1 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 sec. 240.14a-11(c) or sec. 240.14a-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)(l) 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 4, 1999 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 4, 1999, for the following purposes: 1. To elect sixteen 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 the Enron Corp. Annual Incentive Plan; 3. To approve the Amended and Restated Enron Corp. 1991 Stock Plan (as amended and restated effective May 4, 1999); 4. To approve, contingent upon Enron's declaring a stock split of at least 2-for-1 on or before May 4, 2001, a proposed amendment to Enron's Amended and Restated Articles of Incorporation to increase the total number of authorized shares of Common Stock from 600,000,000 to 1,200,000,000; 5. To ratify the Board of Directors' appointment of Arthur Andersen LLP, independent public accountants, as Enron's auditors for the year ending December 31, 1999; 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 8, 1999, 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, PEGGY B. MENCHACA Vice President and Secretary Houston, Texas March 30, 1999 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 4, 1999. 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 30, 1999. Any shareholder giving a proxy may revoke it at any time provided written notice of such revocation is received by the Vice President 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 8, 1999, 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 8, 1999, 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 13.652 shares of Common Stock for each share of Preferred Convertible Stock. On March 8, 1999, the record date, there were outstanding and entitled to vote at the annual meeting of shareholders 351,213,484 shares of Common Stock and 1,315,267 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, 1998, 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, sixteen 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 except Dr. John Mendelsohn. 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, 63 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. Mr. Belfer is also a director of NAC Re Corp. - ------------------------------------------------------------------------------------- [PHOTO] NORMAN P. BLAKE, JR., 57 Director since 1993 Mr. Blake is the Chairman, President and Chief Executive Officer of Promus Hotel Corporation. Mr. Blake served as Chairman, President, and CEO of USF & G Corporation, one of the nation's largest property and casualty insurers, from November, 1990 until it was merged with The St. Paul Companies, Inc. in 1998. He is a director and Vice Chairman of The St. Paul Companies, Inc. and director of Owens-Corning. - ------------------------------------------------------------------------------------- [PHOTO] RONNIE C. CHAN, 49 Director since 1996 For over eight years, Mr. Chan has been Chairman of Hang Lung Development Limited, a publicly traded Hong Kong based company involved in property development and investment as well as hotel development and management. Mr. Chan also co-founded and is a director of Morningside/Springfield Group, which invests in private industrial companies internationally, and he serves on the boards of Standard Chartered Bank PLC and Motorola, Inc. - ------------------------------------------------------------------------------------- 2 5 - ------------------------------------------------------------------------------------- [PHOTO] JOHN H. DUNCAN, 71 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.), Enron Oil & Gas Company ("EOG"), Chase Bank of Texas, National Association and Group I Automotive Inc. - ------------------------------------------------------------------------------------- [PHOTO] JOE H. FOY, 72 Director since 1985 Mr. Foy is a former President of Houston Natural Gas Corporation ("HNG") (a predecessor of Enron) and is a retired partner of Bracewell & Patterson L.L.P., Houston, Texas. For over five years prior to his retirement in 1992, Mr. Foy served as a Senior Partner at such firm. Mr. Foy is also a director of Central and South West Corporation. - ------------------------------------------------------------------------------------- [PHOTO] WENDY L. GRAMM, 54 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., the Chicago Mercantile Exchange and Invesco Funds Group, Inc. - ------------------------------------------------------------------------------------- 3 6 - ------------------------------------------------------------------------------------- [PHOTO] KEN L. HARRISON, 56 Director since 1997 Mr. Harrison has served as Vice Chairman of the Board of Enron since July 1, 1997, and since 1987, has served as Chairman of the Board and Chief Executive Officer of Portland General Electric Company ("PGE"), an electric utility company, and has served, since its inception in 1996, as Chairman of Enron Communications, Inc. Both of these companies are subsidiaries of Enron. Mr. Harrison served as Chairman of the Board, Chief Executive Officer, and President of Portland General Corporation, an electric utility holding company, for more than five years before it merged with Enron on July 1, 1997. He is also a director of EOG. - ------------------------------------------------------------------------------------- [PHOTO] ROBERT K. JAEDICKE, 70 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 also a director of Boise Cascade Corporation, California Water Service Company, GenCorp, Inc. and State Farm Insurance Co. - ------------------------------------------------------------------------------------- [PHOTO] KENNETH L. LAY, 56 Director since 1985 For over thirteen years, Mr. Lay has been Chairman of the Board and Chief Executive Officer of Enron. Mr. Lay is also a director of Eli Lilly and Company, Compaq Computer Corporation, EOG, EOTT Energy Corp. (the general partner of EOTT Energy Partners, L.P.) and Trust Company of the West. - ------------------------------------------------------------------------------------- 4 7 - ------------------------------------------------------------------------------------- [PHOTO] CHARLES A. LEMAISTRE, 75 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. - ------------------------------------------------------------------------------------- [PHOTO] JOHN MENDELSOHN, 62 Since July 1, 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 a director of ImClone Systems, Inc. Over the past five years, he also has served