s relat ed t o company-w ide f unct ions are allocat ed t o each segment . How ever, int erest on corporat e debt is primarily maint ained at Corporat e and is not allocat ed t o t he segment s. Theref ore, management believes t hat IBIT is t he dominant measurement of segment profi t s consist ent w it h Enron’s consolidat ed fi nancial st at ement s. The account ing policies of t he segment s are subst ant ially t he same as t hose described in t he summary of signifi cant account ing policies in Not e 1. Beginning in 2000, Enron’s communicat ions business is being managed as a separat e operat ing segment named Broadband Services and t heref ore, based on crit eria set by SFAS No. 131, “ Disclosures about Segment s of an Ent erprise and Relat ed Inf ormat ion,” is report ed separat ely. Enron has divided it s operat ions int o t he f ollow ing report able segment s, based on similarit ies in economic charact erist ics, product s and services, t ypes of cust omers, met hods of dist ribut ions and regulat ory environment . Transport at ion and Dist ribut ion – Regulat ed indust ries. Int erst at e t ransmission of nat ural gas. M anagement and operat ion of pipelines. Elect ric ut ilit y operat ions. Wholesale Services – Energy commodit y sales and services, risk management product s and fi nancial services t o w holesale cust omers. Development , acquisit ion and operat ion of pow er plant s, nat ural gas pipelines and ot her energy-relat ed asset s. Ret ail Energy Services – Sales of nat ural gas and elect ricit y direct ly t o end-use cust omers, part icularly in t he commercial and indust rial sect ors, including t he out sourcing of energyrelat ed act ivit ies.

Broadband Services – Const ruct ion and management of a nat ionw ide fi ber opt ic net w ork, t he market ing and management of bandw idt h and t he delivery of high-bandw idt h cont ent . Explorat ion and Product ion – Nat ural gas and crude oil explorat ion and product ion primarily in t he Unit ed St at es, Canada, Trinidad and India unt il August 16, 1999. See Not e 2. Corporat e and Ot her – Includes operat ion of w at er and renew able energy businesses as w ell as clean f uels plant s. Financial inf ormat ion by geographic and business segment f ollow s f or each of t he t hree years in t he period ended December 31, 2000.

Geographic Segments

(In millions) Operat ing revenues f rom unaffi liat ed cust omers Unit ed St at es Foreign Income bef ore int erest , minorit y int erest s and income t axes Unit ed St at es Foreign

Year Ended December 31, 2000 1999 1998

$ 77,891 22,898 $100,789

$30,176 9,936 $40,112

$25,247 6,013 $31,260

2,131 351 2,482

$ 1,273 722 $ 1,995

$ 1,008 574 $ 1,582

$ 10,899 844 $ 11,743

$ 8,286 2,395 $10,681

$ 9,382 1,275 $10,657

$ Long-lived asset s Unit ed St at es Foreign

Business Segments

(In millions) 1999 Unaffi liat ed revenues(a) Int ersegment revenues(b) Tot al revenues Depreciat ion, deplet ion and amort izat ion Operat ing income (loss) Equity in earnings of unconsolidated equity affi liates Gains on sales of asset s and invest ment s Int erest income Ot her income, net Income (loss) bef ore int erest , minorit y int erest s and income t axes Capit al expendit ures Ident ifi able asset s Invest ment s in and advances t o unconsolidat ed equit y affi liat es Tot al asset s 1998 Unaffi liat ed revenues(a) Int ersegment revenues(b) Tot al revenues Depreciat ion, deplet ion and amort izat ion Operat ing income (loss) Equity in earnings of unconsolidated equity affi liates Gains on sales of asset s and invest ment s Int erest income Ot her income, net Income (loss) bef ore int erest , minorit y int erest s and income t axes Capit al expendit ures Ident ifi able asset s Invest ment s in and advances t o unconsolidat ed equit y affi liat es Tot al asset s (a) (b) (c) (d)

Wholesale Services

Ret ail Energy Services

Broadband Services

$2,742 213 2,955 278 565 65 25 6 71

$93,278 1,628 94,906 343 1,668 486 9 171 (74)

