-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AZ7VH5iBPiKo3Qqz4ZLK+9qnTmLpOQzydsWX/nZkj728oaZ+xvrzh2C52eEfRrsj aPQudn23UPnBZMHgYfU7VA== 0000821189-97-000017.txt : 19971117 0000821189-97-000017.hdr.sgml : 19971117 ACCESSION NUMBER: 0000821189-97-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENRON OIL & GAS CO CENTRAL INDEX KEY: 0000821189 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 470684736 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09743 FILM NUMBER: 97720211 BUSINESS ADDRESS: STREET 1: 1400 SMITH ST CITY: HOUSTON STATE: TX ZIP: 77002 BUSINESS PHONE: 7138535482 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ____________ Form 10-Q ____________ X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-9743 ENRON OIL & GAS COMPANY (Exact name of registrant as specified in its charter) Delaware 47-0684736 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1400 Smith Street, Houston, Texas 77002-7369 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: 713-853-6161 ____________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 31, 1997. Common Stock, $.01 Par Value 156,918,129 shares Class Number of Shares ENRON OIL & GAS COMPANY TABLE OF CONTENTS Page No. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Income - Three Months Ended September 30, 1997 and 1996 and Nine Months Ended September 30, 1997 and 1996 3 Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 16 ITEM 6. Exhibits and Reports on Form 8-K 16 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ENRON OIL & GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (In Thousands Except Per Share Amounts) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 NET OPERATING REVENUES Natural Gas Associated Companies $ 21,280 $ 52,060 $ 39,928 $ 134,699 Trade 128,719 84,127 381,579 264,178 Crude Oil, Condensate and Natural Gas Liquids Associated Companies 8,164 6,053 27,745 27,306 Trade 31,019 25,863 82,729 75,546 Gains on Sales of Reserves and Related Assets 110 813 7,602 20,334 Other 3,828 1,266 5,941 4,258 Total 193,120 170,182 545,524 526,321 OPERATING EXPENSES Lease and Well 22,490 18,003 71,932 56,733 Exploration 10,717 13,503 41,219 36,910 Dry Hole 4,833 4,427 7,403 9,517 Impairment of Unproved Oil and Gas Properties 6,177 5,607 19,090 15,450 Depreciation, Depletion and Amortization 72,219 59,421 204,041 181,707 General and Administrative 14,942 13,006 40,663 41,493 Taxes Other Than Income 12,985 10,036 42,630 32,692 Total 144,363 124,003 426,978 374,502 OPERATING INCOME 48,757 46,179 118,546 151,819 OTHER INCOME (EXPENSE), NET 214 (1,445) 2,426 (1,968) INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES 48,971 44,734 120,972 149,851 INTEREST EXPENSE, NET 7,996 1,373 18,575 8,820 INCOME BEFORE INCOME TAXES 40,975 43,361 102,397 141,031 INCOME TAX PROVISION 9,802 11,994 23,588 36,159 NET INCOME $ 31,173 $ 31,367 $ 78,809 $ 104,872 EARNINGS PER SHARE OF COMMON STOCK $ .20 $ .20 $ .50 $ .66 AVERAGE NUMBER OF COMMON SHARES 157,072 159,850 157,809 159,898
The accompanying notes are an integral part of these consolidated financial statements. PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON OIL & GAS COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands) September 30, December 31, 1997 1996 (Unaudited) ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 6,125 $ 7,644 Accounts Receivable Associated Companies 38,986 82,059 Trade 184,379 195,239 Inventories 32,086 20,746 Other 15,490 20,222 Total 277,066 325,910 OIL AND GAS PROPERTIES (SUCCESSFUL EFFORTS METHOD) 4,156,828 3,753,199 Less: Accumulated Depreciation, Depletion and Amortization (1,850,603) (1,653,610) Net Oil and Gas Properties 2,306,225 2,099,589 OTHER ASSETS 28,484 32,854 Total Assets $ 2,611,775 $ 2,458,353 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable Associated Companies $ 17,545 $ 77,522 Trade 179,209 200,069 Accrued Taxes Payable 14,055 18,554 Dividends Payable 4,765 4,818 Other 17,610 16,397 Total 233,184 317,360 LONG-TERM DEBT 678,623 466,089 OTHER LIABILITIES 38,782 44,483 DEFERRED INCOME TAXES 317,229 308,948 DEFERRED REVENUE 68,542 56,383 SHAREHOLDERS' EQUITY Preferred Stock, $.01 Par,10,000,000 Shares Authorized and No Shares Issued and Outstanding - - Common Stock, $.01 Par, 320,000,000 Shares Authorized and 160,000,000 Shares Issued 201,600 201,600 Additional Paid In Capital 387,856 388,212 Unearned Compensation (4,953) (5,727) Cumulative Foreign Currency Translation Adjustment (11,881) (10,179) Retained Earnings 762,194 697,564 Common Stock Held in Treasury, 2,872,820 shares at September 30, 1997 and 242,882 shares at December 31, 1996 (59,401) (6,380) Total Shareholders' Equity 1,275,415 1,265,090 Total Liabilities And Shareholders' Equity $ 2,611,775 $ 2,458,353