as an editor of professional publications and as a consultant or scientific advisory board member for a number of pharmaceutical companies and educational, non-profit and governmental institutions. - ------------------------------------------------------------------------------------- [PHOTO] JEROME J. MEYER, 61 Director since 1997 For over eight years, Mr. Meyer has served as Chairman and Chief Executive Officer and a director of Tektronix, Inc., an electronics manufacturer located in Wilsonville, Oregon. He is also a director of Standard Insurance Corp. and AMP, Incorporated. - ------------------------------------------------------------------------------------- 5 8 - ------------------------------------------------------------------------------------- [PHOTO] JEFFREY K. SKILLING, 45 Director since 1997 Since January 1, 1997, Mr. Skilling has served as President and Chief Operating Officer of Enron. From June, 1995 until December, 1996, he served as Chief Executive Officer and Managing Director of Enron Capital & Trade Resources Corp. ("ECT"). From August, 1990 until June, 1995, Mr. Skilling served ECT in a variety of senior managerial positions. Mr. Skilling is also a director of EOG. - ------------------------------------------------------------------------------------- [PHOTO] JOHN A. URQUHART, 70 Director since 1990 Mr. Urquhart serves as Senior Advisor to the Chairman of Enron. From 1991-1998, Mr. Urquhart was Vice Chairman of the Board of Enron. Since August, 1991, Mr. Urquhart has also been President of John A. Urquhart Associates, a management consulting firm in Fairfield, Connecticut. He also serves as a director of Aquarion Company, TECO Energy, Inc., Hubbell, Inc., The Weir Group, PLC and Catalytica Inc. - ------------------------------------------------------------------------------------- [PHOTO] JOHN WAKEHAM, 66 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., 55 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. and Capricorn Investors II, L.P., private investment partnerships concentrating on investments in restructure situations, organized by Mr. Winokur in 1987 and 1994, respectively. Prior to his current appointment, Mr. Winokur was Senior Executive Vice President and a director of Penn Central Corporation. Mr. Winokur is also a director of NAC Re Corporation, The WMF Group, Ltd., Mrs. Fields Holding Company, Inc., CCC Information Services Group, Inc. and DynCorp. - ------------------------------------------------------------------------------------- 6 9 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS As of February 15, 1999, 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 AND SOLE VOTING SHARED VOTING LIMITED AND AND OR NO PERCENT TITLE OF CLASS NAME AND ADDRESS INVESTMENT INVESTMENT INVESTMENT OF OF STOCK OF BENEFICIAL OWNER POWER POWER POWER OTHER CLASS - -------------- ------------------- ----------- ------------- ----------- --------- ------- Common Robert A. Belfer 4,546,904(1)(2) 20,541(3) 11,933(4)(5) 1.35 Preferred 767 Fifth Avenue Convertible New York, NY 10153 237,773(6) 1,052(7) 18.13 Common Mr. and Mrs. Lawrence Ruben 4,018,319(8) 777,811(9) 1.41 Preferred 600 Madison Avenue Convertible New York, NY 10022 230,760(10) 12,051(11) 18.44 Common Jack Saltz 1,409,865(12) 827,926(13) * Preferred 767 Fifth Avenue Convertible New York, NY 10153 72,207 59,550(14) 10.00 Common Enron Corp. 6,415,048(15) 1.91 Preferred Savings Plan Convertible 70,000(15) 5.32 - --------------- * Less than 1%. (1) Includes 13,248 shares held by trust of which Mr. Belfer is trustee, in all of which shares Mr. Belfer disclaims beneficial ownership. Also includes 3,246,076 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) 14,568 shares of Common Stock are subject to stock options exercisable within 60 days after February 15, 1999, which number is included in the number of shares shown as beneficially owned as of such date. (3) Includes 6,180 shares held by Mr. Belfer's wife. Also includes 14,361 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) Includes restricted shares of Common Stock held under Enron's 1991 Stock Plan (the "1991 Stock Plan"). Participants in the 1991 Stock Plan have sole voting power and no investment power for restricted shares awarded under the 1991 Stock Plan until such shares vest in accordance with 1991 Stock Plan provisions. After vesting, the participant has sole investment and voting powers. (5) Includes 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. (6) Includes 3,370 shares held by trusts of which Mr. Belfer is trustee, in all of which shares Mr. Belfer disclaims beneficial ownership. (7) Includes 625 shares held by Mr. Belfer's wife and 427 shares held by trusts of which Mr. Belfer is a co-trustee, in all of which shares Mr. Belfer disclaims beneficial ownership. (8) Includes 59 shares held as trustee or co-trustees for their children and 61,200 shares held by Mrs. Ruben as trustee for a charitable trust. Also includes 3,150,335 shares that would be acquired upon the conversion of the Preferred Convertible Stock. (9) Includes 41,091 shares held by Mr. Ruben as co-trustee for his children; 332,280 shares held by Mr. Ruben as co-trustee for his nieces and nephews; and 124,900 shares held by charitable foundations in which Mr. and Mrs. Ruben have no pecuniary interest. Also includes 164,520 shares that would be acquired upon the conversion of the Preferred Convertible Stock. (10) Includes 95,663 shares held by Mrs. Ruben as trustee for her children and 3,600 shares held by Mrs. Ruben as trustee for a charitable trust. (11) 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 and 1,000 shares held by charitable foundations in which Mr. and Mrs. Ruben have no pecuniary interest. (12) Includes 985,769 shares that would be acquired upon the conversion of the Preferred Convertible Stock. (Notes continue on following page) 7 10 (13) Includes 812,976 shares that would be acquired upon the conversion of the Preferred Convertible Stock. (14) Includes 58,900 shares held by Mr. Saltz's wife as trustee for their children and 650 shares held by a charitable foundation in which Mr. Salz has no pecuniary interest. (15) 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. Includes 955,640 shares that would be acquired upon the conversion of the Preferred Convertible Stock. >STOCK OWNERSHIP OF MANAGEMENT AND BOARD OF DIRECTORS AS OF FEBRUARY 15, 1999 AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP ------------------------------------------ SOLE SHARED SOLE VOTING VOTING VOTING AND LIMITED AND AND OR NO INVESTMENT INVESTMENT INVESTMENT PERCENT TITLE OF CLASS NAME POWER(1) POWER(1) POWER(2)(3) OF CLASS -------------- ---- ---------- ---------- ------------ -------- Enron Corp. Common Stock Robert A. Belfer........................... 