$3,824 791 4,615 38 58 (60) 74 121 5 (33)

$ 408 408 77 (64) 1 3 -

732 270 7,509

2,260 1,280 43,920

165 70 4,266

774 $8,283

4,014 $47,934

104 $4,370

Transport at ion and Dist ribut ion

Wholesale Services

Ret ail Energy Services

Explorat ion and Product ion (c)

$2,013 19 2,032 247 551 50 19 20 45

$35,501 786 36,287 294 889 237 11 126 54

$1,518 289 1,807 29 (81) 5 8

$ 429 97 526 213 66 (1)

685 316 7,148

1,317 1,216 18,501

(68) 64 956

811 $7,959

2,684 $21,185

$ 956

$1,833 16 1,849 253 562 33 31 9 2

$27,220 505 27,725 195 880 42 4 67 (25)

$1,072 1,072 31 (124) (2) 7

$ 750 134 884 315 133 1 (6)

637 310 6,955

968 706 12,205

661 $7,616

2,632 $14,837

(119) 75 747 $ 747

Corporat e and Ot her (d) $

537 (2,632) (2,095) 119 (274) (405) 38 27 (1)

(60) 436 1,313 24 $1,337

(615) 325 3,201 378 $ 3,579

Corporat e and Ot her (d) $

65 226 -

128 690 3,001 $3,001

Tot al $100,789 100,789 855 1,953 87 146 121 212 (37) 2,482 2,381 60,209 5,294 $ 65,503

Tot al

651 (1,191) (540) 87 (623) 22 511 11 75

$ 40,112 40,112 870 802 309 541 162 181

(4) 541 1,740

1,995 2,363 28,345

1,541 $ 3,281

5,036 $ 33,381

$ 31,260 31,260 827 1,378 97 56 88 (37)

385 (655) (270) 33 (73) 24 21 11 (15) (32) 124 2,009

1,140 $ 3,149

1,582 1,905 24,917 4,433 $ 29,350

Unaffiliated revenues include sales to unconsolidated equity affiliates. Intersegment sales are made at prices comparable to those received from unaffiliated customers and in some instances are affected by regulatory considerations. Reflects results through August 16, 1999. See Note 2. Includes consolidating eliminations.

ENRON ANNUAL REPORT 2000

(In millions) 2000 Unaffi liat ed revenues(a) Int ersegment revenues(b) Tot al revenues Depreciat ion, deplet ion and amort izat ion Operat ing income (loss) Equity in earnings of unconsolidated equity affi liates Gains on sales of asset s and invest ment s Gain on t he issuance of st ock by TNPC, Inc. Int erest income Ot her income, net Income (loss) bef ore int erest , minorit y int erest s and income t axes Capit al expendit ures Ident ifi able asset s Invest ment s in and advances t o unconsolidat ed equit y affi liat es Tot al asset s

Transport at ion and Dist ribut ion

Selected Financial and Credit Information (Unaudited) The f ollow ing review of t he credit charact erist ics of Enron Corp. and it s subsidiaries and affi liat es should be read in conjunct ion w it h t he Consolidat ed Financial St at ement s. The credit inf ormat ion t hat f ollow s represent s management ’s calculat ion of cert ain key credit rat ios of Enron. (In millions) Total Obligations Balance sheet debt (short - and long-t erm)

2000

1999

$10,229

$ 8,152

Balance Sheet

180 715 (239) $ 8,808

Not e 15 Not e 15 Balance Sheet Not e 7 Not e 9 Not e 15

Total Obligations

213 556 (532) $10,466

Shareholders’ Equity and Certain Other Items Shareholders’ Equit y

$11,470

$ 9,570

Balance Sheet

It ems added t o shareholders’ equit y: M inorit y int erest s Company-obligat ed pref erred securit ies of subsidiaries Total Shareholders’ Equity and Certain Other Items

