1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A (RULE 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-12 ENRON CORP. -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: ----------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ----------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): ----------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ----------------------------------------------------------------------- (5) Total fee paid: ----------------------------------------------------------------------- [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ----------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ----------------------------------------------------------------------- (3) Filing Party: ----------------------------------------------------------------------- (4) Date Filed: ----------------------------------------------------------------------- 2 [ENRON LOGO] ENRON CORP. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS May 1, 2001 TO THE SHAREHOLDERS: Notice is hereby given that the annual meeting of shareholders of Enron Corp. ("Enron") will be held in the LaSalle Ballroom of the Doubletree Hotel at Allen Center, 400 Dallas Street, Houston, Texas, at 10:00 a.m. Houston time on Tuesday, May 1, 2001, for the following purposes: 1. To elect fourteen directors of Enron to hold office until the next annual meeting of shareholders and until their respective successors are duly elected and qualified; 2. To approve, contingent upon Enron declaring a stock split of at least 2-for-1 on or before May 1, 2003, a proposed amendment to Enron's Amended and Restated Articles of Incorporation to increase the total number of authorized shares of Common Stock from 1,200,000,000 to 2,400,000,000; 3. To approve the Amended and Restated Enron Corp. 1991 Stock Plan (as amended and restated effective May 1, 2001); 4. To ratify the Board of Directors' appointment of Arthur Andersen LLP, independent public accountants, as Enron's auditors for the year ending December 31, 2001; 5. To consider shareholder proposals from Brent Blackwelder, Dianne Burnham, Hildegarde Hannum, and Eleanor MacCracken (collectively, "Friends of the Earth"); General Board of Pension and Health Benefits of The United Methodist Church; Solidago Foundation; Agape Foundation; and Domini Social Investments; and 6. To transact such other business as may properly be brought before the meeting or any adjournment(s) thereof. Holders of record of Enron Common Stock and Cumulative Second Preferred Convertible Stock at the close of business on March 2, 2001, will be entitled to notice of and to vote at the meeting or any adjournment(s) thereof. Shareholders who do not expect to attend the meeting are requested to sign and return the enclosed proxy, for which a postage-paid, return envelope is enclosed. The proxy must be signed and returned in order to be counted. By Order of the Board of Directors, REBECCA C. CARTER Senior Vice President, Board Communications and Secretary Houston, Texas March 27, 2001 3 [ENRON LOGO] ENRON CORP. PROXY STATEMENT The enclosed form of proxy is solicited by the Board of Directors of Enron Corp. ("Enron") to be used at the Annual Meeting of Shareholders to be held in the LaSalle Ballroom of the Doubletree Hotel at Allen Center, 400 Dallas Street, Houston, Texas, at 10:00 a.m. Houston time on Tuesday, May 1, 2001. The mailing address of the principal executive office of Enron is 1400 Smith St., Houston, Texas 77002-7369. This proxy statement and the related proxy are to be first sent or given to the shareholders of Enron on approximately March 26, 2001. Any shareholder giving a proxy may revoke it at any time provided written notice of such revocation is received by the Senior Vice President, Board Communications and Secretary of Enron before such proxy is voted; otherwise, if received in time, properly completed proxies will be voted at the meeting in accordance with the instructions specified thereon. Shareholders attending the meeting may revoke their proxies and vote in person. Holders of record at the close of business on March 2, 2001, of Enron's Common Stock (the "Common Stock") will be entitled to one vote per share on all matters submitted to the meeting. Holders of record at the close of business on March 2, 2001, of Enron's Cumulative Second Preferred Convertible Stock (the "Preferred Convertible Stock") will be entitled to a number of votes per share equal to the conversion rate of 27.304 shares of Common Stock for each share of Preferred Convertible Stock. On March 2, 2001, the record date, there were outstanding and entitled to vote at the annual meeting of shareholders 754,367,414 shares of Common Stock and 1,212,972 shares of Preferred Convertible Stock. There are no other voting securities outstanding. Common Stock and Preferred Convertible Stock are collectively referred to herein as "Voting Stock." Enron's annual report to shareholders for the year ended December 31, 2000, including financial statements, is being mailed herewith to all shareholders entitled to vote at the annual meeting. The annual report does not constitute a part of the proxy soliciting material. ITEM 1. ELECTION OF DIRECTORS At the meeting, fourteen directors are to be elected to hold office until the next succeeding annual meeting of the shareholders and until their respective successors have been elected and qualified. All of the nominees are currently directors of Enron. Proxies cannot be voted for a greater number of persons than the number of nominees named on the enclosed form of proxy. A plurality of the votes cast in person or by proxy by the holders of Voting Stock is required to elect a director. Accordingly, under the Oregon Business Corporation Act and Enron's bylaws, abstentions and "broker non-votes" would not have the same legal effect as a vote withheld with respect to a particular director. A broker non-vote occurs if a broker or other nominee does not have discretionary authority and has not received instructions with respect to a particular item. Shareholders may not cumulate their votes in the election of directors. It is the intention of the persons named in the enclosed proxy to vote such proxy "FOR" the election of the nominees named herein. Should any nominee become unavailable for election, discretionary authority is conferred to vote for a substitute. The following information regarding the nominees, their principal occupations, employment history and directorships in certain companies is as reported by the respective nominees. 4 [PHOTO] ROBERT A. BELFER, 65 Director since 1983 Mr. Belfer's principal occupation is Chairman and Chief Executive Officer of Belco Oil & Gas Corp., a company formed in 1992. Prior to his resignation in April 1986 from Belco Petroleum Corporation ("BPC"), a wholly owned subsidiary of Enron, Mr. Belfer served as President and then Chairman of BPC. --------------------------------------------------------------------------------------- [PHOTO] NORMAN P. BLAKE, JR., 59 Director since 1993 Mr. Blake is Chairman, President and Chief Executive Officer of Comdisco Inc., a diversified technical equipment leasing and information technology services company. Previously, Mr. Blake served as Chief Executive Officer and Secretary General of the United States Olympic Committee. Mr. Blake served as Chairman, President and Chief Executive Officer of the Promus Hotel Corporation from December 1998 until November 1999 when it merged with the Hilton Hotels Corporation. From November 1990 until May 1998, he served as Chairman, President and Chief Executive Officer of USF&G Corporation until its merger with the St. Paul Companies. Mr. Blake is also a director of Owens-Corning Corporation. --------------------------------------------------------------------------------------- [PHOTO] RONNIE C. CHAN, 51 Director since 1996 For the past ten years, Mr. Chan has been Chairman of Hang Lung Group, comprising three publicly traded Hong Kong-based companies involved in property development, property investment and hotels. Mr. Chan also co-founded and is a director of various companies within Morningside/ Springfield Group, which invests in and manages private companies in the manufacturing and service businesses, and engages in financial investments. Mr. Chan is also a director of Standard Chartered PLC and Motorola, Inc. --------------------------------------------------------------------------------------- [PHOTO] JOHN H. DUNCAN, 73 Director since 1985 Mr. Duncan's principal occupation has been investments since 1990. Mr. Duncan is also a director of EOTT Energy Corp. (the general partner of EOTT Energy Partners, L.P.) and Group I Automotive Inc. --------------------------------------------------------------------------------------- 2 5 [PHOTO] WENDY L. GRAMM, 56 Director since 1993 Dr. Gramm is an economist and Director of the Regulatory Studies Program of the Mercatus Center at George Mason University. From February 1988 until January 1993, Dr. Gramm served as Chairman of the Commodity Futures Trading Commission in Washington, D.C. Dr. Gramm is also a director of IBP, inc., State Farm Insurance Co. and Invesco Funds. Dr. Gramm was also a director of the Chicago Mercantile Exchange until December 31, 1999. --------------------------------------------------------------------------------------- [PHOTO] ROBERT K. JAEDICKE, 72 Director since 1985 Dr. Jaedicke is Professor (Emeritus) of Accounting at the Stanford University Graduate School of Business in Stanford, California. He has been on the Stanford University faculty since 1961 and served as Dean from 1983 until 1990. Dr. Jaedicke is a director of California Water Service Company and Boise Cascade Corporation and he plans to retire from the Boise Cascade Corporation board in April 2001. Dr. Jaedicke was also a director of GenCorp, Inc. until July 2000. --------------------------------------------------------------------------------------- [PHOTO] KENNETH L. LAY, 58 Director since 1985 Mr. Lay has been Chairman of the Board of Enron since 1986. From 1986 until February 2001, Mr. Lay was also the Chief Executive Officer of Enron. Mr. Lay is also a director of Eli Lilly and Company, Compaq Computer Corporation, EOTT Energy Corp. (the general partner of EOTT Energy Partners, L.P.), i2 Technologies, Inc. and NewPower Holdings, Inc. --------------------------------------------------------------------------------------- [PHOTO] CHARLES A. LEMAISTRE, 77 Director since 1985 For 18 years, Dr. LeMaistre served as President of the University of Texas M.D. Anderson Cancer Center in Houston, Texas and now holds the position of President Emeritus. --------------------------------------------------------------------------------------- 3 6 [PHOTO] JOHN MENDELSOHN, 64 Director since 1999 Since July 1996, Dr. Mendelsohn has served as President of the University of Texas M.D. Anderson Cancer Center. Prior to 1996, Dr. Mendelsohn was Chairman of the Department of Medicine at Memorial Sloan-Kettering Cancer Center in New York. Dr. Mendelsohn is also a director of ImClone Systems, Inc. --------------------------------------------------------------------------------------- [PHOTO] PAULO V. FERRAZ PEREIRA, 46 Director since 1999 Mr. Pereira is Executive Vice President of Group Bozano. Mr. Pereira served for over five years as President and Chief Operating Officer of Meridional Financial Group and Managing Director of Group Bozano. Mr. Pereira is also the former President and Chief Executive Officer of the State Bank of Rio de Janeiro. --------------------------------------------------------------------------------------- [PHOTO] FRANK SAVAGE, 62 Director since 1999 Since 1995, Mr. Savage has served as Chairman of Alliance Capital Management International (a division of Alliance Capital Management L.P.). Mr. Savage is also a director of Lockheed Martin Corporation, Alliance Capital Management L. P. and Qualcomm Corp. --------------------------------------------------------------------------------------- [PHOTO] JEFFREY K. SKILLING, 47 Director since 1997 Since February 2001, Mr. Skilling has served as President and Chief Executive Officer of Enron. Mr. Skilling served as President and Chief Operating Officer of Enron from January 1997 through February 2001. From August 1990 until December 1996, he served as Chairman and Chief Executive Officer of Enron North America Corp. and its predecessor companies. Mr. Skilling is also a director of the Houston Branch of the Federal Reserve Bank of Dallas. --------------------------------------------------------------------------------------- 4 7 [PHOTO] JOHN WAKEHAM, 68 Director since 1994 Lord Wakeham is a retired former U.K. Secretary of State for Energy and Leader of the Houses of Commons and Lords. He served as a Member of Parliament from 1974 until his retirement from the House of Commons in April 1992. Prior to his government service, Lord Wakeham managed a large private practice as a chartered accountant. He is currently Chairman of the Press