4,546,904(4) 20,541(5) 11,933 1.35 Norman P. Blake, Jr........................ 19,371 278 * Ronnie C. Chan............................. 7,438 * John H. Duncan............................. 82,871 27,848 278 * Joe H. Foy................................. 30,328 278 * Ken L. Harrison............................ 193,785 62,545 * Robert K. Jaedicke......................... 25,024 278 * Kenneth L. Lay............................. 3,190,482 559,137(6) 117,511 1.14 Charles A. LeMaistre....................... 25,624 800 278 * Rebecca P. Mark............................ 441,209 84,220 * Jerome J. Meyer............................ 4,534 * Kenneth D. Rice............................ 301,664 1 66,058 * Jeffrey K. Skilling........................ 866,629 207,703 * Joseph W. Sutton........................... 272,880 454 75,919 * John A. Urquhart........................... 81,948 278 * John Wakeham............................... 4,392 180 * Charls E. Walker........................... 4,311 3,044(7) 278 * Herbert S. Winokur, Jr..................... 55,404 3,500(8) 278 * All directors and executive officers as a group (27 in number)..................... 13,888,041(4) 620,574(5) 770,707 4.39 Enron Corp. Preferred Con- vertible Stock Robert A. Belfer........................... 237,773(9) 1,052(10) 18.13 All directors and executive officers....... All directors and executive officers as a group (27 in number)..................... 237,773 1,052 18.13 Enron Oil & Gas Company Common Stock Robert A. Belfer........................... 15,800 22,600(11) * Norman P. Blake, Jr........................ 2,000 * John H. Duncan............................. 18,225 21,775 * Joe H. Foy................................. 7,000 * Ken L. Harrison............................ 1,300(12) 1,000 * Kenneth L. Lay............................. 20,000(12) 30,000 * Rebecca P. Mark............................ (12) * Kenneth D. Rice............................ 2,334 * Jeffrey K. Skilling........................ 100,000(12) * Charls E. Walker........................... 2,000 1,000 * All directors and executive officers as a group (27 in number)..................... 188,904(12) 76,375 17,683(13) * (Table continues on following page) 8 11 AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP ------------------------------------------ SOLE SHARED SOLE VOTING VOTING VOTING AND LIMITED AND AND OR NO INVESTMENT INVESTMENT INVESTMENT PERCENT TITLE OF CLASS NAME POWER(1) POWER(1) POWER(2)(3) OF CLASS -------------- ---- ---------- ---------- ------------ -------- EOTT Energy Partners, L.P. Common Units Norman P. Blake, Jr........................ 1,000 * John H. Duncan............................. 8,500 * Kenneth L. Lay............................. 5,000 * All directors and executive officers as a group (27 in number)..................... 9,500 5,000 * Northern Border Partners, L.P. Common Units Robert A. Belfer........................... 32,500 25,500(14) * Norman P. Blake............................ 1,500 * All directors and executive officers as a group (27 in number)..................... 34,000 25,500 * - --------------- * Less than 1%. (1) The number of shares of Common Stock subject to stock options exercisable within 60 days after February 15, 1999, which number is included in the number of shares shown as beneficially owned as of such date, is as follows: Mr. Belfer, 14,568 shares; Mr. Blake, 13,008 shares; Mr. Chan, 2,496 shares; Mr. Duncan, 23,208 shares, for which he has shared voting and investment power for 22,888 of such shares; Mr. Foy, 18,248 shares; Mr. Harrison, 190,202 shares; Dr. Jaedicke, 17,248 shares; Mr. Lay, 2,741,640 shares, for which he has shared voting and investment power for 188,846 of such shares; Dr. LeMaistre, 18,248 shares; Ms. Mark, 327,201 shares; Mr. Meyer, 1,360 shares; Mr. Rice, 207,257 shares; Mr. Skilling, 734,190 shares; Mr. Sutton, 255,627 shares; Mr. Urquhart, 74,818 shares; Lord Wakeham, 3,728 shares; Dr. Walker, 320 shares; Mr. Winokur, 18,248 shares; and all directors and executive officers as a group (27 in number), 7,975,092 shares. (2) Includes restricted shares of Common Stock held under Enron's 1991 and 1994 Stock Plans (the "Plans") for certain individuals. Participants in those 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. Total shares held by the group includes 5,584 shares with shared voting power. (4) Includes 13,248 shares held by a trust of which Mr. Belfer is trustee, in all of which shares Mr. Belfer disclaims beneficial ownership. Also includes 3,246,076 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 6,180 shares held by Mr. Belfer's wife. Also includes 14,361 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 195,600 shares held in a charitable foundation in which Mr. Lay has no pecuniary interest. (7) Shares owned by Dr. Walker's wife and in which Dr. Walker disclaims beneficial ownership. (8) Shares held in a charitable foundation in which Mr. Winokur has no pecuniary interest. (9) Includes 3,370 shares held by trusts of which Mr. Belfer is trustee, in all of which shares Mr. Belfer disclaims beneficial ownership. (10) Includes 625 shares held by Mr. Belfer's wife and 427 shares held by trusts of which Mr. Belfer is a co-trustee, in all of which shares Mr. Belfer disclaims beneficial ownership. (Notes continue on following page) 9 12 (11) Includes 20,000 shares held by trusts of which Mr. Belfer is co-trustee or his wife is trustee for their children and 2,600 shares held by his daughter, in all of which shares Mr. Belfer disclaims beneficial ownership and 3,000 shares held in a charitable foundation in which Mr. Belfer has no pecuniary interest. (12) Does not include 82,270,000 shares owned by Enron in which each of Messrs. Lay, Harrison, Skilling and Ms. Mark, in their capacities as Chairman of the Board, Vice Chairman of the Board, President and Vice Chairman, respectively, of Enron, has sole voting and investment power pursuant to the provisions of Enron's bylaws. (13) Total shares held by the group includes 472 shares with shared voting power. (14) Includes 19,500 shares held in trusts in which Mr. Belfer's son or wife is trustee or in which Mr. Belfer is trustee or a co-trustee, 3,000 shares held by Mr. Belfer's wife and 3,000 shares held in a charitable trust in which Mr. Belfer has no pecuniary interest. BOARD OF DIRECTORS AND COMMITTEES The Board of Directors held five regularly scheduled meetings and three special meetings during the year ended December 31, 1998. 