2,414 904 $14,788

2,430 1,000 $13,000

Balance Sheet , Not e 8 Balance Sheet , Not e 10

Funds Flow from Operations Net cash provided by operat ing act ivit ies Changes in w orking capit al Funds Flow from Operations

$ 4,779 1,769 $ 3,010

$ 1,228 (1,000) $ 2,228

Cash Flow St at ement Cash Flow St at ement

876 (38) 838

710 (54) 656

Estimated Lease Interest Expense (f )

106

124

Adjusted Earnings for Credit Analysis Income bef ore int erest , minorit y int erest s and income t axes

$ 2,482

It ems added t o liabilit y profi le: Guarant ees(a) Residual value guarant ees of synt het ic leases Net liabilit y f rom price risk management act ivit ies(b) Debt exchangeable f or EOG Resources, Inc. shares(c) Debt of unconsolidat ed equit y affi liat es(d) Firm t ransport at ion obligat ions(e)

Interest and Estimated Lease Interest Expense Int erest incurred Capit alized int erest Interest and Related Charges, net

Adjust ment s t o IBIT: Gain on sales of non-merchant asset s Impairment of long-lived assets (including equity investments) Dist ribut ions in excess of (less t han) earnings of unconsolidat ed equit y affi liat es Est imat ed lease int erest expense (f ) Total Adjusted Earnings for Credit Analysis

ENRON ANNUAL REPORT 2000

Key Credit Ratios Funds fl ow int erest coverage (g) Pret ax int erest coverage (h) Funds fl ow f rom operat ions/Tot al obligat ions Tot al obligat ions/Tot al obligat ions plus Tot al shareholders’ equit y and cert ain ot her it ems Debt /Tot al Capit al ( i)

(a) (b) (c) (d) (e) (f) (g) (h) (i)

(146) 326 (276) 106 $ 2,492

$ 1,995

(541) 441 173 124 $ 2,192

4.07 2.54 28.8%

3.67 2.63 25.3%

41.4% 40.9%

40.4% 38.5%

Source

M anagement ’s Discussion and Analysis Income St at ement

Income St at ement

Cash Flow St at ement Cash Flow St at ement Not e 9

Management estimates Enron’s risk adjusted exposure on uncollateralized guarantees is approximately 10% of the total nominal value of the guarantees issued. Excess of price risk management liabilities over price risk management assets. Enron expects to extinguish this obligation by delivering shares of EOG Resources, Inc. stock. Debt of unconsolidated equity affiliates is non-recourse and therefore is excluded from Enron’s obligations. Firm transportation obligations are excluded, as contracted capacity has market value. Management estimates Enron’s lease interest expense for the year based on the average minimum lease payment or commitment (excluding principal repayments and other items). Calculated as funds flow from operations plus interest incurred and estimated lease interest expense, divided by interest incurred and estimated lease interest expense. Calculated as total adjusted earnings divided by interest incurred and estimated lease interest expense. Total capital includes debt, minority interests, company-obligated preferred securities of subsidiaries and shareholders’ equity.

OUR VALUES Communication We have an obligation to communicate. Here, we take the time to talk with one anotherâ&#x20AC;Ś and to listen. We believe that information is meant to move and that information moves people. Respect We treat others as we would like to be treated ourselves. We do not tolerate abusive or disrespectful treatment. Integrity We work with customers and prospects openly, honestly and sincerely. When we say we will do something, we will do it; when we say we cannot or will not do something, then we wonâ&#x20AC;&#x2122;t do it.

ENRON ANNUAL REPORT 2000

Excellence We are satisfied with nothing less than the very best in everything we do. We will continue to raise the bar for everyone. The great fun here will be for all of us to discover just how good we can really be.

Board of Directors

ROBERT A. BELFER (1, 3) New York, New York Chairman, Belco Oil & Gas Corp. NORM AN P. BLAKE, JR. (3, 4) Colorado Springs, Colorado Chairman, President and CEO, Comdisco, Inc., and Former CEO and Secret ary General, Unit ed St at es Olympic Commit t ee RONNIE C. CHAN (2, 3) Hong Kong Chairman, Hang Lung Group

ENRON ANNUAL REPORT 2000

JOHN H. DUNCAN (1* , 4) Houst on, Texas Former Chairman of t he Execut ive Committee of Gulf & Western Industries, Inc.