Complaints Commission in the U.K. and chairman or director of a number of publicly traded U.K. companies. --------------------------------------------------------------------------------------- [PHOTO] HERBERT S. WINOKUR, JR., 57 Director since 1985 Mr. Winokur is Chairman and Chief Executive Officer of Capricorn Holdings, Inc. (a private investment company) and Managing General Partner of Capricorn Investors, L.P., Capricorn Investors II, L.P. and Capricorn Investors III, L.P., partnerships concentrating on investments in restructure situations, organized by Mr. Winokur in 1987, 1994 and 1999, respectively. From August 2000 until March 2001, Mr. Winokur served as Nonexecutive Chairman of Azurix Corp. Prior to his current appointment, Mr. Winokur was Senior Executive Vice President and a director of Penn Central Corporation. He is also a director of NATCO Group, Inc., Mrs. Fields' Holding Company, Inc., CCC Information Services Group, Inc. and DynCorp. --------------------------------------------------------------------------------------- 5 8 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS As of February 15, 2001, Enron knows of no one who beneficially owns in excess of 5% of a class of Enron's Voting Stock except as set forth in the table below: AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP ----------------------------------------------------- SOLE VOTING SOLE SHARED AND VOTING VOTING LIMITED OR AND AND NO PERCENT TITLE OF NAME AND ADDRESS OF INVESTMENT INVESTMENT INVESTMENT OF CLASS OF STOCK BENEFICIAL OWNER POWER POWER POWER OTHER CLASS -------------- --------------------------- ---------- ---------- ---------- ---------- ------- Common Robert A. Belfer 8,438,839(1)(2) 29,514(3) 23,476(4) 1.12 Preferred 767 Fifth Avenue 214,580 627(5) 17.66 Convertible New York, NY 10153 Common Janus Capital Corporation 40,914,560(6) 5.43 Preferred 100 Fillmore Street Convertible Denver, CO 80206-4923 Common Mr. and Mrs. Lawrence Ruben 7,744,758(7) 2,541,271(8) 1.35 Preferred 600 Madison Avenue 235,351(9) 46,097(10) 23.09 Convertible New York, NY 10022 Common Jack Saltz 2,720,473(11) 1,549,522(12) * Preferred 767 Fifth Avenue 69,845 54,916(13) 10.24 Convertible New York, NY 10153 Common Enron Corp. 15,409,696(14)(15) 2.04 Preferred Savings Plan 70,000(14) 5.74 Convertible --------------- * Less than 1%. (1) Includes 5,858,892 shares that would be acquired upon the conversion of the Preferred Convertible Stock shown in the table as being beneficially owned by Mr. Belfer with sole voting and investment power. (2) Includes 31,755 shares of Common Stock that are subject to stock options exercisable within 60 days after February 15, 2001, which number is included in the number of shares shown as beneficially owned as of such date. (3) Includes 12,360 shares held by Mr. Belfer's wife and 34 shares owned by a limited partnership in which Mr. Belfer is the grantor. Also includes 17,120 shares that would be acquired upon the conversion of the Preferred Convertible Stock shown in the table as being beneficially owned by Mr. Belfer with shared voting and investment power. (4) Represents shares held under Enron's Savings Plan (the "Savings Plan"). Participants in the Savings Plan instruct the Savings Plan Trustee as to how the participant's shares should be voted. Additionally, participants have limited investment power with respect to shares in the Savings Plan. (5) Includes 625 shares held by Mr. Belfer's wife and two shares held by a trust in which Mr. Belfer is co-trustee, in all of which shares Mr. Belfer disclaims beneficial ownership. (6) Mr. Thomas H. Bailey, ten percent (10%) owner and President and Chairman of Janus Capital Corporation, may be deemed the beneficial owner of the Janus Capital Corporation shares because of such stock ownership and positions. (7) Includes 25 shares held by Mrs. Ruben as trustee for her son and 6,426,024 shares that would be acquired upon the conversion of the Preferred Convertible Stock. (8) Includes 174,441 shares held by Mr. Ruben as co-trustee for his children; 641,560 shares held by Mr. Ruben as co-trustee for his nieces and nephews; 102,455 shares held by a trust in which Mr. Ruben is co-trustee; and 364,183 shares held by charitable (Notes continue on following page) 6 9 foundations in which Mr. and Mrs. Ruben have no pecuniary interest. Also includes 1,258,632 shares that would be acquired upon the conversion of the Preferred Convertible Stock. (9) Includes 44,807 shares held by Mrs. Ruben as trustee for her children. (10) Includes 11,051 shares held by Mr. Ruben as co-trustee for his nieces and nephews, in which shares Mr. Ruben has no pecuniary interest; 33,973 shares held by a limited partnership in which Mrs. Ruben is a managing member of the general partnership, but has no pecuniary interest; 73 shares held by a limited liability company in which Mrs. Ruben is a managing member, but has no pecuniary interest; and 1,000 shares held by charitable foundations in which Mr. and Mrs. Ruben have no pecuniary interest. (11) Includes 1,907,048 shares that would be acquired upon the conversion of the Preferred Convertible Stock. (12) Includes 3,150 shares held by Mr. Saltz's wife; 29,200 shares held by Mr. Saltz's wife as trustee for her children and 17,746 shares held by a charitable foundation in which Mr. Saltz has no pecuniary interest. Also includes 1,499,426 shares that would be acquired upon the conversion of the Preferred Convertible Stock. (13) Includes 52,942 shares held by Mr. Saltz's wife as trustee for her children and 1,974 shares held by a charitable foundation in which Mr. Saltz has no pecuniary interest. (14) Pursuant to the terms of the Savings Plan, shares allocated to employee accounts are voted by the Savings Plan trustee as instructed by the employees. If the trustee receives no voting directions from the respective employees, then all such shares are to be voted by the trustee in the same proportion as the allocated shares that are voted by employees. (15) Includes 1,911,280 shares of Common Stock that would be acquired upon the conversion of the Preferred Convertible Stock. STOCK OWNERSHIP OF MANAGEMENT AND BOARD OF DIRECTORS AS OF FEBRUARY 15, 2001 AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP --------------------------------------- SOLE VOTING SOLE SHARED AND VOTING VOTING LIMITED AND AND OR NO PERCENT INVESTMENT INVESTMENT INVESTMENT OF TITLE OF CLASS NAME POWER(1) POWER(1) POWER(2)(3) CLASS -------------- ---- ---------- ---------- ----------- ------- Enron Corp. Common Stock Robert A. Belfer......................... 8,438,839(4) 29,514(5) 23,476 1.12 Norman P. Blake, Jr...................... 24,611 * Ronnie C. Chan........................... 19,199 * John H. Duncan........................... 174,253 59,584 * Mark A. Frevert.......................... 1,267,351 15,966 * Ken L. Harrison.......................... 938,262 16,430 * Stanley C. Horton........................ 357,712 3,608 23,223 * Robert K. Jaedicke....................... 57,087 * Kenneth L. Lay........................... 5,392,718 2,367,897(6) 170,282 1.05 Charles A. LeMaistre..................... 56,287 * John Mendelsohn.......................... 5,563 * Jerome J. Meyer.......................... 17,400 * Paulo V. Ferraz Pereira.................. 3,195 * Kenneth D. Rice.......................... 1,469,133 22,783 * Frank Savage............................. 4,005 * Jeffrey K. Skilling...................... 1,941,377 150,152 * John A. Urquhart......................... 47,795 * John Wakeham............................. 20,987 * Herbert S. Winokur, Jr................... 107,755 12,000(7) All directors and executive officers as a group (30 in number)................... 23,379,222 2,473,254 736,385 3.44 (Table continues on following page) 7 10 AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP --------------------------------------- SOLE VOTING SOLE SHARED AND VOTING VOTING LIMITED AND AND OR NO PERCENT INVESTMENT INVESTMENT INVESTMENT OF TITLE OF CLASS NAME POWER(1) POWER(1) POWER(2)(3) CLASS -------------- ---- ---------- ---------- ----------- ------- Enron Corp. Preferred Convertible Stock Robert A. Belfer......................... 214,580 627(8) 17.66 All directors and executive officers as a group (30 in number)................... 214,580 627 17.66 EOTT Energy Partners, L.P. Common Units Norman P. Blake, Jr...................... 1,000 * John H. Duncan........................... 8,500 * Stanley C. Horton........................ 10,000 * Kenneth L. Lay........................... 5,000 * All directors and executive officers as a group (30 in number)................... 19,500 5,000 * Northern Border Partners, L.P. Common Units Robert A. Belfer......................... 30,500 16,500(9) * Norman P. Blake, Jr...................... 1,500 * Stanley C. Horton........................ 10,000 * All directors and executive officers as a group (30 in number)................... 42,500 16,500 * NewPower Holdings, Inc. Common Stock Mark A. Frevert.......................... 58,450 * Kenneth L. Lay........................... 150,000 * Kenneth D. Rice.......................... 27,426 * All directors and executive officers as a group (30 in number)................... 3,668,976 6.32 --------------- * Less than 1%. (1) The number of shares of Enron Common Stock subject to stock options exercisable within 60 days after February 15, 2001, which number is included in the number of shares shown as beneficially owned as of such date, is as follows: Mr. Belfer, 31,755 shares; Mr. Blake, 18,155 shares; Mr. Chan, 16,475 shares; Mr. Duncan, 39,755 shares, for which he has shared voting and investment power for 32,384 of such shares; Mr. Frevert, 1,052,202 shares; Mr. Harrison, 858,950 shares; Mr. Horton, 240,322 shares; Dr. Jaedicke, 39,755 shares; Mr. Lay, 5,285,542 shares, for which he has shared voting and investment power for 1,828,210 of such shares; Dr. LeMaistre, 39,755 shares; Dr. Mendelsohn, 5,451 shares; Mr. Meyer, 10,491 shares; Mr. Pereira, 3,195 shares; Mr. Rice, 1,447,969 shares; Mr. Savage, 3,195 shares; Mr. Skilling, 824,038 shares; Mr. Urquhart, 31,755 shares; Lord Wakeham, 18,075 shares; Mr. Winokur, 31,755 shares; and all directors and executive officers as a group (30 in number), 12,611,385 shares. (2) Includes restricted shares of Enron Common Stock held under Enron's 1991 and 1994 Stock Plans (the "Plans") for certain individuals. Participants in the Plans have sole voting power and no investment power for restricted shares awarded under the Plans until such shares vest in accordance with the Plans' provisions. After vesting, the participant has sole investment and voting powers. (3) Includes shares held under the Savings Plan and/or the Enron Corp. Employee Stock Ownership Plan ("ESOP"). Participants in the Savings Plan instruct the Savings Plan trustee as to how the participant's shares should be voted. Additionally, participants have limited investment power with respect to shares in the Savings Plan. Participants in the ESOP have sole voting power and no investment power prior to distribution of shares from the ESOP. Includes 2,598 shares held by the spouse of Mr. Horton, for which he may be deemed to have shared voting and investment power. Total shares held by the group includes 8,863 shares with shared voting power. (Notes continue on following page) 8 11 (4) Includes 5,858,892 shares that would be acquired upon the conversion of the Preferred Convertible Stock shown in the table as being beneficially owned by Mr. Belfer with sole voting and investment power. (5) Includes 12,360 shares held by Mr. Belfer's wife and 34 shares owned by a limited partnership in which Mr. Belfer is the grantor. Also includes 17,120 shares that would be acquired upon the conversion of the Preferred Convertible Stock shown in the table as being beneficially owned by Mr. Belfer with shared voting and investment power. (6) Includes 539,687 shares held in a charitable foundation in which Mr. Lay has no pecuniary interest. (7) Shares held in a charitable foundation in which Mr. Winokur has no pecuniary interest. (8) Includes 625 shares held by Mr. Belfer's wife and two shares held by a trust in which Mr. Belfer is co-trustee, in all of which shares Mr. Belfer disclaims beneficial ownership. (9) Includes 13,500 shares held in trust in which Mr. Belfer's son or wife is trustee or in which Mr. Belfer is trustee or a co-trustee and 3,000 shares held by Mr. Belfer's wife. BOARD OF DIRECTORS AND COMMITTEES The Board of Directors held five regularly scheduled meetings and four special meetings during the year ended December 31, 2000. The Executive Committee meets on a less formal basis and may exercise all of the powers of the Board of Directors, except where restricted by Enron's bylaws or by applicable law. During the year ended December 31, 2000, the Executive Committee met seven times. The Executive Committee is currently composed of Messrs. Duncan (Chairman), Belfer, Lay, LeMaistre, Skilling and Winokur. The Board of Directors uses working committees with