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, 1998, the Executive Committee met 13 times. The Executive Committee is currently composed of Messrs. Duncan (Chairman), Belfer, Foy, Lay, LeMaistre, Skilling and Winokur. On May 4, 1998, the Board of Directors adopted the Corporate Governance Guidelines of the Board of Directors of Enron Corp. (the "Corporate Governance Guidelines"). The Corporate Governance Guidelines set forth procedures and guidelines to assist the Board of Directors in discharging its responsibilities to Enron and Enron's shareholders. The Corporate Governance Guidelines impose the following obligations on the Board of Directors: (i) approval of requirement of legal and ethical conduct by Enron, its officers, and employees, and (ii) approval of Enron corporate strategy and major management initiatives including general oversight of Enron's business. In addition, the Corporate Governance Guidelines set forth guidelines for selection, compensation and evaluation of the Board of Directors and senior executives of Enron, and require a succession plan with respect to senior executives. 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 serves as the overseer of Enron's financial reporting, internal controls, and compliance processes. At five meetings during the year ended December 31, 1998, the Audit and Compliance Committee met with the independent auditors, as well as Enron officers and employees who are responsible for legal, financial and accounting matters. In addition to recommending the appointment of the independent auditors to the Board of Directors, the Audit and Compliance Committee reviews the scope of and fees related to the audit, the accounting policies and reporting practices, contract and internal auditing and internal controls, compliance with Enron's policies regarding business conduct and other matters as deemed appropriate. The Audit and Compliance Committee is currently composed of Messrs. Jaedicke (Chairman), Chan, Foy, and Wakeham and Dr. Gramm. The Compensation and Management Development Committee's responsibility is to establish Enron's compensation strategy and ensure that the senior executives of Enron and its wholly owned affiliates 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 seven times during the year ended December 31, 1998, 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 and Jaedicke. 10 13 The Finance Committee serves as a monitor of Enron's financial activities. In meeting seven times during the year ended December 31, 1998, 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, changes in the risk management policy, transaction approval process and the policy for approval of guarantees, letters of credit, letters of indemnity and recommending action with regard thereto to the Board of Directors. The Finance Committee is currently composed of Messrs. Winokur (Chairman), Belfer, Blake, Chan, Meyer, Urquhart and Walker. The Nominating and Corporate Governance Committee has oversight for 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, and periodic evaluation of director independence and performance. This committee met three times during the year ended December 31, 1998. The Nominating and Corporate Governance Committee is currently composed of Messrs. Walker (Chairman), Meyer and Wakeham, and Dr. Gramm. 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 attended and $1,250 for each 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 1991 Stock Plan, as amended and restated effective May 6, 1997, ("the 1991 Stock Plan") in 1998 were $889,000, or an average of $63,500 per nonemployee director. Section 6.9 of the 1991 Stock Plan permits nonemployee directors whose ownership of 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, an opinion of counsel was submitted to the Committee indicating that Dr. Wendy Gramm, wife of Senator Phil Gramm, could have a material conflict of interest as a result of legislation that has been, or may be, introduced in the United States Senate involving electricity deregulation and other issues of direct concern to Enron and its subsidiaries if she continued participation in the 1991 Stock Plan and maintained ownership of Enron stock. Based on the opinion that her continued participation in the 1991 Stock Plan could be considered as a conflict of interest, Dr. Gramm's unvested restricted shares and options were canceled as of December 31, 1998, in accordance with the 1991 Stock Plan. As a result, Dr. Gramm will receive an additional service fee of $7,323 each quarter for 16 quarters following the date unvested restricted shares and options were cancelled. In lieu of future stock grants, Dr. Gramm will receive value equal to the stock grants stipulated under the 1991 Stock Plan which will be deposited in the Flexible Deferral Account of the 1994 Deferral Plan coincident with the grant date applicable to the stock grants stipulated under the 1991 Stock Plan. Additionally, all quarterly retainer fees and meeting fees will be paid in cash. Further, Dr. Gramm's phantom stock account in the 1994 Deferral Plan has been reinvested in the Flexible Deferral Account of the 1994 Deferral Plan effective January 1, 1999. Directors can elect to receive fees in cash, defer receipt of their fees to a later specified date under Enron's 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 Enron's 1994 Deferral Plan may elect to invest their deferrals among several different investment choices. During 1998, six directors elected to defer fees under Enron's 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 1996, 1997 and 1998 was the minimum rate of 12%. Three directors elected to receive their fees in a combination of phantom stock units and stock options in lieu of cash according to the terms of the 1991 Stock Plan. During 1998, each nonemployee director received 400 shares of phantom stock units (valued at $53 per share on the date of grant) and options to purchase 1,600 shares (with an exercise price of $53 per share) according to the terms of the 1991 Stock 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 executive officers. The basic philosophy behind executive compensation at Enron is to reward the executive's performance