WENDY L. GRAM M (2, 5) Washingt on, D.C. Direct or of t he Regulat ory St udies Program of t he M ercat us Cent er at George M ason Universit y Former Chairman, U.S. Commodit y Fut ures Trading Commission KEN L. HARRISON Port land, Oregon Former Chairman and CEO, Port land General Elect ric Company ROBERT K. JAEDICKE (2* , 4) St anf ord, Calif ornia Prof essor of Account ing (Emerit us) and Former Dean, Graduat e School of Business, St anf ord Universit y KENNETH L. LAY (1) Houst on, Texas Chairman, Enron Corp. CHARLES A. LEM AISTRE (1, 4* ) San Ant onio, Texas President Emerit us, Universit y of Texas M .D. Anderson Cancer Cent er

JOHN M ENDELSOHN (2, 5) Houst on, Texas President , Universit y of Texas M .D. Anderson Cancer Cent er JEROM E J. M EYER (3, 5) Wilsonville, Oregon Chairman, Tekt ronix, Inc. PAULO V. FERRAZ PEREIRA (2, 3) Rio de Janeiro, Brazil Execut ive Vice President of Group Bozano Former President and COO, M eridional Financial Group, and Former President and CEO, St at e Bank of Rio de Janeiro, Brazil FRANK SAVAGE (3, 4) St amf ord, Connect icut Chairman, Alliance Capit al M anagement Int ernat ional (a division of Alliance Capit al M anagement L.P.) JEFFREY K. SKILLING (1) Houst on, Texas President and CEO, Enron Corp.

JOHN A. URQUHART (3) Fairfi eld, Connect icut Senior Advisor t o t he Chairman, Enron Corp., President , John A. Urquhart Associat es, and Former Senior Vice President of Indust rial and Pow er Syst ems, General Elect ric Company JOHN WAKEHAM (2, 5* ) London, England Former U.K. Secret ary of St at e f or Energy and Leader of t he Houses of Lords and Commons

FROM LEFT TO RIGHT: Top row : John M endelsohn, Jeff rey K. Skilling and Frank Savage M iddle row : Charles A. LeM aist re, Ronnie C. Chan, Herbert S. Winokur, Jr., Kennet h L. Lay, Wendy L. Gramm, Robert K. Jaedicke, John Wakeham and Robert A. Belf er Bot t om row : John H. Duncan, Paulo V. Ferraz Pereira, John A. Urquhart , Norman P. Blake, Jr., Ken L. Harrison and Jerome J.M eyer

Execut ive Commit t ee Audit Commit t ee Finance Commit t ee (4) Compensat ion Commit t ee (5) Nominat ing Commit t ee * Denot es Chairman (1) (2) (3)

ENRON ANNUAL REPORT 2000

HERBERT S. WINOKUR, JR. (1, 3* ) Greenw ich, Connect icut President , Winokur Holdings, Inc., and Former Senior Execut ive Vice President , Penn Cent ral Corporat ion