functional responsibility in the more complex recurring areas where disinterested oversight is required. The Audit and Compliance Committee reviews the scope and results of the audits, the notice and application of accounting principles and the effectiveness of internal controls. The Audit and Compliance Committee met five times during the year ended December 31, 2000. The Audit and Compliance Committee is currently composed of Messrs. Jaedicke (Chairman), Chan, Mendelsohn, Pereira, Wakeham and Dr. Gramm. The Compensation and Management Development Committee's responsibility is to establish Enron's compensation strategy and to ensure that the senior executives of Enron and its wholly owned subsidiaries are compensated effectively in a manner consistent with the stated compensation strategy of Enron, internal equity considerations, competitive practices and the requirements of appropriate regulatory bodies. In meeting ten times during the year ended December 31, 2000, the Compensation and Management Development Committee also continued to monitor and approve awards earned pursuant to Enron's comprehensive executive compensation program, monitor Enron's employee benefit programs and review matters relating to management development and management succession. The Compensation and Management Development Committee is currently composed of Messrs. LeMaistre (Chairman), Blake, Duncan, Jaedicke and Savage. The Finance Committee serves as a monitor of Enron's finance activities. In meeting five times during the year ended December 31, 2000, the Finance Committee reviewed the financial plans and proposals of management, including equity and debt offerings, changes in stock dividends and the equity repurchase program, the changes in the risk management policy, the transaction approval process and the policy for approval of guarantees, letters of credit, letters of indemnity, and other support arrangements and recommended action with regard thereto to the Board of Directors. The Finance Committee is currently composed of Messrs. Winokur (Chairman), Belfer, Blake, Chan, Meyer, Pereira, Savage and Urquhart. The Nominating and Corporate Governance Committee has oversight for making or evaluating recommendations regarding the size of the Board of Directors, recruiting and recommending candidates for election to the Board of Directors, monitoring the Corporate Governance Guidelines for revision and compliance, monitoring Enron's social and environmental performance and performing periodic evaluation of 9 12 director independence and performance. This committee met three times during the year ended December 31, 2000. The Nominating and Corporate Governance Committee is currently composed of Messrs. Wakeham (Chairman), Mendelsohn, Meyer and Dr. Gramm. During the year ended December 31, 2000, each director attended at least 75% of the total number of meetings of the Board of Directors and the committees on which the director served, except Mr. Chan. AUDIT AND COMPLIANCE COMMITTEE REPORT The Audit and Compliance Committee (the "Audit Committee") operates under a written charter adopted by the Board of Directors (attached hereto as Exhibit A) and is comprised of six independent directors, each of whom is able to understand fundamental financial statements and at least one of whom has past experience in accounting or related financial management experience. The members of the Audit Committee are Messrs. Jaedicke (Chairman), Chan, Mendelsohn, Pereira, Wakeham and Dr. Gramm. The Audit Committee serves as the overseer of Enron's financial reporting, internal controls and compliance processes. At five meetings during the year ended December 31, 2000, the Audit Committee met with the independent auditors, as well as with Enron officers and employees who are responsible for financial reporting, accounting, internal controls, and legal matters. In addition to recommending the appointment of the independent auditors to the Board of Directors, the Audit Committee reviews the scope of and fees related to the audit, accounting policies and reporting practices, internal auditing and internal controls, compliance with Enron's policies regarding business conduct and other matters as deemed appropriate. The Audit Committee has met and held discussions with management and the independent auditors. Management represented to the Audit Committee that Enron's consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Audit Committee has reviewed and discussed the audited consolidated financial statements with management and the independent auditors. The Audit Committee discussed with the independent auditors matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees). Enron's independent auditors also provided to the Audit Committee written disclosures required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with the independent auditors that firm's independence. 10 13 Based upon the Audit Committee's discussion with management and the independent auditors and the Audit Committee's review of the representation of management and the report of the independent auditors to the Audit Committee, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in Enron's Annual Report on Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission. Audit and Compliance Committee: Dr. Robert K. Jaedicke (Chairman) Mr. Ronnie C. Chan Dr. Wendy L. Gramm Dr. John Mendelsohn Mr. Paulo V. Ferraz Pereira Lord John Wakeham AUDIT FEES During 2000, Enron retained its principal auditor, Arthur Andersen LLP, to provide services in the following categories and amounts: Principal Auditor Fees: $25 million Financial Information Systems Design and Implementation Fees: $ 0 All Other Fees:(1) $27 million --------------- (1) Other fees primarily related to business process and risk management consulting, tax compliance and consulting, due diligence procedures related to acquisitions or other activities, work performed in connection with registration statements and various statutory or other audits. 11 14 COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS DIRECTOR COMPENSATION Each nonemployee director of Enron receives an annual service fee of $50,000 for serving as a director. No additional fees are paid for serving on committees, except that committee chairs receive an additional $10,000 annually. Meeting fees are $1,250 for each Board of Directors meeting and committee meeting attended. Total directors' fees paid in cash, deferred under the Enron Corp. 1994 Deferral Plan (the "1994 Deferral Plan") or received in a combination of phantom stock units and stock options in lieu of cash under the Enron Corp. 1991 Stock Plan, as amended and restated effective May 4, 1999 (the "1991 Stock Plan"), in 2000 were $1,107,492, or an average of $79,107 per nonemployee director. Directors are required to defer 50% of their annual service fee into the Phantom Stock Plan of the 1994 Deferral Plan. In some countries, deferrals into the 1994 Deferral Plan may create adverse tax consequences for the director. In August, 1999, the Compensation and Management Development Committee (the "Committee") approved a change such that upon notification by Enron management of the applicable international tax laws, a director may receive an award of phantom stock units under the 1991 Stock Plan in lieu of mandatory deferrals into the Phantom Stock Account of the 1994 Deferral Plan. A change was subsequently approved allowing Lord Wakeham to receive phantom stock units in lieu of deferrals into the Phantom Stock Account, beginning with 50% of his retainer earned on December 31, 1999, which resulted in a grant of 141 phantom stock units with a value of $6,250. As long as Lord Wakeham does not revoke his election, as of July 1 of each year, the Committee shall approve an award of phantom stock units in a number determined by the Committee that will reflect the value of such portion of the retainer fee that is waived by Lord Wakeham for the calendar year. Such award of phantom stock units will fully vest on the fifth anniversary of the date of grant. Directors can elect to receive remaining fees in cash, defer receipt of their fees to a later specified date under the 1994 Deferral Plan or receive their fees in a combination of phantom stock units and stock options in lieu of cash under the 1991 Stock Plan. Participants in the 1994 Deferral Plan may elect to invest their deferrals among several different investment choices. During 2000, eight of the 13 eligible directors elected to defer fees under the 1994 Deferral Plan. Prior to 1994, directors were able to defer their fees under Enron's 1985 Deferral Plan, which continues to credit interest on account balances based on 150% of Moody's seasoned corporate bond yield index with a minimum rate of 12%, which for 1998, 1999 and 2000 was the minimum rate of 12%. Four directors elected to receive stock in lieu of fees in a combination of phantom stock units and stock options according to the terms of the 1991 Stock Plan. During 2000, each nonemployee director received 360 phantom stock units (valued at $75.125 per unit on the date of grant) and options to purchase 10,775 shares (with an exercise price of $75.125 per share) according to the terms of the 1991 and 1994 Stock Plans. The 1991 Stock Plan permits nonemployee directors whose ownership of Enron Common Stock would result in a material conflict of interest for business, employment, or professional purposes, to submit an opinion of counsel of such fact to the Committee with a request that such nonemployee director not be eligible to receive further grants under the 1991 Stock Plan and to forfeit all outstanding grants made to such nonemployee director until such time as the Committee is satisfied that such conflicts have been removed or no longer apply. In December, 1998, Dr. Gramm provided to the Committee a written opinion of counsel indicating that her continued participation in the 1991 Stock Plan could be considered a conflict of interest; accordingly, she has chosen not to receive further grants under the 1991 Stock Plan. Therefore, Dr. Gramm did not receive stock options or phantom stock units in 2000. Instead, on behalf of Dr. Gramm, Enron contributed the value of phantom stock units and stock options into her Flexible Deferral Account under the 1994 Deferral Plan. 12 15 REPORT FROM THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE REGARDING EXECUTIVE COMPENSATION The Compensation and Management Development Committee (the "Committee") of the Board of Directors is responsible for developing the Enron executive compensation philosophy. It is the duty of the Committee to administer the philosophy and its relationship with the compensation paid to the chief executive officer (the "CEO") and each of the other senior executives. The Committee focuses on ensuring there is a strong link between the success of the shareholder and the rewards of the executives. Mission The basic philosophy behind executive compensation at Enron is to reward executive performance that creates long-term shareholder value. This pay-for-performance tenet is embedded in each aspect of an executive's total compensation package. Additionally, the philosophy is designed to promote teamwork by tying a significant portion of compensation to business unit and Enron performance. Base salaries, annual incentive awards and long-term incentive awards are reviewed periodically to ensure consistency with Enron's total compensation philosophy. We believe that Enron's executive compensation program has contributed significantly to the increase in shareholder value from 1991 to 2000, during which time a shareholder who invested $100 in Enron Common Stock would have received $1,497 or a 1397% increase in value, compared to 391% for the S&P 500 and 534% for industry peers. The Committee believes that with the present plan designs, management will continue to strive to increase shareholder value. Total Compensation All decisions regarding executive compensation are made based upon performance, as measured against pre-established objectives and competitive practice, as measured by utilizing multiple public and private compensation surveys. Each year, Enron conducts an executive compensation study covering executives in the top corporate and business unit positions. The Committee utilizes the services of Towers Perrin, a consulting firm experienced in executive compensation, to conduct the study. Compensation studies evaluate total direct compensation which is defined as base salary plus most recent actual annual incentive earned plus the estimated annualized present value of long-term incentive grants. Competitive compensation rates are developed using published/private compensation survey sources for companies of comparable size (as measured by revenue) and, as appropriate, in comparable industries. Data from the sources represent similar positions in general industry and industry specific companies as appropriate. For example, trading industry data are used for commercial positions in Enron Wholesale Services; high-technology industry data are blended with general industry data for many Enron Broadband Services positions; and, pipeline services data are blended with general industry data for Enron Transportation Services business unit positions. Market data are reflective of job level and job type and regressed on corporate or business unit revenues. Executives have the opportunity to earn at the 75th percentile or higher level, subject to obtaining performance at the 75th percentile or higher. Higher achievement provides higher value, while lesser performance decreases total compensation. In order to assure that an executive's compensation is tied to performance, more dollars of total compensation are placed at risk, tied to Enron absolute performance and performance relative to the S&P 500 group of companies. 