The accompanying notes are an integral part of these consolidated financial statements. PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON OIL & GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) Nine Months Ended September 30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Reconciliation of Net Income to Net Operating Cash Inflows: Net Income $ 78,809 $ 104,872 Items Not Requiring Cash Depreciation, Depletion and Amortization 204,041 181,707 Impairment of Unproved Oil and Gas Properties 19,090 15,450 Deferred Income Taxes 8,510 (1,653) Other, Net 1,168 3,682 Exploration Expenses 41,219 36,910 Dry Hole Expenses 7,403 9,517 Gains on Sales of Reserves and Related Assets (7,602) (20,334) Other, Net (4,580) (2,886) Changes in Components of Working Capital and Other Liabilities Accounts Receivable 47,122 (20,287) Inventories (11,340) (7,682) Accounts Payable (28,277) 43,447 Accrued Taxes Payable (4,499) 2,172 Other Liabilities 3,595 2,874 Other, Net 3,876 387 Amortization of Deferred Revenue (32,420) (32,538) Changes in Components of Working Capital Associated with Investing and Financing Activities 22,423 (31,052) NET OPERATING CASH INFLOWS 348,538 284,586 INVESTING CASH FLOWS Additions to Oil and Gas Properties (448,405) (320,077) Exploration Expenses (41,219) (36,910) Dry Hole Expenses (7,403) (9,517) Proceeds from Sales of Reserves and Related Assets 23,331 62,837 Changes in Components of Working Capital Associated with Investing Activities (21,730) 28,816 Other, Net (2,771) (5,930) NET INVESTING CASH OUTFLOWS (498,197) (280,781) FINANCING CASH FLOWS Long-Term Debt Affiliate - (128,762) Other 216,442 141,880 Dividends Paid (14,232) (14,372) Treasury Stock Purchased (58,428) (32,973) Proceeds from Sales of Treasury Stock 4,661 14,827 Other, Net (303) 2,236 NET FINANCING CASH INFLOWS (OUTFLOWS) 148,140 (17,164) DECREASE IN CASH AND CASH EQUIVALENTS (1,519) (13,359) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,644 23,039 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,125 $ 9,680
The accompanying notes are an integral part of these consolidated financial statements. PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements of Enron Oil & Gas Company and subsidiaries (the "Company") included herein have been prepared by management without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods. Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to prior period financial statements to conform with the current presentation. As more fully discussed in notes 1 and 12 to the consolidated financial statements included in the Company's 1996 Annual Report on Form 10-K, the Company engages in price risk management activities primarily for non-trading and to a lesser extent for trading purposes. Derivatives are utilized for non-trading purposes to hedge the impact of market fluctuations on natural gas and crude oil market prices. Hedge accounting is utilized in non-trading activities when there is a high degree of correlation between price movements in the derivative and the item designated as being hedged. Gains and losses on derivative financial instruments used for hedging purposes are recognized as revenue in the same period as the hedged item. Gains and losses on hedging instruments that are closed prior to maturity are deferred in the consolidated balance sheets. In instances where the anticipated correlation of price movements does not occur, hedge accounting is terminated and future changes in the value of the derivative are recognized as gains or losses using the mark-to-market method of accounting. Derivative and other financial instruments utilized in connection with trading activities, primarily price swaps and call options, are accounted for using the mark-to-market method, under which changes in the market value of outstanding financial instruments are recognized as gains or losses in the period of change. The cash flow impact of derivative and other financial instruments used for non- trading and trading purposes is reflected as cash flows from operating activities in the consolidated statements of cash flows. 