that creates long-term shareholder value. This pay-for-performance tenet is embedded in most aspects of an executive's total compensation package. Salary increases, annual incentive awards and long-term incentive grants are reviewed periodically to ensure consistency with Enron's total compensation philosophy. Base Salary All decisions regarding base salary are made based upon individual performance as measured against pre-established individual objectives and competitive practice as measured by periodic compensation surveys. In the past, Enron has conducted a bi-annual executive compensation study covering the top 25 to 30 executive positions in the top corporate and operating company positions. In October, 1998, the Committee utilized the services of Towers Perrin, a consulting firm experienced in executive compensation, to conduct an expanded executive compensation study covering the top executives who have received long-term compensation grants. Corporate positions were benchmarked using the companies from a variety of industries with revenues from $20 billion to $30 billion because the Committee felt that this provided more comparable data for measuring corporate compensation. Operating company positions were benchmarked according to revenue size using data collected from sources best representing their specific markets. For example, Enron Capital & Trade Resources Corp.'s ("ECT") positions were benchmarked with financial institutions, brokerage firms, and energy marketing and trading firms while Enron International Inc.("EI") was benchmarked with pipeline companies, business development and engineering and construction firms with an international focus, and various financial institutions to represent EI's expertise at obtaining project financing. Base salaries for all positions are targeted at the median of the respective markets. Annual Incentive Awards In 1999, the Annual Incentive Plan will be 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 will be funded as a percentage of recurring after-tax net income as approved by the Committee and the shareholders and is based on company performance and competitive industry practice. Downward adjustment of the fund is at the sole discretion of the Committee and is based on performance against other goals such as earnings per share, cash flow, strengthening the balance sheet and total shareholder return. These factors are not weighted, but are applied 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. All decisions regarding individual incentive awards are made based upon individual performance as measured against pre-established individual objectives and competitive practice as measured by compensation surveys, but in no event will an individual incentive award exceed the specified percentage of recurring after-tax net income as established by the Committee and approved by shareholders. Under the Annual Incentive Plan, awards can be made in any combination of cash, stock and stock options. Annual incentive awards are intended to result in total cash compensation (base salary plus annual incentive) at the top quartile of the industry comparator group, given 13 16 top quartile performance. Based upon Enron's 1998 performance and the last compensation survey described above, this objective was met. Long-Term Incentive Grants Long-term incentive grants are targeted at the top quartile of the specific industry comparator group for corporate and operating company executive compensation participants. Long-term grants are typically made up of any combination of performance units, stock options, and/or performance based restricted stock. For ECT executives, the long-term component of their total compensation package is made up of grants of stock options and phantom stock units. The phantom stock units are granted under the ECT Phantom Stock Unit Plan. In the past, Enron has typically granted performance units to corporate and certain operating company executives which compare Enron's total shareholder return to peer group performance over a four-year period. Under this program, in order for top quartile compensation to be realized, the total shareholder return of Enron must rank at least third among the peer group of 11 companies for the four-year period. Although Enron's relative performance to its peers is an important measure, it has become more difficult to identify the most appropriate peer group for a company with Enron's diversified lines of business. Also, due to the changes associated with increased merger and acquisition activity, peer group performance is much more volatile without directly being tied to the efforts of executive management. Enron's desire is to (a) ensure executive retention where performance warrants, (b) compensate top executives based on performance relative to the aggressive performance goals set at the beginning of each year and which the company's executives directly control, and (c) provide long-term compensation programs most effective in creating a link between executive and shareholder financial returns. As a result, for the 1999 long-term grants to corporate and certain operating company executives, performance based restricted stock and stock options have been utilized. Aggregate stock holdings of the executives have no bearing on the size of long-term incentive grants. The ultimate value of the performance based restricted stock awards to executives depends upon the achievement of recurring after-tax net income targets established by the Committee for the years 1999, 2000 and 2001 and Enron's stock price. Stock options are granted at market price; therefore, for any compensation to be realized pursuant to stock options, the market price of Common Stock must increase. Total Compensation Approximately 75% of the total compensation of Enron's most senior executives is "at risk", based strictly upon the performance of Enron relative to stated recurring after-tax net income targets, stock price performance and total shareholder return which impacts grants of performance units which are still outstanding. Also, several significant elements in the employee benefit package, the Enron Corp. Employee Stock Ownership Plan, Enron Corp. Savings Plan and Portland General Holdings Retirement Savings Plan (which together hold approximately 5.9% of Common Stock as of December 31, 1998), the Bonus Stock Option and Phantom Stock Deferral Programs and the All-Employee Stock Option Program ("AESOP"), are driven by increasing shareholder