13 16 Base Salary Base salaries for all positions are targeted at the median of the respective markets. The annual salary increase budget is set to maintain Enron's market position. Base pay as well as other compensation components are also reflective of individual performance. Actual base salaries are slightly above the market median. Annual Incentive Awards The primary objective of the annual incentive plan is to promote outstanding performance by Enron in absolute terms, as well as in comparison to its peer companies. The plan is funded as a percent of recurring after-tax net income as approved by the Committee each year. The payment will be based upon Enron's performance against pre-established goals, as well as business unit and individual performance. Annual bonus payments are based upon Enron's performance measured against the Operating Plan as approved by the Board of Directors. Key performance criteria such as funds flow, return on equity, debt reduction, earnings per share improvements, and other relevant factors will be considered at the option of the Committee. These criteria are weighted each year based upon priorities and may be changed from year to year. A Performance Review Report is presented to the Committee in January. This report summarizes management's view regarding whether and to what extent the key performance criteria were attained. The Performance Review Report also discusses any other significant, but unforeseen factors that positively or negatively affect Enron's performance. The Committee verifies Enron's actual recurring after-tax net income, reviews management's funding level recommendation and approves the resulting award fund. An annual incentive plan is provided for certain executive officers subject to the provisions of Section 16 of the Securities Exchange Act of 1934, as amended ("Section 16 Officers"), and is funded as a percentage of recurring after-tax net income (not to exceed five percent) as approved by the Committee and the shareholders based upon company performance and competitive industry practice. Downward adjustment of the fund is at the sole discretion of the Committee. However, upward adjustment of the fund over the formula-driven amount is not allowed. Since the performance goal of Enron is recurring after-tax net income, the fund increases or decreases based on the earnings performance of Enron. Business unit performance is measured against the appropriate business unit annual plan. After the Board of Directors determines the overall funding level, the Office of the Chairman determines the allocations for each operating group based on performance. Individual payouts are based on business unit performance (or corporate financial performance for corporate executives) and the employee's individual performance as determined through the Performance Review Committee ("PRC") process. Generally, the Committee will review the individual recommendations for key executives and the Office of the Chairman approves the recommendations for all other participants. Long-Term Incentive Grants Enron's long-term incentive program is designed to tie executive performance directly to the creation of shareholder wealth. Accordingly, in 2001 awards are made one-half in non-qualified stock options and one-half in restricted stock with a performance accelerated vesting feature. The value of an Enron stock option is based upon the value of Enron stock at the time of the grant and other factors, including stock price volatility, dividend rate, option term, vesting schedule, termination provisions, and long-term interest rates. A third party compensation consultant derives the value, which is approved by the Committee. Stock options are typically granted in January with a five year term, vesting 15% on date of grant and 15% vesting each subsequent 14 17 July 31 and January 31 thereafter, with the last traunche vesting 10% on January 31 three years after date of grant. Restricted stock cliff vests four years from date of grant, however, vesting can be accelerated based upon Enron's annual cumulative shareholder return relative to the S&P 500. Long-term incentive targets are set based on executive compensation survey results and as approved by the Committee. Grants are determined based upon the current PRC assessment. Grants are reviewed and approved by the Office of the Chairman and also by the Committee for Section 16 officers. In the past, the Committee utilized other long-term compensation vehicles that they deemed appropriate. For 2000, long-term grants to executives consisted of stock options and restricted stock. A comparative analysis of Enron's executive compensation levels was conducted in November, 2000, and the results indicated Enron's 2000 actual total direct compensation to be at the 75th percentile of the market which meets Enron's stated philosophy relative to pay and performance. Chief Executive Officer Compensation As part of an annual review, the Committee applies the executive compensation philosophy to the total compensation package of the CEO and the other senior executives. In 2000, Mr. Lay's base salary was $1,300,000. As such, base salary in excess of $1,000,000 was deferred into Enron's 1994 Deferral Plan to preserve tax deductibility under Section 162(m). (See "Compliance with Internal Revenue Code Section 162(m)" below.) In recognition of Enron's extremely strong performance during 2000 relative to recurring after-tax net income and other financial measures, Mr. Lay received a cash annual incentive award of $7,000,000. The Committee determined the amount of the annual incentive award taking into consideration the competitive pay level for a CEO of a company with comparable revenue size, competitive bonus levels for CEO's in specific high performing companies, and the annual performance report presented by management, which reflected an increase in total recurring net income of 28% from the previous year, Enron's increase in recurring earnings per share of 25%, and a total shareholder return of over 88%, compared to 66.29% for Enron's proxy peer group, -9.03% for the S&P 500 and -39.1% for the NASDAQ. In January 2001, Mr. Lay received a long-term incentive award consisting of a grant of stock options, at market value on the date of grant, to acquire 347,830 shares, and a grant of 106,578 shares of restricted stock with performance accelerated vesting features. The stock options have a five-year term, vesting 15% on date of grant and 15% vesting each subsequent July 31 and January 31 thereafter, with the last traunche vesting 10% on January 31, 2004. The restricted stock will vest and be released on January 31, 2005. Accelerated vesting may occur if Enron's total shareholder return exceeds S&P 500 performance. In addition, the accelerated vesting provisions on Mr. Lay's December 1996 and January 1997 stock option grants were triggered since Enron's total shareholder return for 2000 of over 88% exceeded the performance hurdle of 120% of the total shareholder return of the S&P 500, which had a negative return in 2000. Mr. Lay received a cash payment in 2001 of $3,600,000 under the Performance Unit Plan for the 1997-2000 performance period. Payments are made under the Performance Unit Plan if Enron's total shareholder return ranks sixth or greater as compared to 11 industry peers, the S&P 500 and 90-day U.S. Treasury Bills for the four year performance period. During the measurement period from 1997-2000 Enron's return to its shareholders was 294.45% compared with an average of 128.05% for industry peers, and 21.63% for 90-day U.S. Treasury Bills. This performance earned Enron a ranking of first amongst its peer group, therefore, the units had a value of $2.00. Subsequent to 1998, Enron began granting restricted stock in lieu of grants of 15 18 Performance Units. Therefore, Mr. Lay has one outstanding grant, which will be valued over the four year period of 1998 through 2001. In February 2001, with Enron's election of Mr. Lay to the position of Chairman of the Board, Mr. Lay's base annual salary was changed to $975,000 to reflect the transition to his new role. Compliance with Internal Revenue Code Section 162(m) Section 162(m) of the Internal Revenue Code, as amended (the "Code"), generally disallows a tax deduction to public companies for compensation over $1,000,000 paid to a company's CEO and four other most highly compensated executive officers, as reported in its proxy statement. Qualifying performance-based compensation is not subject to the deduction limit if certain requirements are met. Enron has structured most aspects of the performance-based portion of the compensation for its executive officers (which includes stock option grants, performance units, and performance based annual incentive awards) in a manner that complies with the statute. The Amended and Restated Enron Corp. 1991 Stock Plan, the Amended and Restated Performance Unit Plan, and the Enron Corp. Annual Incentive Plan were presented to and approved by shareholders at the 1999, 1995 and 1999 Annual Meetings of Shareholders, respectively. Compensation and Management Development Committee: Charles A. LeMaistre (Chairman) Norman P. Blake John H. Duncan Robert K. Jaedicke Frank Savage 16 19 COMPARATIVE STOCK PERFORMANCE As required by applicable rules of the Securities and Exchange Commission (the "SEC"), the graph below was prepared based upon the following assumptions: 1. $100 was invested in Enron Common Stock, the S&P 500 and the peer group as referenced below on December 31, 1995. 2. The peer group investments are weighted based on the market capitalization of each individual company within the peer group at the beginning of each year and the trading activity of the stock of each individual company during the year. 3. Dividends are reinvested on the ex-dividend dates. The companies that comprised Enron's original peer group are as follows: The AES Corporation; BG Group plc; The Coastal Corporation; Columbia Energy Group; Consolidated Natural Gas Company; Duke Energy Corporation; Dynegy Inc.; El Paso Energy Corporation; Occidental Petroleum Corporation; PG&E Corporation; and The Williams Companies, Inc. As a result of mergers and divestitures in 2000, the following peer group changes have been made: Consolidated Natural Gas Company, due to its merger with Dominion Resources Inc., has been replaced by Dominion Resources, Inc.; Columbia Energy Group ceased trading and therefore was replaced by Level 3 Communications, Inc. Accordingly, the companies that comprise Enron's current peer group during 2000 are as follows: The AES Corporation; BG Group plc; The Coastal Corporation; Dominion Resources, Inc.; Duke Energy Corporation; Dynegy Inc.; El Paso Energy Corporation; Level 3 Communications, Inc.; Occidental Petroleum Corporation; PG&E Corporation; and The Williams Companies, Inc. Although this method of calculating shareholder return differs from the method that Enron uses for purposes of its Performance Unit Plan, it does display a similar trend. 17 20 COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN Enron Corp., S&P 500 and Peer Group (Performance Results Through 12/31/00) [PEFORMANCE GRAPH] -------------------------------------------------------------------------------- 1995 1996 1997 1998 1999 2000 -------------------------------------------------------------------------------- Enron Corp. $100.00 $115.53 $113.96 $159.58 $251.60 $474.61 S&P 500 $100.00 $123.25 $164.21 $210.85 $253.61 $227.89 Peer Group - Original $100.00 $113.44 $167.65 $186.26 $190.03 $243.95 Peer Group - Current $100.00 $111.18 $168.96 $190.15 $190.75 $254.88 In July 1999, Enron announced a 2-for-1 stock split which became effective on August 13, 1999. All references to stock options and restricted stock in the compensation tables, supporting footnotes, contracts and other transactions sections reflect the 2-for-1 stock split. 