2. Income tax provision for the three-month and nine-month periods ended September 30, 1997 and 1996 includes tax benefits of $2.5 million, $6.0 million, $7.8 million and $12.2 million, respectively, related to tight gas sand federal income tax credit utilization. Income tax provision for the nine-month period ended September 30, 1997 includes benefits of $9.7 million related to the sales of certain international assets and subsidiaries and the refiling of certain Canadian tax returns. Income tax provision for the nine-month period ended September 30, 1996 includes a reduction of $8.5 million primarily associated with a reassessment of deferred tax requirements and the successful resolution on audit of Canadian income taxes for certain prior years. PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Natural Gas Net Operating Revenues are comprised of the following (in millions): Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Wellhead Natural Gas Revenues Associated Companies (1)(2) $ 40.1 $ 44.7 $ 136.0 $ 150.6 Trade 111.5 69.5 336.8 211.1 Total $ 151.6 $114.2 $ 472.8 $ 361.7 Other Natural Gas Marketing Activities Gross Revenues from: Associated Companies $ 20.3 $ 26.4 $ 69.3 $ 62.6 Trade (3) 33.2 31.1 100.6 103.7 Total 53.5 57.5 169.9 166.3 Associated Costs from: Associated Companies (1)(4) 36.3 35.8 121.7 94.4 Trade 16.0 16.6 55.4 50.8 Total 52.3 52.4 177.1 145.2 Net 1.2 5.1 (7.2) 21.1 Commodity Price Transaction Revenue (Reductions) Trading 2.1 - 2.7 (1.2) Non-Trading (5) (4.9) 16.9 (46.8) 17.3 Total (2.8) 16.9 (44.1) 16.1 Total $ (1.6) $ 22.0 $(51.3) $ 37.2 Crude Oil, Condensate and Natural Gas Liquids Net Operating Revenues are comprised of the following (in millions): Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Wellhead Crude Oil, Condensate and Natural Gas Liquids Revenues Associated Companies $ 8.9 $ 9.9 $ 31.9 $ 35.1 Trade 31.0 25.9 82.7 75.6 Total $ 39.9 $ 35.8 $ 114.6 $ 110.7 Other Crude Oil and Condensate Marketing Activities Commodity Price Hedging Revenue Reductions(5) $ (.7) $ (3.9) $ (4.1) $ (7.8) 1) Wellhead Natural Gas Revenues include $24.5 million, $24.7 million, $86.6 million and $82.2 million for the three-month and nine-month periods ended September 30, 1997 and 1996, respectively, associated with deliveries by Enron Oil & Gas Company to Enron Oil & Gas Marketing, Inc., a wholly- owned subsidiary, reflected as a cost in Other Natural Gas Marketing Activities - Associated Costs. 2) Includes $5.1 million, $4.0 million, $21.3 million and $11.4 million for the three-month and nine-month periods ended September 30, 1997 and 1996, respectively, associated with the equivalent wellhead value of volumes delivered under the terms of a volumetric production payment agreement effective October 1, 1992, as amended, net of transportation. PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Continued) ENRON OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3) Includes $10.9 million, $10.9 million, $32.4 million and $32.5 million for the three-month and nine-month periods ended September 30, 1997 and 1996, respectively, associated with the amortization of deferred revenues under the terms of a volumetric production payment agreement effective October 1, 1992, as amended. 4) Includes $9.7 million, $8.5 million, $31.4 million and $24.6 million for the three-month and nine-month periods ended September 30, 1997 and 1996, respectively, for volumes delivered under the terms of a volumetric production payment agreement effective October 1, 1992, as amended, including equivalent wellhead value, any applicable transportation costs and exchange differentials. 5) Represents revenue increases or reductions associated with commodity price swap transactions primarily with Enron Corp. affiliated companies based on NYMEX-related commodity prices in effect on dates of execution, less customary transaction fees. These transactions were originally entered into as price hedges for a portion of wellhead sales. 4. As reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, the Company has been named as a potentially responsible party in certain Comprehensive Environmental Response Compensation and Liability Act proceedings. However, management does not believe that any potential assessments resulting from such proceedings will individually or in the aggregate have a materially adverse effect on the financial condition or results of operations of the Company. 