value. Inherent in this "at-risk" component is a heavy weighting toward long-term performance. We believe this feature provides Enron management with a long-term strategic incentive that will encourage the continued creation of shareholder value. In addition, the Committee has approved stock ownership guidelines which provide that each member of the Office of the Chairman is required to own Enron stock having a value equal to at least five times his or her annual base salary, each Management Committee member is required to own Enron stock having a value equal to at least two times his or her annual base salary, and other principal 14 17 corporate and operating officers named in the annual report to shareholders are required to own Enron stock having a value equal to at least his or her annual base salary. For purposes of these guidelines, ownership includes grants of restricted stock but does not include grants of stock options. The Committee consults from time to time with Towers Perrin which has access to national compensation surveys and financial records of Enron. The Committee reviews all elements of executive compensation to ensure that the total compensation delivered is reflective of company performance with input on market competitiveness. The executive compensation program is designed to provide top quartile compensation for top quartile performance. Through the Towers Perrin study which was recently conducted, the Committee confirmed that Enron's total direct compensation levels are competitive with the targeted objective. 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 executives. In 1998, Mr. Lay received a $100,000, or 8.3%, increase in base salary. Mr. Lay's base salary on May 1, 1998 was $1,300,000. Since Mr. Lay's base salary exceeds $1,000,000, base salary in excess of this amount is deferred into Enron's 1994 Deferral Plan to preserve tax deductibility under Section 162(m) of the Internal Revenue Code. (See "Compliance with Internal Revenue Code Section 162(m)" below.) In recognition of Enron's extremely strong performance during 1998 relative to recurring after-tax net income, Mr. Lay received an annual incentive award consisting of $3,150,000 in cash. The Committee determined the amount of the annual incentive award taking into consideration the annual performance report presented by management, which reflected an increase in total recurring net income of 35% from the previous year, Enron's increase in earnings per share of over 14%, and a shareholder return of 39.6%, compared to 2.9% for Enron's proxy peer group, 28.3% for the Standard & Poors 500 ("S&P 500") and 18.1% for the Dow Jones Industrial Average. In addition to the annual incentive award, at the end of 1998, 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 295,325 common shares, and a grant of 68,057 shares of performance based restricted stock. The performance based restricted stock will vest and be released on January 31, 2002 as follows: (a) 33 1/3% of the shares will vest and be released if earnings targets are met in any one year of the three-year period 1999, 2000 and 2001, (b) 66 2/3% of the shares will vest and be released if earnings targets are met in any two years of the three-year period 1999, 2000 and 2001, and (c) 100% of the shares will vest and be released if earnings targets are met in each year of the three-year period 1999, 2000 and 2001 or cumulatively over the three-year period 1999, 2000, and 2001. Shares of performance based restricted stock which do not become vested according to the above provisions will be canceled. Also, the accelerated vesting provisions were triggered on (1) Mr. Lay's February 8, 1994 stock option award since Enron's 1998 recurring earnings per share goal was met and (2) Mr. Lay's December, 1996 and January, 1997 grants since Enron's total shareholder return for 1998 of 39.6% was higher than the 1998 S&P 500 performance. Mr. Lay did not receive a cash payment under the Performance Unit Plan for the 1995-1998 performance period. Payments are made under the Performance Unit Plan only if Enron's total shareholder return ranks at least sixth out of 12 industry peers for the four-year performance period. During the measurement period from 1995-1998, Enron's return to its shareholders was 98.4% compared with 128.85% for industry peers, 180.8% for the S&P 500, and 20.5% for 90-day U.S. Treasury Bills. This performance earned Enron a ranking of seventh and therefore, the units had no value. 15 18 Compliance with Internal Revenue Code Section 162(m) Section 162(m) of the Internal Revenue Code, as amended ("Section 162(m)"), 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 the performance based portion of the compensation for most of its executive officers (which currently consists of stock options grants, performance based restricted stock grants and annual incentive awards) in a manner that complies with the statute. The Amended and Restated 1991 Stock Plan, the Amended and Restated Performance Unit Plan, and the Annual Incentive Plan were presented to and approved by shareholders at the 1997, 1995 and 1994 Annual Meetings of Shareholders, respectively. The Annual Incentive Plan is being presented to shareholders for approval in 1999, which is required every five years under Section 162(m) when no funding formula has been specified. The recommended changes are to establish a specific funding formula as a percentage of recurring after-tax net income, to specify Section 16 officers as participants, and to specify an individual limit for payouts. Occasionally, Enron may grant restricted stock with time based vesting for specific reasons which would not qualify as performance based compensation. Also, the ECT Phantom Stock Unit Plan has not been submitted to shareholders for approval and therefore does not qualify as performance based compensation under Section 162(m). Summary Executive compensation at Enron is taken seriously by the Committee, the Board of Directors and senior management. The Committee believes that there has been a strong link between the success of the shareholder and the rewards of the executives. This success is evidenced by the increase in shareholder value from 1989 to 1998, during which time a shareholder who invested $100 in the Common Stock would have received $715, or a 715% increase in value, compared to 468% for the S&P 500 and 319% for industry peers. The Committee believes that with the present plan designs, management will continue to strive to increase shareholder value. Compensation and Management Development Committee Charles A. LeMaistre (Chairman) Norman P. Blake John H. Duncan Robert K. Jaedicke 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. $10,000 was invested in Enron Common Stock, the S&P 500, and the peer group as referenced below on December 31, 1993. 