18 21 EXECUTIVE COMPENSATION The following table summarizes certain information regarding compensation paid or accrued during each of Enron's last three fiscal years to Enron's Chief Executive Officer and each of Enron's four other most highly compensated executive officers (the "Named Officers"): SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION -------------------------------------- ---------------------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP NAME & PRINCIPAL SALARY BONUS COMPENSATION AWARDS OPTIONS/ PAYOUTS POSITION YEAR $ $ ($)(1) ($)(2) SARS(#) ($) ---------------- ---- ---------- ---------- ------------ ---------- ---------- ---------- Kenneth L. Lay.............. 2000 $1,300,000 $7,000,000 $ 381,551 $7,500,025(4) 782,830 $1,218,750(13) Chairman of the Board 1999 $1,300,000 $3,900,000 $ 206,716 $ -- 1,300,000 $ -- 1998 $1,266,667 $3,150,000 $ 160,292 $3,883,503(5) 749,630(9) $ -- Jeffrey K. Skilling......... 2000 $ 850,000 $5,600,000 $ 47,403 $3,500,037(4) 867,880(10) $ -- President and Chief 1999 $ 850,000 $3,000,000 $ 51,701 $ -- 1,000,000 $ -- Executive Officer 1998 $ 816,667 $2,250,000 $ 23,949 $1,764,544(5) 586,330(9) $ -- Mark A. Frevert............. 2000 $ 520,000 $2,000,000 $2,603,541 $1,500,043(4) 1,147,820(11) $ -- Chairman and Chief 1999 $ 513,333 $1,300,000 $1,670,356 $ -- 201,905(6) $ -- Executive Officer, Enron 1998 $ 458,337 $1,000,000 $ 612,258 $2,390,004(6) 697,550(6) $ -- Wholesale Services Kenneth D. Rice............. 2000 $ 420,000 $1,750,000 $ 81,333 $ -- 1,796,733(12) $3,953,820(14) Chairman and Chief 1999 $ 413,333 $1,100,000 $ 63,681 $ -- 201,905 $ -- Executive Officer, Enron 1998 $ 362,500 $1,100,000 $ 9,000 $2,503,766(7) 497,550 $ -- Broadband Services, Inc. Stanley C. Horton........... 2000 $ 520,000 $1,200,000 $ 15,600 $1,000,044(4) 108,035 $ 300,000(13) Chairman and Chief 1999 $ 513,333 $1,000,000 $ 15,000 -- $ -- Executive Officer, Enron 1998 $ 491,667 $ 700,000 $ 14,300 $1,002,548(8) 91,260(9) $ -- Transportation Services Company ALL OTHER COMPENSATION NAME & PRINCIPAL ----------------- POSITION YEAR ($)(3) ---------------- ---- -------- Kenneth L. Lay.............. 2000 $857,316 Chairman of the Board 1999 $560,046 1998 $554,904 Jeffrey K. Skilling......... 2000 $120,825 President and Chief 1999 $116,342 Executive Officer 1998 $114,055 Mark A. Frevert............. 2000 $447,584 Chairman and Chief 1999 $198,203 Executive Officer, Enron 1998 $390,917 Wholesale Services Kenneth D. Rice............. 2000 $ 16,482 Chairman and Chief 1999 $ 8,937 Executive Officer, Enron 1998 $ 4,342 Broadband Services, Inc. Stanley C. Horton........... 2000 $ 11,934 Chairman and Chief 1999 $ 7,078 Executive Officer, Enron 1998 $ 13,362 Transportation Services Company --------------- (1) Includes perquisites and other personal benefits. Personal plane usage of $107,548, $159,334 and $334,179 has been reported for Mr. Lay in 1998, 1999 and 2000, respectively. Mr. Frevert has received payments to cover additional tax liabilities related to his previous expatriate assignment of $600,258, $1,655,088 and $2,557,055 in 1998, 1999 and 2000, respectively. Personal plane usage of $24,962 and $21,166 has been reported for Mr. Skilling in 1999 and 2000, respectively. A FlexPerq allowance of $22,500, $25,500 and $25,500 has been reported for Mr. Skilling for 1998, 1999 and 2000, respectively. Personal plane usage of $51,681 and $63,081 has been reported for Mr. Rice in 1999 and 2000, respectively. A FlexPerq allowance of $14,300, $15,000 and $15,600 has been reported for Mr. Horton in 1998, 1999 and 2000, respectively. Also, Enron maintains three deferral plans for key employees under which payment of base salary, annual bonus and long-term incentive awards may be deferred to a later specified date. Under the 1985 Deferral Plan, interest is credited on amounts deferred based on 150% of Moody's seasoned corporate bond yield index with a minimum rate of 12%, which for 1998, 1999 and 2000 was the minimum rate of 12%. No interest has been reported as Other Annual Compensation under the 1985 Deferral Plan for participating Named Officers because the crediting rates during 1998, 1999 and 2000 did not exceed 120% of the long-term Applicable Federal Rate ("AFR") of 14.38% in effect at the time the 1985 Deferral Plan was implemented. Beginning January 1996, the 1994 Deferral Plan credits interest based on fund elections chosen by participants. Since earnings on deferred compensation invested in third-party investment vehicles, comparable to mutual funds, need not be reported, no interest has been reported as Other Annual Compensation under the 1994 Deferral Plan during 1998, 1999 and 2000. Other Annual Compensation also includes cash perquisite allowances and cash paid for benefits lost due to statutory and/or plan earnings limits. (2) The following is the aggregate total number of shares in unreleased restricted stock holdings and their value as of December 31, 2000 for each of the Named Officers: Mr. Lay, 249,264 shares valued at $20,720,070; Mr. Skilling, 115,208 shares valued at $9,576,665; Mr. Frevert, 55,969 shares (Notes continue on following page) 19 22 valued at $4,652,423; Mr. Horton, 35,157 shares valued at $2,922,426; and Mr. Rice, 26,704 shares valued at $2,219,770. In accordance with the provisions of the 1991 Stock Plan, in the event of a "change of control," outstanding grants of restricted stock shall become fully vested. Dividend equivalents for all restricted stock awards accrue from date of grant and are paid upon vesting. (3) The amounts shown include the value as of year-end 1998, 1999 and 2000 of Enron Common Stock allocated during those years to employees' special subaccounts under the Enron Corp. Employee Stock Ownership Plan and 1999 and 2000 matching contributions on employees' Enron Corp. Savings Plan account. Included in 1998, 1999 and 2000 for Mr. Lay is $4,388, $5,109 and $6,934, respectively, that is attributable to term life insurance coverage pursuant to split-dollar life insurance arrangements. Also included in 1998, 1999 and 2000 for Mr. Lay is $280,265 for each year, which represents the remainder of the annual premium that was provided in exchange for forfeiture by Mr. Lay of post-retirement executive supplemental survivor benefits and executive supplemental retirement benefits. Additionally, included in 1998, 1999 and 2000 for Mr. Lay is $16,170, $17,340 and $18,616, respectively, of imputed income that is attributable to a split-dollar life insurance premium of $250,000 (also included) which is paid annually by Enron on a life insurance policy already owned by Mr. Lay, with recovery of the cost of such premiums upon Mr. Lay's death. Also included in 2000 is $288,940 which reflects a one-time payment for the tradeout of Mr. Lay's coverage of his Houston Natural Gas Executive Supplemental Benefit Agreement. Included in 1998, 1999 and 2000 for Mr. Skilling is $110,192, $109,868 and $109,388, respectively, attributable to term-life insurance coverage pursuant to a split-dollar life insurance arrangement with recovery of the cost of such premiums upon Mr. Skilling's death. Included in 1998, 1999 and 2000 for Mr. Frevert is $385,327, $182,837 and $433,537, respectively, for allowances and other payments relating to his previous international assignment. (4) Restricted stock awards made under the Enron Corp. Long Term Incentive Program vest four years following the grant date. However, vesting can be accelerated based upon Enron's annual cumulative shareholder return relative to the S&P 500. In 2000, Enron's performance exceeded the 90th percentile of the S&P 500 companies which provided for 100% vesting in 2001. (5) Represents performance-based restricted stock, which was granted in 1998 in lieu of performance units. (6) Mr. Frevert's employment agreement, executed in June, 1998, provided for a grant of 400,000 stock options and 97,056 restricted shares on August 10, 1998. Stock options vest 20% on the grant date and 20% on each December 31 thereafter and restricted shares vest 25% on the grant date and 25% on each January 31 thereafter. Mr. Frevert was also granted 297,550 stock options on December 31, 1998 and 201,905 options on December 31, 1999, which vested 20% on the grant date and 20% on each anniversary of the grant date. (7) Mr. Rice received a grant of 80,102 restricted shares on August 10, 1998. With the achievement of specified earnings objectives in 1998 and 1999, 33 1/3% of the shares became vested, and were released in 1999 and 2000, respectively. The remaining 33 1/3% vested on January 31, 2001 as the grant was converted to time-based vesting during 2000. Mr. Rice also received a separate grant of 26,480 phantom shares on January 19, 1998 in lieu of 50% of his 1997 cash bonus. (8) Mr. Horton received an award of 20,064 restricted shares on January 19, 1998, which vest 33 1/3% on each January 31, 1999, 2000 and 2001; however, vesting was accelerated such that all shares vested 100% on January 31, 1999 as Enron's actual 1998 recurring diluted earnings per share exceeded it's 1997 earnings performance. (9) Represents stock options awarded on January 5, 1998 (Mr. Skilling 205,130), and January 19, 1998 (Mr. Lay, 158,980, Mr. Skilling 112,830), which vested 20% on grant date and vest 20% on each anniversary of the grant date. On December 31, 1998, Mr. Lay, Mr. Skilling and Mr. Horton received stock options (590,650, 268,370 and 91,260, respectively), under the Enron Corp. Long-Term Incentive Program which vest 25% on the grant date and 25% on each anniversary of the grant date. (10) On February 8, 2000, Mr. Skilling received a grant of 500,000 stock options which vested 25% at grant and 25% on each anniversary of the grant date. (11) Mr. Frevert's employment agreement provided for a grant of 463,500 stock options, which vest 50% on each anniversary of the grant. Mr. Frevert received an additional grant of 525,000 options which vested 50% on the grant date and 50% one year after date of grant. (12) In association with the amendment and extension of Mr. Rice's employment agreement, he received the following grants which represent multiple years of long-term value with the following vesting schedules: 600,000 stock options with a three year term, which vest 50% on each anniversary of the grant; 692,308 options with a two year term which vest 50% on the grant date and 50% on the first anniversary after the date of grant; and 500,000 stock options with a five year term which vest 25% on each anniversary of the grant date. (13) Reflects a cash payment under the Enron Corp. Performance Unit Plan for the 1996-1999 performance period. Payments are made under the Performance Unit Plan based on Enron's total shareholder return relative to its peers. Enron's performance over the 1996-1999 performance period rendered a value of $1.50 per unit based on a ranking of second as compared to 11 industry peers. (14) Represents a cash payout under the ECT Long-Term Compensation Plan relative to a 1997 grant of 101,380 Phantom Stock Units which became fully vested as of December 31, 1999. Sixty percent of the award was redeemed in 2000, based on Enron's closing stock price on January 24, 2000. The remaining 40% will be redeemed over a two year period, based on Enron's stock price performance. 20 23 STOCK OPTION GRANTS DURING 2000 The following table sets forth information with respect to grants of stock options pursuant to the Enron Corp. 1991 Stock Plan to the Named Officers reflected in the Summary Compensation Table. No stock appreciation rights ("SARs") were granted during 2000. INDIVIDUAL GRANTS ------------------------------------- NUMBER OF SECURITIES UNDERLYING % OF TOTAL POTENTIAL REALIZABLE VALUE AT OPTIONS/ OPTIONS/SARS EXERCISE ASSUMED ANNUAL RATES OF STOCK PRICE SARS GRANTED TO OR BASE APPRECIATION FOR OPTION TERM(1) GRANTED EMPLOYEES IN PRICE EXPIRATION -------------------------------------------- NAME (#)(2) FISCAL YEAR ($/SH) DATE 0%(3) 5% 10% ---- ---------- ------------ -------- ---------- ----- --------------- --------------- Kenneth L. Lay.............. 769,235(4) 1.96% $47.3125 01/10/07 $ 0 $ 14,816,188 $ 34,528,019 50(5) 0.00% $62.5000 02/07/07 $ 0 $ 1,272 $ 2,965 13,545(6) 0.03% $83.1250 12/29/07 $ 0 $ 458,366 $ 1,068,187 Jeffrey K. Skilling......... 358,975(4) 0.92% $47.3125 01/10/07 $ 0 $ 6,914,195 $ 16,113,016 50(5) 0.00% $62.5000 02/07/07 $ 0 $ 1,272 $ 2,965 8,855(6) 0.02% $83.1250 12/29/07 $ 0 $ 299,655 $ 698,324 500,000(7) 1.28% $66.1250 02/08/07 $ 0 $ 13,459,758 $ 31,366,959 Mark A. Frevert............. 153,850(4) 0.39% $47.3125 01/10/07 $ 0 $ 2,963,295 $ 6,905,738 50(5) 0.00% $62.5000 02/07/07 $ 0 $ 1,272 $ 2,965 5,420(6) 0.01% $83.1250 12/29/07 $ 0 $ 183,414 $ 427,433 75,000(8) 0.19% $65.0000 01/24/07 $ 0 $ 1,984,615 $ 4,624,996 525,000(9) 1.34% $71.1250 06/01/02 $ 0 $ 3,827,414 $ 7,841,531 463,500(10) 1.18% $71.1250 06/01/03 $ 0 $ 5,196,335 $ 10,911,891 Kenneth D. Rice............. 50(5) 0.00% $62.5000 02/07/07 $ 0 $ 1,272 $ 2,965 4,375(6) 0.01% $83.1250 12/29/07 $ 0 $ 148,051 $ 345,022 692,308(11) 1.77% $67.8125 02/14/02 $ 0 $ 4,812,081 $ 9,858,899 600,000(12) 1.53% $67.8125 02/14/03 $ 0 $ 6,413,367 $ 13,467,563 500,000(12) 1.28% $67.8125 02/14/05 $ 0 $ 9,367,672 $ 20,700,105 Stanley C. Horton........... 