5. In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings per Share" effective for interim and annual periods after December 15, 1997. This statement replaces primary earnings per share ("EPS") with a newly defined basic EPS and modifies the computation of diluted EPS. The Company does not anticipate that implementation of SFAS 128 will have a material impact on its computation of EPS. 6. In February 1997, the FASB issued SFAS No. 129 - "Disclosures of Information about Capital Structures" which is applicable to all entities that issue securities other than ordinary common stock and is effective for all periods ending after December 15, 1997. There are no additional disclosures required of the Company at this time relating to the issuance of SFAS No. 129. 7. In June 1997, the FASB issued SFAS No. 130 - "Reporting Comprehensive Income" which applies to all entities that report financial position, results of operations and cash flows and is effective for fiscal years beginning after December 15, 1997. The statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. 8. In July 1997, the FASB issued SFAS No. 131 - "Disclosures about Segments of an Enterprise and Related Information" effective for annual periods beginning after December 15, 1997 and interim and annual periods in the second year of application. This statement requires that public business enterprises report information about operating segments on a "management approach" in annual financial statements and requires that the enterprises report selected information about operating segments in interim financial reports to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. There are no additional disclosures required of the Company at this time relating to the issuance of SFAS No. 131. 9. In June 1997, the Company canceled an existing revolving credit agreement and replaced it with two new revolving credit agreements entered into with a group of banks (the "Credit Agreements"). The Credit Agreements provide for current aggregate borrowings of up to $400 million, with provisions for increases up to $800 million at the option of the Company and subject to lender approval. The Credit Agreements consist of a $100 million, 364-day credit agreement which matures on June 25, 1998 and is renewable annually by mutual consent, and a $300 million five-year agreement that matures on June 27, 2002. Advances under the agreements bear interest, at the option of the Company, based on a base rate or a Eurodollar rate. There were no advances outstanding under the agreements at September 30, 1997. PART I. FINANCIAL INFORMATION - (Continued) ITEM 1. FINANCIAL STATEMENTS - (Concluded) ENRON OIL & GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. In August 1997, the Company repaid an existing bank loan of $40 million and, in September 1997, repaid an existing bank loan of $30 million. These repayments were made from commercial paper and short-term bank loans. In September 1997, the Company issued, pursuant to a public offering, $100 million of 6.5% Notes due September 15, 2004. 11. Enron Oil & Gas India Ltd. ("EOGIL"), a wholly-owned subsidiary of the Company, is a respondent in two public interest lawsuits filed in the Delhi High Court, India. The first (the "Wadehra Action") was brought by B. L. Wadehra, an Indian public interest lawyer, against the Union of India, EOGIL, EOGIL co-participants in the Panna and Mukta fields, Reliance Industries Limited ("Reliance") and Oil & Natural Gas Corporation Limited ("ONGC"), and certain other respondents. ONGC is the Indian national oil company and is wholly-owned by the Union of India. The second suit (the "CPIL Action") was brought by the Centre for Public Interest Litigation and the National Alliance of People's Movement against the Union of India, the Central Bureau of Investigation, ONGC, Reliance and EOGIL. Petitioners in both the Wadehra Action and the CPIL Action allege various improprieties in the award of the Panna and Mukta fields to EOGIL, Reliance and ONGC, and seek the cancellation of the Production Sharing Contract for the Panna and Mukta fields. The Union of India is vigorously disputing these allegations. The Company believes that the public competitive bidding process for the fields was fair and that the award of these fields to EOGIL, Reliance and ONGC was proper. Although no assurances can be given, the Company believes that the claims made by the petitioners in both actions are without merit, and that the