Enron Corporate Policy Committee KEN LAY

CLIFF BAXTER

STAN HORTON

Chairman, Enron

Vice Chairman & Chief St rat egic Offi cer, Enron

Chairman & CEO, Enron Transport at ion Services

RICK CAUSEY

STEVE KEAN

Execut ive Vice President & Chief Account ing Offi cer, Enron

Execut ive Vice President & Chief of St aff , Enron

DAVE DELAINEY

LOU PAI

Chairman & CEO, Enron Energy Services

Chairman & CEO, Enron Xcelerat or

JIM DERRICK

KEN RICE

Execut ive Vice President & General Counsel, Enron

Chairman & CEO, Enron Broadband Services

ANDY FASTOW

JOHN SHERRIFF

Execut ive Vice President & Chief Financial Offi cer, Enron

President & CEO, Enron Europe

MARK FREVERT

GREG WHALLEY

Chairman & CEO, Enron Wholesale Services

President & COO, Enron Wholesale Services

JEFF SKILLING President and Chief Execut ive Offi cer, Enron

KEVIN HANNON Chief Operat ing Offi cer, Enron Broadband Services

Shareholder Information TRANSFER AGENT, REGISTRAR, DIVIDEND PAYING AND REINVESTMENT PLAN AGENT (DIRECTSERVICE PROGRAM) First Chicago Trust Company c/o EquiServe P.O. Box 2500 Jersey Cit y, NJ 07303-2500 (800) 519-3111 (201) 324-1225 TDD: (201) 222-4955 For direct deposit of dividends only, call: (800) 870-2340 Int ernet address: ht t p://w w w.equiserve.com

2000 ANNUAL REPORT This Annual Report and t he st at ement s cont ained herein are submit t ed f or t he general information of the shareholders of Enron Corp. and are not intended for use in connect ion w it h or t o induce t he sale or purchase of securit ies.

ENRON ANNUAL REPORT 2000

ADDITIONAL INFORMATION

Enron Corp.’s Annual Report t o shareholders and Form 10-K report t o t he Securit ies and Exchange Commission are available upon request on Enron’s Int ernet address ht t p://w w w.enron.com For inf ormat ion regarding specifi c shareholder quest ions, w rit e or call t he Transf er Agent .

Financial analysts and investors who need additional information should contact: Enron Corp. Invest or Relat ions Dept . P.O. Box 1188, Suit e 4926B Houst on, TX 77251-1188 (713) 853-3956 Enron’s Int ernet address: ht t p://w w w.enron.com

ANNUAL MEETING OF SHAREHOLDERS The Annual M eet ing of Shareholders w ill be held in Houst on, Texas, in t he LaSalle Ballroom of t he Doublet ree Hot el at Allen Cent er, 400 Dallas St reet , on Tuesday, M ay 1, 2001, at 10 a.m. Inf ormat ion w it h respect t o t his meet ing is cont ained in t he Proxy St at ement sent w it h t his Annual Report t o holders of record of Enron Corp.’s Common St ock and t he Cumulat ive Second Pref erred Convert ible St ock on M arch 2, 2001. The 2000 Annual Report is not t o be considered a part of t he proxy solicit ing mat erial.

DIVIDEND REINVESTMENT The Transf er Agent of f ers holders of Enron Corp. Common St ock t he opport unit y t o reinvest part or all of t heir dividends in t he purchase of addit ional shares of Common St ock by part icipat ing

in t he Direct SERVICE Program f or Shareholders of Enron Corp. This program gives almost everyone t he opport unit y t o purchase addit ional shares of Common St ock w it hout paying a brokerage commission. Anyone w ishing t o part icipat e in t he program may, upon t imely applicat ion, reinvest some, all, or none of t he cash dividends paid on t heir Common St ock, or make opt ional cash payment s of as lit t le as $25, af t er an init ial invest ment of $250 f or new shareholders, w it h a limit of $120,000 per calendar year. Direct request s f or f urt her inf ormat ion t o: Direct SERVICE Program f or Shareholders of Enron Corp. c/o First Chicago Trust Company c/o EquiServe P.O. Box 2598 Jersey Cit y, NJ 07303-2598 Shareholders may call: (800) 519-3111 Non-shareholders request s f or program mat erials: (800) 662-7662 Int ernet address: ht t p://w w w.equiserve.com TDD: (201) 222-4955

Enron Annual Report 2000

1400 Smith Street Houston, Texas 77002-7361 www.enron.com

ÂŠ 2001 Enron Corp. Enron and t he Enron logo are regist ered t rademarks, and Endless possibilit ies, EnronOnline, DealBench, energydesk.com, Commodit ylogic and Clickpaper.com are t rademarks of Enron Corp. or one of it s subsidiaries. Ot her company, product and services names may be t rademarks of ot hers.