102,565(4) 0.26% $47.3125 01/10/07 $ 0 $ 1,975,498 $ 4,603,751 50(5) 0.00% $62.5000 02/07/07 $ 0 $ 1,272 $ 2,965 5,420(6) 0.01% $83.1250 12/29/07 $ 0 $ 183,414 $ 427,433 All Employee and Director Optionees.................. 39,167,000(13) 100% $70.0200(14) N/A $ 0 $ 1,724,726,748(15) $ 4,370,796,208(15) All Shareholders............ N/A N/A N/A N/A $ 0 $33,098,092,659(15) $83,877,065,208(15) Optionee Gain as % of Gain.. N/A N/A N/A N/A N/A 5.16% 5.16% --------------- (1) The dollar amounts under these columns represent the potential realizable value of each grant of options assuming that the market price on Enron Common Stock appreciates in value from the date of grant at the 5% and 10% annual rates prescribed by the SEC and, therefore, are not intended to forecast possible future appreciation, if any, of the price of Enron Common Stock. (2) If a "change of control" (as defined in the 1991 Stock Plan) were to occur before the options become exercisable and are exercised, the vesting described below will be accelerated and all such outstanding options shall be surrendered and the optionee shall receive a cash payment by Enron in an amount equal to the value of the surrendered options (as defined in the 1991 Stock Plan). (3) An appreciation in stock price, which will benefit all shareholders, is required for optionees to receive any gain. A stock price appreciation of 0% would render the option without value to the optionees. (4) Represents stock options awarded on January 10, 2000 under the Enron Corp. Long-Term Incentive Program. Awards vest 25% on the grant date and 25% on each anniversary thereafter. (5) A grant of 50 stock options was provided to each eligible employee in February, 2000, in recognition of Enron stock reaching a fair market value of $50 after the August, 1999 2-for-1 stock split. (Notes continue on following page) 21 24 (6) All eligible employees received an option grant under the EnronOptions Program. The EnronOptions Program provides a grant of options equal to 5% of base annual salary for each year of participation in the program, not to exceed five years of participation. Employees who received grants in 2000 will vest 20% each year beginning June 30, 2001. (7) Options vest 25% on date of grant and 25% on each anniversary thereafter. (8) Mr. Frevert made a voluntary deferral election to receive a portion of his 1999 Annual Incentive Bonus in the form of stock options which were granted in January, 2000 and were 100% vested on date of grant. (9) Options vest 50% on the grant date and 50% on the anniversary of the grant date. (10) Options vest 50% on each anniversary of the grant date. (11) Options vest 50% on the grant date and 50% on the anniversary of the grant date. The options were granted with the provision that any options that would have vested within ninety (90) days of the date of an involuntary termination would vest upon date of termination. (12) 600,000 options vest 50% on each anniversary of the grant date; 500,000 options vest 25% on each anniversary of the grant. These options were granted with the provision that any options that would have vested within ninety (90) days of the date of an involuntary termination would vest upon date of termination. (13) Includes options awarded on December 31, 2000 under the EnronOptions Program. (14) Weighted average exercise price of all Enron stock options granted to employees in 2000. (15) Appreciation for All Employee and Director Optionees is calculated using the maximum allowable option term of ten years, even though in some cases the actual option term is less than ten years. Appreciation for all shareholders is calculated using an assumed ten-year option term, the weighted average exercise price for All Employee and Director Optionees ($70.02) and the number of shares of Common Stock acquired and outstanding on December 31, 2000. AGGREGATED STOCK OPTION/SAR EXERCISES DURING 2000 AND STOCK OPTION/SAR VALUES AS OF DECEMBER 31, 2000 The following table sets forth information with respect to the Named Officers concerning the exercise of SARs and options during the last fiscal year and unexercised options and SARs held as of the end of the fiscal year: NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES DECEMBER 31, 2000 DECEMBER 31, 2000 ACQUIRED ON VALUE --------------------------- ---------------------------- NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------ ----------- ------------- ------------ ------------- Kenneth L. Lay......... 2,288,724 $123,399,478 5,145,963 1,451,763 $257,483,342 $104,094,272 Jeffrey K. Skilling.... 1,193,370 $ 62,484,460 483,732 1,347,400 $ 20,596,905 $ 48,737,354 Mark A. Frevert........ 490,000 $ 28,732,712 1,010,139 1,220,492 $ 41,030,788 $ 32,180,218 Kenneth D. Rice........ 282,402 $ 16,226,027 869,395 1,824,213 $ 34,516,748 $ 41,480,119 Stanley C. Horton...... 360,002 $ 20,601,248 233,146 158,527 $ 13,238,096 $ 7,362,286 RETIREMENT AND SUPPLEMENTAL BENEFIT PLANS Enron maintains the Enron Corp. Cash Balance Plan (the "Cash Balance Plan") which is a noncontributory defined benefit pension plan to provide retirement income for employees of Enron and its subsidiaries. Through December 31, 1994, participants in the Cash Balance Plan with five years or more of service were entitled to retirement benefits in the form of an annuity based on a formula that uses a percentage of final average pay and years of service. In 1995, the Board of Directors adopted an amendment to and restatement of the Cash Balance Plan changing the plan's name from the Enron Corp. Retirement Plan to the Enron Corp. Cash Balance Plan. In connection with a change to the retirement benefit formula, all employees became fully vested in retirement benefits earned through December 31, 1994. The formula in place prior to 22 25 January 1, 1995 was suspended and replaced with a benefit accrual in the form of a cash balance of 5% of annual base pay beginning January 1, 1996. Under the Cash Balance Plan, each employee's accrued benefit will be credited with interest based on ten-year treasury bond yields. Directors who are not employees are not eligible to participate in the Cash Balance Plan. Enron also maintains a noncontributory employee stock ownership plan ("ESOP") which covers all eligible employees. Allocations to individual employees' retirement accounts within the ESOP offset a portion of benefits earned under the Cash Balance Plan prior to December 31, 1994. December 31, 1993 was the final date on which ESOP allocations were made to employees' retirement accounts. In addition, Enron has a supplemental retirement plan that is designed to restore payments to certain employees that are lost under the Cash Balance Plan due to the benefit limitations under Internal Review Code Section 415 and limitations on considered pay under Internal Review Code Section 401(a)(17). This plan also restores benefits for deferral plan participants that are lost under the Cash Balance Plan due to the salary deferred under Enron's Deferral Plans. The following table sets forth the estimated annual benefits payable under normal retirement at age 65, assuming current remuneration levels without any salary projection and participation until normal retirement at age 65, with respect to the Named Officers under the provisions of the foregoing retirement plans: ESTIMATED CURRENT CREDITED CURRENT ESTIMATED CREDITED YEARS OF COMPENSATION ANNUAL BENEFIT YEARS OF SERVICE AT COVERED BY PAYABLE UPON NAME SERVICE AGE 65 PLANS RETIREMENT ---- -------- ---------- ------------ -------------- Kenneth L. Lay.......................... 23.9 30.2 $1,300,000 $475,042 Jeffrey K. Skilling..................... 10.4 28.3 $ 850,000 $284,607 Mark A. Frevert......................... 16.4 35.0 $ 520,000 $216,853 Kenneth D. Rice......................... 20.0 42.6 $ 420,000 $242,485 Stanley C. Horton....................... 27.0 41.1 $ 520,000 $233,933 --------------- NOTE: The estimated annual benefits payable are based on the straight life annuity form without adjustment for any offset applicable to a participant's retirement subaccount in the ESOP. Mr. Skilling participates in the Executive Supplemental Survivor Benefit Plan (the "Survivor Benefit Plan"). Mr. Lay has waived his participation in lieu of life insurance premiums. In the event of death after retirement, the Survivor Benefit Plan provides an annual benefit to the participant's spouse equal to 50% of the participant's annual base salary at retirement, paid for ten years. The Survivor Benefit Plan also provides that in the event of death before retirement, the participant's spouse receive an annual benefit equal to 30% of the participant's annual base salary at death, paid for the life of the participant's spouse (but for no more than 20 years in some cases). SEVERANCE PLANS Enron's Severance Pay Plan, as amended, provides for the payment of benefits to employees who are terminated for failing to meet performance objectives or standards or who are terminated due to reorganization or economic factors. The amount of benefits payable for performance related terminations is based on length of service and may not exceed six weeks of pay. For those terminated as the result of reorganization or economic circumstances, the benefit is based on length of service and amount of pay up to a maximum 23 26 payment of 26 weeks of base pay. If the employee signs a Waiver and Release of Claims Agreement, the employee may receive an additional severance benefit equal to the severance benefit described above. Under no circumstances will the total severance benefit paid under Enron's Severance Pay Plan exceed 52 weeks of pay. Under Enron's Change of Control Severance Plan, in the event of an unapproved change of control of Enron, any employee who is involuntarily terminated within two years following the change of control will be eligible for severance benefits equal to two weeks of base pay multiplied by the number of full or partial years of service, plus one month of base pay for each $10,000 (or portion of $10,000) included in the employee's annual base pay, plus one month of base pay for each five percent of annual incentive award opportunity under any approved plan. The maximum an employee can receive is 2.99 times the employee's average W-2 earnings over the past five years. EMPLOYMENT CONTRACTS Mr. Lay entered into an employment agreement with Enron in December, 1996, which, as amended, provides for a minimum salary of $1,300,000 and expires on December 31, 2003. To preserve tax deductibility, any base salary in excess of $1,000,000 should be deferred into Enron's 1994 Deferral Plan. His agreement also provides for a split-dollar life insurance arrangement, whereby Enron will pay five annual premiums of $250,000 on a life insurance policy already owned by Mr. Lay, with recovery of the cost of such premiums upon Mr. Lay's death. Benefits payable under Enron's Deferral Plans and the HNG Deferral Plan in the event of Mr. Lay's termination of employment will be paid as if Mr. Lay had retired from Enron, regardless of the reason for termination. During 2000, Mr. Lay's $4,000,000 interest-bearing line of credit was paid in full. Total accrued interest on the loan in 2000 was $110,174, calculated at the Applicable Federal Rate in effect at the time the loan was made as per his agreement. In the event of his termination for any reason (except termination for cause), Mr. Lay will receive a lump sum payment for each full calendar year of the remaining term of the agreement equal to base salary, performance bonus and long-term grant value received in calendar year 2000, offset against amounts payable under the severance plan maintained by Enron, through the term of the agreement. If severance remuneration payable under the agreement is held to constitute an "excess parachute payment" and Mr. Lay becomes liable for any tax penalties imposed thereon, Enron will make a cash payment to him in an amount equal to the tax penalties plus an amount equal to any additional tax for which he will be liable as a result of receipt of the payment for such tax penalties and payment for such reimbursement for additional tax. The employment agreement contains noncompete provisions in the event of Mr. Lay's termination of employment. Mr. Skilling entered into an employment agreement with Enron in January, 1996, which, as amended and extended, provides for a minimum annual salary of $750,000 and expires on December 31, 2003. In October, 1997, the employment agreement was amended to provide for a $4,000,000 loan to Mr. Skilling, of which $2,000,000 was repaid during 1999. Total accrued interest on the loan in 2000 was $126,747, calculated at an average interest rate of 6.24%, and such interest has been paid by Mr. Skilling. The remaining loan will be forgiven if Mr. Skilling fulfills all the duties and responsibilities under his employment agreement through December 31, 2001 or is involuntarily terminated prior to December 31, 2001. As an additional benefit to Mr. Skilling, Enron pays a portion of the annual premiums associated with a split-dollar life insurance policy (for 2000, Enron