ultimate resolution of these matters will not have a material adverse effect on its financial condition or results of operations. PART I. FINANCIAL INFORMATION - (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENRON OIL & GAS COMPANY The following review of operations for the three-month and nine-month periods ended September 30, 1997 and 1996 should be read in conjunction with the consolidated financial statements of Enron Oil & Gas Company (the "Company") and notes thereto. Results of Operations Three Months Ended September 30, 1997 vs. Three Months Ended September 30, 1996 In both the third quarter of 1997 and 1996, the Company generated net income of $31 million. Net operating revenues for the third quarter of 1997 were $193 million as compared to $170 million for the third quarter of 1996. Wellhead volume and price statistics are as follows: 1997 1996 Natural Gas Volumes (MMcf/d)(1) United States (2) 639 571 Canada 109 99 North America 748 670 Trinidad 115 104 India 34 - Total 897 774 Average Natural Gas Prices ($/Mcf)(3) United States (4) $ 2.02 $ 1.82 Canada 1.23 1.01 North America Composite 1.91 1.70 Trinidad 1.04 1.00 India 2.93 - Total Composite 1.84 1.60 Crude Oil/Condensate Volumes (MBbl/d)(1) United States 12.3 8.7 Canada 2.5 2.1 North America 14.8 10.8 Trinidad 3.4 4.5 India 2.4 2.4 Total 20.6 17.7 Average Crude Oil/Condensate Prices ($/Bbl)(3) United States $ 19.19 $22.03 Canada 17.39 18.26 North America Composite 18.88 21.29 Trinidad 18.91 19.73 India 18.21 19.60 Total Composite 18.81 20.67 (1) Million cubic feet per day or thousand barrels per day, as applicable. (2) Includes 48 MMcf per day for the three-month periods ended September 30, 1997 and 1996 delivered under the terms of a volumetric production payment agreement effective October 1, 1992, as amended. (3) Dollars per thousand cubic feet or per barrel, as applicable. (4) Includes an average equivalent wellhead value of $1.14/Mcf and $.91/Mcf for the three-month periods ended September 30, 1997 and 1996, respectively, for the volumes described in note (2), net of transportation costs. Wellhead revenues increased 28% to $192 million in the third quarter of 1997 compared to $150 million in the third quarter of 1996. This increase primarily reflects increased worldwide natural gas volumes, North America crude oil and condensate volumes and average wellhead natural gas prices which were partially offset by lower crude oil and condensate volumes in Trinidad and lower overall crude oil and condensate average wellhead prices. PART I. FINANCIAL INFORMATION - (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENRON OIL & GAS COMPANY Third quarter 1997 wellhead natural gas volumes were up approximately 16% from the comparable period in 1996 increasing net operating revenues by approximately $18 million. This is primarily attributable to a 12% increase in North America wellhead natural gas volumes in the third quarter of 1997 compared to the third quarter a year ago. International natural gas volumes increased 43% primarily reflecting the new natural gas flowing from the Tapti field in India. Wellhead natural gas prices in the third quarter of 1997 were 15% higher than the comparable period a year ago adding approximately $19 million to net operating revenues. A 16% increase in wellhead crude oil and condensate volumes more than offset a 9% decrease in average prices in the third quarter of 1997 as compared to third quarter of 1996 resulting in a net increase of $2 million to net operating revenues. A 37% increase in North America wellhead crude oil and condensate volumes was partially offset by a decline in crude oil production from the Ibis field offshore Trinidad. Other marketing activities associated with sales and purchases of natural gas, natural gas and crude oil price hedging and trading transactions and margins related to the volumetric production payment reduced net operating revenue by $2 million during the third quarter of 1997, compared to an $18 million increase in the third quarter of 1996. A $5 million revenue reduction related to natural gas commodity price hedging activities utilizing NYMEX-related commodity market transactions in the third quarter of 1997 partially offset greater wellhead price benefits noted above and compares to a $17 million increase associated with similar transactions a year ago. During the third quarter of 1997, operating expenses of $144 million were approximately $20 million higher than in the third quarter of 1996. Lease and well expenses increased $4 million primarily due to expanded operations. Third quarter 1997 exploration expenses decreased by approximately $3 million compared to third quarter 1996 primarily due to a larger portion of anticipated expenses being incurred in the first half of 1997 compared to 1996. Depreciation, depletion and amortization ("DD&A") expense increased approximately $13 million primarily reflecting an increase in North America production volumes. The average DD&A rate in the third quarter of 1997 was $.75 per thousand cubic feet equivalent ("Mcfe") compared to $.72 per Mcfe in the third quarter of 1996 primarily reflecting the impact of a change in production mix. Taxes other than income increased approximately $3 million over the comparable period in 1996 related primarily to increased wellhead revenues in North America. Net interest expense of $8 million was approximately $7 million higher than the $1 million incurred in the third quarter of 1996 primarily reflecting a higher average debt level during the third quarter of 1997 as compared to the same quarter in 1996. Income tax provision decreased $2 million for the third quarter of 1997 as compared to the third quarter of 1996 partially reflecting lower income before income taxes. Federal income taxes accrued in interim periods are calculated using the estimated annual effective income tax rate. PART I. FINANCIAL INFORMATION - (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ENRON OIL & GAS COMPANY Nine Months Ended September 30, 1997 vs. Nine Months Ended September 30, 1996 In the first nine months of 1997, the Company generated net income of $79 million compared to net income of $105 million for the first nine months of 1996. Net operating revenues for the first nine months of 1997 were $546 million as compared to $526 million for the comparable period a year ago. Wellhead volume and price statistics are as follows: 1997 1996 Natural Gas Volumes (MMcf/d)(1) United States (2) 657 598 Canada 99 97 North America 756 695 Trinidad 114 126 India 11 - Total 881 821 Average Natural Gas Prices ($/Mcf)(3) United States (4) $ 2.19 $ 1.82 Canada 1.39 1.11 North America Composite 2.09 1.72 Trinidad 1.04 1.00 India 2.93 - Total Composite 1.96 1.61 Crude Oil/Condensate Volumes (MBbl/d)(1) United States 11.4 8.6 Canada 2.4 2.4 North America 13.8 11.0 Trinidad 3.5 5.6 India 1.8 2.8 Total 19.1 19.4 Average Crude Oil/Condensate Prices ($/Bbl)(3) United States $20.24 $20.72 Canada 17.30 17.76 North America Composite 19.72 20.09 Trinidad 18.88 18.95 India 20.78 19.09 Total Composite 19.66 19.62 (1) Million cubic feet per day or thousand barrels per day, as applicable. (2) Includes 48 MMcf per day for the nine-month periods ended September 30, 1997 and 1996 delivered under the terms of a volumetric production payment agreement effective October 1, 1992, as amended. (3) Dollars per thousand cubic feet or per barrel, as applicable. (4) Includes an average equivalent wellhead value of $1.61/Mcf and $.86/Mcf for the nine-month periods ended September 30, 1997 and 1996, respectively, for the volumes described in note (2), net of transportation costs. Wellhead revenues increased 24% to $587 million in the first nine months of 1997 compared to $472 million in the first nine months of 1996. This increase primarily reflects increased average wellhead prices for natural gas, crude oil and condensate and natural gas liquids and increased North America volumes. PART I. FINANCIAL INFORMATION - (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) ENRON OIL & GAS COMPANY Average wellhead natural gas prices were up approximately 22% from the comparable period in 1996 increasing net operating revenues by approximately $86 million. This is attributable to a 22% increase in North America wellhead natural gas prices in the first nine months of 1997 compared to the first nine months a year ago. Wellhead natural gas volumes increased 7% in the first nine months of 1997 compared to the first nine months of 1996 adding approximately $25 million to net operating revenues. Increased natural gas liquids volumes in the first nine months of 1997 added approximately $5 million to net operating revenues. The increase primarily resulted from an acquisition of producing properties in the last quarter of 1996. Other marketing activities associated with sales and purchases of natural