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 comprise Enron's peer group are as follows: BP Amoco Corporation; British Gas PLC; The Coastal Corporation; Columbia Energy Group; Consolidated Natural Gas Company; Duke Energy Corporation; Occidental Petroleum Corporation; El Paso Energy Corporation; Sonat Inc.; Dynegy Inc.; 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. COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN Enron Corp., S&P 500 and Peer Group (Performance Results Through December 31, 1998) [PERFORMANCE GRAPH] Measurement Period (Fiscal Year Covered) Enron Corp. S&P 500 Peer Group 1993 10000 10000 10000 1994 10781 10123 9980 1995 13763 13885 12897 1996 15880 17034 18443 1997 15641 22672 23608 1998 21836 29098 24288 1997 1998 On a ten-year basis, $10,000 invested in Common Stock on December 31, 1988 would provide a return to shareholders of 715% through December 31, 1998, as compared to an investment in the S&P 500, which would yield a return of 468%, or Enron's peer group which would yield a return of 319% for the same time period. 17 20 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 -------------------------------------- ---------------------------------------- OTHER RESTRICTED SECURITIES ANNUAL STOCK UNDERLYING LTIP SALARY BONUS COMPENSATION AWARDS OPTIONS/ PAYOUTS NAME & PRINCIPAL POSITION YEAR $ $ ($)(1) ($)(2) SARS (#) ($)(14) ------------------------- ---- ---------- ---------- ------------ ------------ ---------- ---------- Kenneth L. Lay 1998 $1,266,667 $3,150,000 $ 160,292 $ 3,883,503(4) 374,815 $ -- Chairman of the Board and 1997 $1,200,000 $ 475,000 $ 228,847 $ -- 950,460(13) $ -- Chief Executive Officer, Enron 1996 $ 990,000 $1,620,864 $ 162,399 $ -- 920,660(13) $ -- Jeffrey K. Skilling 1998 $ 816,667 $2,250,000 $ 23,949 $ 1,764,544(4) 293,165 $ -- President and Chief 1997 $ 750,000 $ 450,000 $ 22,525 $10,230,268(5) 1,000,000(13) $ -- Operating Officer, Enron 1996 $ 423,333 $ 800,000 $ 15,061 $ 5,999,989(6) 358,905(13) $ -- Rebecca P. Mark 1998 $ 660,833 $1,750,000 $1,733,562 $ 298,450(7) 450,000 $3,924,481 Vice Chairman, Enron and 1997 $ 506,252 $ 184,500 $ 91,859 $ 7,079,783(8) 432,322(8) $1,747,172 Chairman and Chief 1996 $ 423,342 $ 100,000 $ 14,054 $ 3,945,869(9) 125,000(9) $2,098,340 Executive Officer, Azurix Joseph W. Sutton 1998 $ 512,084 $1,212,250 $ 13,500 $ -- 274,390 $2,940,860 Chairman and Chief Executive 1997 $ 442,709 $1,089,500 $ 8,100 $ 4,354,423(8) 285,483(8) $1,303,479 Officer, Enron International Inc. 1996 $ 370,000 $ 50,000 $ 19,820 $ 2,951,060(9) 100,000(9) $1,399,975 Kenneth D. Rice 1998 $ 362,500 $1,100,000 $ 9,000 $ 2,503,766(10) 248,775 $ -- Chairman and Chief 1997 $ 300,000 $ 850,000 $ 2,400 $ 111,740(11) 160,351(13) $ -- Executive Officer, 1996 $ 300,000 $ 425,000 $ 12,556 $ 6,199,982(12) 71,800(13) $ -- Enron Capital & Trade Resources Corp. ALL OTHER COMPENSATION ------------ NAME & PRINCIPAL POSITION ($)(3) ------------------------- ------------ Kenneth L. Lay $ 554,904 Chairman of the Board and $ 545,264 Chief Executive Officer, Enron $ 281,368 Jeffrey K. Skilling $ 114,055 President and Chief $ 107,673 Operating Officer, Enron $ 1,103 Rebecca P. Mark $ 70,051 Vice Chairman, Enron and $ 90,453 Chairman and Chief $ 101,984 Executive Officer, Azurix Joseph W. Sutton $ 116,088 Chairman and Chief Executive $ 47,415 Officer, Enron International Inc. $ 55,935 Kenneth D. Rice $ 4,342 Chairman and Chief $ 250,612 Executive Officer, $ 501,715 Enron Capital & Trade Resources Corp. - --------------- (1) Includes perquisites and other personal benefits if value is greater than the lesser of $50,000 or 10% of reported salary and bonus. Personal plane usage of $116,712, $192,847, and $107,548 has been reported for Mr. Lay in 1996, 1997 and 1998, respectively. Personal plane usage of $78,759 and $62,419 has been reported for Ms. Mark in 1997 and 1998, 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 1996, 1997 and 1998 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 1996, 1997, and 1998, 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 1, 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 1996, 1997 and 1998. Other Annual Compensation also includes cash perquisite allowances and cash paid for benefits lost due to statutory and/or plan earnings limits. Principal and accrued interest totaling $955,343 on a personal executive loan extended to Ms. Mark during 1997 was forgiven during 1998. In 1999, additional loan forgiveness of $700,000 was provided to Ms. Mark associated with a personal executive loan made to her during 1998. (2) The following is the aggregate total number of shares in unreleased restricted stock holdings and their value as of December 31, 1998 for each of the Named Officers: Mr. Lay, 68,057 shares valued at $3,883,503; Mr. Skilling, 206,361 shares valued at $11,775,475; Ms. Mark, 144,979 shares valued at $8,272,864; Mr. Sutton, 89,088 shares valued at $5,083,584; and Mr. Rice, 108,182 shares valued at $6,173,135. 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 1996 and 1998, of Common Stock allocated during those years to employees' special subaccounts under the Enron Corp. Employee Stock Ownership Plan, and 1998 matching contributions on employees' Enron Corp. Savings Plan account. Included in 1996, 1997 and 1998 for Mr. Lay is $3,775, $4,388, and $5,109, respectively, that is (Notes continue on following page) 18 21 attributable to term life insurance coverage pursuant to split-dollar life insurance arrangements. Also included in 1996, 1997 and 1998 for Mr. Lay is $276,490, $275,877, and $280,265, respectively, 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 1997 and 1998 for Mr. Lay is $14,999 and $16,170, 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. Included in 1997 and 1998 for Mr. Skilling is a cash payment by Enron of $107,673 and $110,192, 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. Pursuant to Mr. Rice's employment agreement, he received retention payments of $500,000 in August 1996, and $250,000 in January 1997. (4) Represents performance based restricted stock which was granted in lieu of performance units for the 1999-2002 performance