paid $109,388). The employment agreement, as amended, provides that in the event of an involuntary termination prior to the expiration of the term, Enron will pay the remainder of the premiums. The policy is owned by Mr. Skilling, and upon his death Enron will recover the cost of premium payments. This benefit generates no imputed income for Mr. Skilling, as he contributes an amount equal to the annual cost of current life insurance as measured by the insurer's current minimum premium rate for standard risks. The 24 27 amendment stipulates that in the event of involuntary termination prior to the expiration of the term, Mr. Skilling will receive a lump sum payment for each full calendar year of the remaining term of the agreement equal to base salary, performance bonus and long-term grant value received in calendar year 2000, offset against amounts payable under the severance plan maintained by Enron, as well as full vesting of all outstanding stock options and restricted stock awards (with the exception of stock options granted on November 16, 1999). Additionally, the amended agreement stipulates that if severance remuneration payable under the agreement is held to constitute an "excess parachute payment" and Mr. Skilling becomes liable for any tax penalties imposed thereon, Enron will make a cash payment to him in an amount equal to the tax penalties plus an amount equal to any additional tax for which he will be liable as a result of receipt of the payment for such tax penalties and payment for such reimbursement for additional tax. The employment agreement contains noncompete provisions in the event of Mr. Skilling's termination of employment. Mr. Frevert entered into an employment agreement with Enron in March 2000, which provides for a minimum annual salary of $520,000 and expires on May 31, 2003. Mr. Frevert received stock options awards pursuant to his agreement (see footnotes following the Summary Compensation and Stock Option Grants During 2000 table). In the event of involuntary termination prior to the expiration of the term, Mr. Frevert will receive cash amounts not to exceed one year's annual base salary and performance bonus, determined by averaging Mr. Frevert's base salary and performance bonus for the last two years of employment. The employment agreement contains noncompete provisions in the event of Mr. Frevert's termination of employment. Mr. Rice entered into an employment agreement with Enron in June 1998, which as amended, provides for an annual salary of $420,000. In February 2000, the agreement was amended and extended to January 31, 2002 and was updated to reflect Mr. Rice's duties as Chief Commercial Officer of Enron Broadband Services, Inc. As a result of the amendment and extension of his employment agreement, Mr. Rice received stock option awards in 2000 (see footnotes following the Summary Compensation and Stock Option Grants During 2000 table). In the event of involuntary termination, Mr. Rice will receive a cash payment equal to his monthly base salary through the term of his agreement and will continue to vest during the ninety (90) day period following termination in all grants other than the grants made in February 2000. In the event of voluntary termination, the agreement provides a lump sum payment of $800,000, as well as salary through the date of such termination. The employment agreement contains noncompete provisions in the event of Mr. Rice's termination of employment. Mr. Horton entered into an agreement with Enron in October 1996, which as amended, provides for a minimum annual salary of $520,000 and expires on July 31, 2002. Pursuant to the terms of the agreement, Mr. Horton will receive stock options and restricted stock in January 2001 and January 2002 with a grant value totaling $2,000,000 for each year (to be delivered 50% in options and 50% in restricted shares). In the event of involuntary termination prior to the expiration of the term, Mr. Horton will receive cash amounts not to exceed one year's base salary and performance bonus, determined by averaging Mr. Horton's base salary and performance bonus for the last two years of employment. In the event of involuntary termination after the term expires, Mr. Horton would receive a payment equal to three month's salary based upon the base monthly salary in effect immediately preceding termination. The employment agreement contains noncompete provisions in the event of Mr. Horton's termination of employment. 25 28 CERTAIN TRANSACTIONS Effective August 1, 1991, Enron, Enron Power Corp. (a wholly owned subsidiary of Enron) and John A. Urquhart entered into a Consulting Services Agreement which has been amended several times, the latest of such amendments was effective as of January 1, 2001, to provide for an extension of the agreement through December 31, 2001. Pursuant to the terms of the agreement, Mr. Urquhart serves as Senior Advisor to the Chairman and consults with Enron regarding the development and implementation of an integrated strategic international business plan and other matters concerning international business and operations. The amendment provides for a retainer fee of $16,538 per month for providing up to 45 days of consulting services annually and a daily rate of $4,410 for days in excess of 45 days annually. In August, 1995, the agreement was amended to provide for a grant of 100,000 Enron phantom stock options at a grant price equal to the December 29, 1995, Enron closing stock price, or $19.0625. The phantom shares vested 50% on June 29, 1996 and 50% on December 29, 1996, and were to expire on December 31, 1998. With the extension of Mr. Urquhart's Consulting Services Agreement through December 31, 2001, the expiration date of the 100,000 Enron phantom stock options granted on December 29, 1995 was extended to December 31, 2002. Mr. Urquhart is reimbursed for all reasonable out-of-pocket expenses incurred in performing services under the agreement. The services to be performed by Mr. Urquhart pursuant to the Consulting Services Agreement do not include, and are in addition to his duties as a director of Enron, and the above compensation is in addition to the remuneration payable to Mr. Urquhart as a member of the Board of Directors of Enron. During 2000, Enron paid Mr. Urquhart $493,914 for services rendered (including reimbursement of expenses) under the Consulting Services Agreement. Mr. Urquhart was a director of Enron Renewable Energy Corp. ("EREC") until his resignation on February 23, 2000. On January 2, 1997, Mr. Urquhart was awarded options to purchase 67,495 shares of EREC common stock at an exercise price of $15.00, granted in tandem with options to purchase 47,500 shares of Enron Common Stock at an exercise price of $21.31, both of which were awarded at fair market value on the date of grant. The options became 20% vested on the date of grant and were to vest 20% on each anniversary of the date of grant through January 2, 2001. As a result of EREC's merger with another subsidiary of Enron, an election event occurred under the EREC Stock Plan. Accordingly, Mr. Urquhart made an election to receive a cash payment in the amount of $2,443,319 for EREC stock options. The cash-out of the EREC options canceled the value of his tandem Enron Corp. stock options. Effective September 30, 1996, a monthly retainer of $6,000 was approved for payment to Lord John Wakeham in consideration of his services to Enron and its affiliates relating to his advice and counsel on matters relating specifically to European business and operations. The services to be performed by Lord Wakeham pursuant to this monthly retainer arrangement do not include and are in addition to his duties as a director of Enron and the above compensation is in addition to the remuneration payable to Lord Wakeham as a member of the Board of Directors of Enron. For the year 2000, Enron paid Lord Wakeham $72,000 for services rendered to Enron Europe Limited. Enron Supply Corp., a subsidiary of Enron, and Lay/Wittenberg Travel Agency in the Park, Inc. ("TAP") are parties to an Agreement for Services under which TAP provides travel arrangements for Enron and its affiliates' employees. The agreement will expire on December 31, 2003. TAP is owned 50% by Sharon Lay, sister of Kenneth L. Lay, Chairman of the Board of Enron. During 2000, TAP received net revenue in the amount of $517,200 attributable to Enron employee travel. Herbert S. Winokur, Jr., a director of Enron, is affiliated with National Tank Company ("NATCO"), a privately owned company that is a provider of wellhead equipment, systems and services used in the 26 29 production of oil and gas. During the calendar year ended December 31, 2000, NATCO recorded revenues of $370,294 from sales to subsidiaries of Enron of oilfield equipment, services and spare parts in the ordinary course of business on terms that Enron believes are no less favorable than the terms of similar arrangements with third parties. Mr. Winokur's affiliation with NATCO arises out of his indirect management of two funds that own NATCO's indirect parent. In addition, Mr. Winokur is a minority limited partner of such funds. Enron believes that its subsidiaries and NATCO will continue to enter into similar arrangements throughout 2001. During 2000, certain Enron subsidiaries and affiliates (defined for purposes of the following paragraphs, "Enron") entered into a number of transactions with LJM2 Co-Investment, L.P. ("LJM2"), a private investment company that primarily engages in acquiring or investing in energy and communications-related investments, primarily involving either assets Enron had decided to sell or risk management activities intended to limit Enron's exposure to price and value fluctuations with respect to various assets. Andrew S. Fastow, Executive Vice President and Chief Financial Officer of Enron, is the managing member of LJM2's general partner. The general partner of LJM2 is entitled to receive a percentage of the profits of LJM2 in excess of the general partner's portion of the total capital contributed to LJM2, depending upon the performance of the investments made by LJM2. In ten of these transactions LJM2 acquired various debt and equity securities, or other ownership interests, from Enron that were directly or indirectly engaged in the domestic and/or international energy or communications business, while in one transaction LJM2 acquired dark fiber from an Enron subsidiary. The aggregate consideration agreed to be paid to Enron pursuant to these eleven transactions was approximately $213 million. Also during 2000, LJM2 sold to Enron certain merchant investment interests for a total consideration of approximately $76 million. Also, during 2000, Enron engaged in other transactions with LJM2 intended to manage price and value risk with regard to certain merchant and similar assets by entering into derivatives, including swaps, puts, and collars. As part of such risk management transactions, LJM2 purchased equity interests in four structured finance vehicles for a total of approximately $127 million. Enron, in turn, contributed a combination of assets, Enron notes payable, restricted shares of outstanding Enron stock (and the restricted right to receive additional Enron shares) in exchange for interests in the vehicles. Enron and LJM2 subsequently entered into derivative transactions through these four vehicles with a combined notional amount of approximately $2.1 billion. These transactions occurred in the ordinary course of Enron's business and were negotiated on an arm's length basis with senior officers of Enron other than Mr. Fastow. Management believes that the terms of the transactions were reasonable and no less favorable than the terms of similar arrangements with unrelated third parties. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Since 1996, Belco Oil & Gas Corp. ("BOGC") has entered into natural gas and crude oil commodity swap agreements and option agreements with Enron Capital & Trade Resources Corp., and its predecessor companies now known as, Enron North America Corp. ("ENA"). These agreements were entered into in the ordinary course of business of ENA and are on terms that ENA believes are no less favorable than the terms of similar arrangements with third parties. Pursuant to the terms of these agreements, in 2000, ENA received from BOGC a net amount of approximately $32,000,000 in settlement and a net amount of approximately $1,000,000 in option premiums. The amount of future payments (as well as whether payments are made by ENA to BOGC or vice versa) is affected by fluctuations in energy commodity prices. Enron believes that BOGC and ENA will continue to enter into similar arrangements throughout 2001. 