gas, natural gas and crude oil price hedging and trading transactions and margins related to the volumetric production payment reduced net operating revenues by $55 million during the first nine months of 1997, compared to a $29 million increase in the first nine months of 1996. A $47 million revenue reduction related to natural gas commodity price hedging activities utilizing NYMEX-related commodity market transactions in the first nine months of 1997 partially offset greater wellhead price benefits noted above and compares to a $17 million increase associated with similar transactions a year ago. A decrease in margins associated with sales and purchases of natural gas and the volumetric production payment reduced net operating revenues by approximately $7 million as compared to a $21 million addition in the first nine months of 1996, primarily resulting from the higher costs of natural gas delivered in 1997. During the first nine months of 1997, operating expenses of $427 million were approximately $52 million higher than in the first nine months of 1996. Lease and well expenses increased $15 million primarily due to increased production activities at higher costs in North America to maximize the volumes delivered at the higher product prices available in the first quarter of 1997 and expanded operations. Worldwide increases in exploration activities by the Company in the first nine months of 1997 over the first nine months of 1996 increased exploration expenses by approximately $4 million. The $4 million increase in impairment of unproved oil and gas properties is primarily a result of increased unproved lease acquisitions in North America. DD&A expense increased approximately $22 million in the first nine months of 1997 compared to the first nine months of 1996, primarily reflecting an increase in North America production volumes. The average DD&A rate in the first nine months of 1997 was $.73 per Mcfe compared to $.70 per Mcfe for the first nine months of 1996 which primarily reflects the impact of a change in production mix. Taxes other than income for the first nine months of 1997 increased approximately $10 million over the comparable period in 1996 primarily reflecting increased wellhead revenues in North America. Net interest expense of $19 million was approximately $10 million higher in the first nine months of 1997 as compared to the comparable period in 1996 reflecting a higher average debt level during the first nine months of 1997. Income tax provision decreased $13 million for the first nine months of 1997 as compared to the first nine months of 1996 primarily due to lower income before income taxes. An approximate $10 million benefit related to the sales of certain international assets and subsidiaries and the refiling of certain Canadian tax returns was recognized in the first nine months of 1997. An approximate $9 million benefit was recognized in the first nine months of 1996 associated with a reassessment of deferred tax requirements and the successful resolution on audit of Canadian income taxes for certain prior years. Federal income taxes accrued in interim periods are calculated using the estimated annual effective income tax rate. PART I. FINANCIAL INFORMATION - (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) ENRON OIL & GAS COMPANY Capital Resources and Liquidity The Company's primary sources of cash during the nine months ended September 30, 1997 included funds generated from operations and proceeds from borrowings. Primary cash outflows included funds used in operations, exploration and development expenditures, common stock repurchases, dividends paid to Company shareholders and the repayment of debt. Discretionary cash flow, a frequently used measure of performance for exploration and production companies, is derived by adjusting net income to eliminate the effects of depreciation, depletion and amortization, impairment of unproved oil and gas properties, deferred income taxes, gains on sales of reserves and related assets, certain other miscellaneous non- cash amounts, except for amortization of deferred revenue, and exploration and dry hole expenses and to include proceeds from sales of reserves and related assets. The Company generated discretionary cash flow of $371 million during the first nine months of 1997 compared to $390 million generated for the comparable period in 1996 primarily reflecting lower proceeds from sales of reserves