27 30 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires Enron's officers, directors and persons who own more than 10% of the Common Stock or the Preferred Convertible Stock to file with the SEC reports of ownership and changes in ownership concerning the Common Stock or the Preferred Convertible Stock and to furnish Enron with copies of all Section 16(a) forms they file. Based upon Enron's review of the Section 16(a) filings that have been received by Enron, Enron believes that all filings required to be made under Section 16(a) during 2000 were timely made, except that three transactions, all reflecting the deemed acquisition and disposition of common stock upon the exercise of derivative phantom stock units on January 24, 2000, for either cash or phantom units in the deferral plan, for each of John C. Baxter, Richard B. Buy, Andrew S. Fastow, Mark A. Frevert and Kenneth D. Rice were not timely reported; one exempt stock option grant for J. Mark Metts and one exempt phantom stock unit grant for John Wakeham were not timely reported; and Lawrence Ruben did not timely file one report containing a private transaction with family members. ITEM 2. AMENDMENT OF AMENDED AND RESTATED ARTICLES OF INCORPORATION TO INCREASE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK (CONTINGENT UPON FUTURE DECLARATION OF STOCK SPLIT) The Board of Directors of Enron from time to time considers the possibility of declaring a stock split of the Enron Common Stock. However, as described below, Enron does not have a sufficient number of authorized shares of Common Stock to permit the Board of Directors to implement a 2-for-1 stock split. Therefore, at the Annual Meeting of Shareholders, there will be submitted for shareholder approval the resolutions described below that would, contingent upon a stock split of at least 2-for-1 being declared on or before May 1, 2003, amend the Amended and Restated Articles of Incorporation of Enron Corp. to increase the authorized number of shares of Common Stock that Enron has authority to issue from 1,200,000,000 shares to 2,400,000,000 shares (the "Charter Amendment"). Shareholder approval of the following resolutions is necessary in order to effect the Charter Amendment: RESOLVED, that the Amended and Restated Articles of Incorporation of Enron Corp. are hereby amended by amending the first paragraph of Article IV thereof to read in its entirety as follows: The total number of shares of all classes of stock which this Corporation shall have authority to issue is 2,416,500,000 shares of capital stock, of which 16,500,000 shares are Preferred Stock (the "Preferred Stock"), and 2,400,000,000 shares are Common Stock (the "Common Stock"). RESOLVED FURTHER, that the officers of Enron are hereby authorized, notwithstanding the authorization of the foregoing amendments by the shareholders of Enron, to execute and file the Articles of Amendment relating to such proposed amendment only if after May 1, 2001 and on or before May 1, 2003, Enron shall declare a 2-for-1 stock split effected as a dividend of one share of Common Stock for each outstanding share of Common Stock or a greater stock split effected as a dividend of shares of Common Stock on outstanding shares of Common Stock. If the Charter Amendment is adopted by the required vote of shareholders, it will become effective when the appropriate Articles of Amendment to the Amended and Restated Articles of Incorporation of Enron are filed. However, no Articles of Amendment will be filed unless on or prior to May 1, 2003, the Board of Directors declares at least a 2-for-1 stock split effected as a dividend. 28 31 If such a stock split is effected, each holder of record of Common Stock on the record date established by the Board of Directors will be entitled to receive a certificate representing the additional shares of Common Stock issuable pursuant to the stock split and the Common Stock certificates outstanding prior to the stock split will remain outstanding without any need for shareholders to return certificates to Enron or to the transfer agent. Enron has been advised by tax counsel that a stock split effected as a dividend on the Common Stock would result in no gain or loss or realization of taxable income to holders of Common Stock under existing federal income tax laws. Each shareholder's basis would be allocated on a pro rata basis among the shares held on the record date for the stock split and the new shares issued in the stock split and the holding period for the new shares would be deemed to be the same as the holding period for the shares held on the record date. Enron shareholders subject to taxation in jurisdictions other than the United States should consult their tax advisers regarding the tax treatment of stock splits in such jurisdictions. In accordance with the terms of Enron's convertible securities and various stock option and incentive plans, in the event of a stock split, appropriate adjustments will be made in the number of shares of Common Stock issuable and any applicable conversion or exercise price. REASONS FOR THE INCREASE IN NUMBER OF AUTHORIZED SHARES The Board of Directors believes that an increase in the number of authorized shares of Common Stock is beneficial in the event a 2-for-1 or greater stock split is declared. Enron is currently authorized to issue 1,200,000,000 shares of Common Stock, of which 758,598,801 were issued and outstanding and 151,758,865 were reserved for issuance at the close of business on February 28, 2001. As a result, Enron currently does not have enough authorized shares of Common Stock to effect a 2-for-1 stock split. Although the Charter Amendment will increase the total number of authorized shares of Common Stock by an amount greater than that necessary to effect a 2-for-1 stock split, the existing relative proportion of issued and reserved shares to unissued shares will not change materially in the case of a 2-for-1 stock split. The Charter Amendment will therefore ensure that Enron will continue to have additional shares available for future issuance from time to time for proper corporate purposes, including possible future acquisitions, stock option or other employee incentive plans or future stock splits effected as dividends. The additional shares could potentially be issued at times and under circumstances that could have a dilutive effect on earnings per share and on the equity ownership and voting power of the present holders of Common Stock. Although the flexibility of the Board of Directors to issue additional Common Stock could enhance the Board of Directors' ability to negotiate on behalf of the shareholders in a takeover situation and also could be used by the incumbent Board of Directors to make a change of control more difficult, the Board of Directors has no present intention of issuing any shares of Common Stock for any anti-takeover purpose. REQUIRED VOTE AND RECOMMENDATION The Charter Amendment will be approved at the Annual Meeting if the number of votes cast in favor of the Charter Amendment exceeds the number of votes cast opposing it. Under Oregon law, abstentions and broker non-votes will not be counted for or against this proposal. The shares represented by the proxies solicited by the Board of Directors will be voted as directed on the form of proxy or, if no direction is indicated, will be voted "FOR" the approval of this proposal. THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THIS PROPOSAL. 29 32 ITEM 3. APPROVAL OF AMENDED AND RESTATED 1991 STOCK PLAN The shareholders approved the Enron Corp. 1991 Stock Plan (the "1991 Stock Plan") at the 1991 Annual Meeting, approved an amendment to the 1991 Stock Plan, effective May 3, 1994, at the 1994 Annual Meeting, approved an amended and restated 1991 Stock Plan, effective May 6, 1997, at the 1997 Annual Meeting, and approved an amended and restated 1991 Stock Plan, effective May 4, 1999, at the 1999 Annual Meeting. The 1991 Stock Plan is intended to provide individual participants with an opportunity to acquire a proprietary interest in Enron and give them an additional incentive to use their best efforts for Enron's long- term success. The 1991 Stock Plan permits the granting of (i) stock options, including incentive stock options meeting the requirement of the Code, (ii) phantom stock units and (iii) restricted stock, any of which may be granted separately or together. Grants may be made to any employee (i) who is a resident of the United Kingdom, or (ii) who is a member of the Executive Committee of the Company, and any individual who is a Director of the Company duly elected by shareholders of the Company who is not an Employee at the time a grant is made. Of such eligible individuals, grants of Incentive Stock Options may be made only to Employees who are employees of the Company within the meaning of section 424(e) or (f) of the Internal Revenue Code. The 1991 Stock Plan is administered by the Compensation and Management Development Committee of the Board of Directors (the "Committee"), each of the members of which meet the definition of nonemployee director in Rule 16b-3 under the Exchange Act. The Committee has the authority to establish administrative rules, to designate individuals to receive awards and determine the size of such awards, and to set the terms and conditions of awards except for certain terms and conditions set out in the 1991 Stock Plan. Except for awards made to persons subject to Section 16 of the Exchange Act, the Committee may delegate to individuals in specified executive officer positions of the Company the authority to make and issue awards for a specified number of shares subject to the terms and provisions of the plan. Stock options permit the recipient to purchase shares of Common Stock, commonly referred to as exercising their option, at a fixed price, determined on the date of grant, regardless of the fair market value on the date of exercise. Upon the vesting of the phantom stock units, the holder is entitled to payment in shares of Common Stock at the rate of one share of Common Stock for each such unit, plus dividend equivalents accrued for such number of shares of Common Stock from the date of grant to the vesting date. Restricted stock is an award of shares of Common Stock which are potentially forfeitable. Restricted stock may provide the recipient all of the rights of an Enron shareholder including the right to vote the shares and accrue dividend equivalents from the date of grant to the vesting date (the date shares cease to be forfeitable). However, the stock may not be transferred by the recipient until certain restrictions, such as time, lapse. The 1991 Stock Plan contains several provisions so that certain awards under the plan qualify as performance-based compensation under Section 162(m). No individual can be granted more than 2,000,000 stock options in a calendar year, subject to adjustment for certain events affecting Enron Common Stock as provided for in the 1991 Stock Plan. The purchase price of a stock option cannot be less than the fair market value of a share on the date of grant. As of March 1, 2001, the closing price for Common Stock was $68.68 per share. A maximum of 200,000 shares of performance-based restricted stock can be granted to any individual in a calendar year, subject to adjustment for certain events affecting Enron Common Stock as provided for in the 1991 Stock Plan. The Committee is authorized to grant Awards of Restricted Stock which qualify as performance-based compensation under Code Section 162(m), provided that a) the issuance is contingent upon attainment of pre-established performance criteria; b) restrictions lapse contingent upon attainment of pre-established 30 33 performance criteria; or c) the issuance is in lieu of cash payments under the Enron Corp. Annual Incentive Plan or the Enron Corp. Performance Unit Plan, based upon attainment of the performance criteria established under the terms of those stockholder approved plans. The performance criteria to be used with such Awards shall be recurring after-tax net income and/or cash flow at the Company and/or subsidiary level and earnings per share and/or total shareholder return at the Company level as determined at the sole discretion of the Committee. Performance criteria will be established by the Committee prior to the beginning of each performance period, defined as January 1 of each year, or such later date as permitted under the Code or applicable regulations. "Recurring after-tax net income" means after-tax net income subject to adjustment by the Committee in its sole discretion for what the Committee considers an unordinary or nonrecurring items of after-tax net income. The Board of Directors cannot increase the number of shares authorized for granting awards under the 1991 Stock Plan, increase the maximum number of options that may be granted under Section 5.1 of the Plan or Shares of performance-based restricted stock that may be granted under Section 5.2(vi) and phantom stock units that may be granted under Section 5.2(vii) to any individual in a calendar year, change the minimum option price, extend the maximum period during which awards may be granted, change the class of participants eligible to receive awards or modify the material terms of the 1991 Stock Plan without obtaining shareholder approval.