and related assets partially offset by lower current income taxes. Net operating cash flows of $349 million for the first nine months of 1997 increased approximately $64 million as compared to the first nine months of 1996 primarily reflecting changes in working capital requirements resulting from the higher 1996 end of year operating revenues collected in 1997 and lower current income taxes in 1997 partially offset by the higher level of related end of year 1996 accounts payable paid in 1997. Based upon existing economic and market conditions, management believes net operating cash flow and available financing alternatives will continue to be sufficient to fund net investing and other cash requirements of the Company for the foreseeable future. Exploration and development expenditures for the first nine months of 1997 and 1996 are as follows (in millions): 1997 1996 North America $ 419 $ 291 Outside North America India 51 53 Other 27 23 Total $ 497 $ 367 Exploration and development expenditures for the first nine months of 1997 were higher than expenditures in the first nine months of 1996 primarily due to increased acquisitions and developmental drilling activities in North America. The level of exploration and development expenditures will vary in future periods depending on energy market conditions and other related economic factors. The Company has significant flexibility with respect to financing alternatives and the ability to adjust its exploration and development expenditures as circumstances warrant. There are no material continuing commitments associated with expenditure plans. PART I. FINANCIAL INFORMATION - (Concluded) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Concluded) ENRON OIL & GAS COMPANY Information Regarding Forward Looking Statements This Quarterly Report on Form 10-Q includes forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that such expectations will be achieved. Important factors that could cause actual results to differ materially from those in the forward looking statements herein include, but are not limited to, the timing and extent of changes in commodity prices for crude oil, natural gas and related products and interest rates, the extent of the Company's success in discovering, developing and producing reserves and in acquiring oil and gas properties, political developments around the world and conditions of the capital and equity markets during the periods covered by the forward looking statements. PART II. OTHER INFORMATION ENRON OIL & GAS COMPANY ITEM 1. Legal Proceedings See Part I, Item 1, Notes 4 and 11 to Consolidated Financial Statements which are incorporated herein by reference. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K Current Report on Form 8-K filed on October 27, 1997 to report the sale on September 29, 1997 of $100 million principal amount of 6.50% Notes due September 15, 2004 pursuant to an underwritten public offering. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENRON OIL & GAS COMPANY (Registrant) Date: November 14, 1997 By /S/ WALTER C. WILSON Walter C. Wilson Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: November 14, 1997 By /S/ BEN B. BOYD Ben B. Boyd Vice President and Controller (Principal Accounting Officer) Exhibit 12 Enron Oil & Gas Company Computation of Ratio of Earnings to Fixed Charges (In Thousands) (Unaudited) Nine Months Ended Year Ended December 31 9/30/97 1996 1995 1994 1993 1992 EARNINGS AVAILABLE FOR FIXED CHARGES: Net Income $ 78,809 $140,008 $142,118 $147,998 $138,025 $ 97,580 Less: Capitalized Interest Expense (10,416) (9,136) (6,490) (6,124) (5,457) (3,580) Add: Fixed Charges 28,991 21,997 18,414 14,613 15,378 25,869 Income Tax Provision(Benefit) 23,588 50,954 41,936 5,937 (25,752) (17,736) Earnings Available $120,972 $203,823 $195,978 $162,424 $122,194 $102,133 FIXED CHARGES: Interest Expense 18,382 12,370 11,310 8,135 9,921 22,289 Capitalized Interest 10,416 9,136 6,490 6,124 5,457 3,580 Rental Expense Representative of Interest Factor 193 491 614 354 - - Total Fixed Charges $ 28,991 $ 21,997 $ 18,414 $ 14,613 $ 15,378 $ 25,869 RATIO OF EARNINGS TO FIXED CHARGES 4.17 9.27 10.64 11.12 7.95 3.95
EX-27 2
5 9-MOS DEC-31-1997 SEP-30-1997 6,125 0 223,365 0 32,086 277,066 4,156,828 (1,850,603) 2,611,775 233,184 0 0 0 201,600 1,073,815 2,611,775 531,981 545,524 0 426,978 (2,426) 0 18,575 102,397 23,588 78,809 0 0 0 78,809 0 0
-----END PRIVACY-ENHANCED MESSAGE-----