period. Assuming continuous employment with the Company, the award will become vested and will be released January 31, 2002 as follows: (a) 33 1/3% of the total number of shares granted will vest and be released if earnings targets, as set by the Board of Directors at its sole discretion, are met in any one year of the three-year period 1999, 2000 and 2001, (b) 66 2/3% of the total number of shares granted will vest and be released if earnings targets, as set by the Board of Directors at its sole discretion, are met in any two years of the three-year period 1999, 2000 and 2001, and (c) 100% of the total number of shares granted will vest and be released if earnings targets, as set by the Board of Directors at its sole discretion, are met in each of the three years or cumulatively over the three-year period 1999, 2000 and 2001. Shares of restricted stock which do not become vested according to the above provisions will be canceled. (5) Represents restricted stock awarded to Mr. Skilling on October 13, 1997. Restricted stock vested 33 1/3% on October 13, 1998, and the remainder will vest on October 13, 1999 and October 13, 2000. (6) Restricted stock was awarded to Mr. Skilling on January 23, 1996, as a result of the termination of the ECT Executive Compensation Plan (the "ECT Executive Compensation Plan") and his rights related thereto, became 66.7% vested on July 23, 1996, and 100% vested on December 1, 1996. (7) Restricted stock was awarded to Ms. Mark on January 19, 1998 which was to vest 33 1/3% on each January 31 of 1999, 2000 and 2001 with an accelerated vesting feature allowing for the vesting and release of 100% of the total number of shares if in 1998 Enron's actual recurring diluted earnings per share ("EPS") exceeded actual 1997 recurring diluted EPS performance. The shares were vested and released on January 31, 1999 as Enron exceeded its 1997 EPS performance in 1998. (8) Restricted stock and options were granted to Ms. Mark and Mr. Sutton on February 10, 1997 as a buyout of their fixed participation interests in the Enron Development Corp. Project Participation Plan (the "Project Participation Plan"). The restricted stock was to vest 20% at grant and 20% per year on each of the first four anniversaries if EI met its earnings targets each year through the year 2000, as stated in the 1997-2001 five-year plan. In consideration of promotions and contract extensions initiated during 1998 for Ms. Mark and Mr. Sutton, the vesting schedule was revised such that 60% of the restricted shares granted would vest 50% on January 31, 1999 and 50% on January 31, 2000. Ms. Mark's restricted shares will continue to vest regardless of EI earnings performance and employment status or reason for termination. Mr. Sutton's restricted shares will vest contingent upon continued employment. The stock options granted February 10, 1997, were to vest 20% at grant and 20% on each anniversary date thereafter. To provide further consideration for contract extension, the vesting was accelerated by 12 months, such that the remaining 60% of the options granted would vest 50% on January 1, 1999 and 50% on January 1, 2000. In the event of termination, for any reason, prior to January 1, 2000, the unvested options shall become fully vested. In the event of termination for any reason, Ms. Mark and Mr. Sutton shall have the lesser of three years or the remaining term of the options to exercise their options. (9) Restricted stock and options were granted to Ms. Mark and Mr. Sutton on February 12, 1996 for entering into employment agreements and to replace variable project participation interests under the Project Participation Plan. The restricted shares were to vest conditioned upon meeting certain Enron after-tax net income and EI aggregate project net present value targets. In consideration of promotions and contract extensions, a revised vesting schedule was approved which provides that unvested restricted shares would vest 50% on January 31, 1999 and 50% on January 31, 2000 tied to EI meeting earnings targets in 1998 and 1999. The stock options were to vest 25% at grant and 75% on February 12, 2001 with an acceleration feature on the condition that Enron met the EPS targets set by the Board of Directors for 1996, 1997 and 1998 with 25% vesting on February 1, 1997, February 1, 1998, and February 1, 1999, respectively. In consideration of promotions and contract extensions initiated during 1998 for Ms. Mark and Mr. Sutton, the vesting schedule was revised such that 50% of the restricted shares granted would vest 50% on January 1, 1999 and 50% on January 1, 2000 with vesting no longer tied to EPS targets or employment. In the event of termination, for any reason, prior to January 1, 2000, the unvested options shall become fully vested. In the event of termination for any reason, Ms. Mark and Mr. Sutton shall have the lesser of three years or the remaining term of the options to exercise their options. (Notes continue on following page) 19 22 (10) Mr. Rice received a grant of 40,051 restricted shares on August 10, 1998 in lieu of cash compensation, which vests based upon the ratio of ECT actual earnings to target earnings that are achieved for the year ending on December 31, 1998 and each subsequent December 31 ending on or before December 31, 2002. Shares will be released on January 31, following the end of the calendar year as follows: 0% if ECT earnings ratio is less than 80%; 15% if ratio is more than 80% but less than 95%; 20% if the ratio is more than 95% but less than 105%; 33 1/3% if the ratio is more than 105%, but less than 120%; and 40% if the ratio is more than 120%. On January 31, 1999, 33 1/3% of the shares became vested, and were released. Mr. Rice also received a separate grant of 13,240 phantom shares on January 19, 1998 in lieu of 50% of his 1997 cash bonus. (11) Represents award of performance based restricted shares granted on January 21, 1997 which vest three years from date of grant contingent upon ECT meeting earnings objectives. (12) Represents restricted stock awarded to Mr. Rice on January 23, 1996, as a result of the termination of the ECT Executive Compensation Plan. As of January 1, 1999, the award is 84.47% vested and the remaining shares will vest January 1, 2000. (13) The following executives elected to receive or received on a mandatory basis, stock options in lieu of a portion of their cash bonus payments as follows: Mr. Lay received grants of 73,850 options in 1996, and 56,545 options in 1997; Mr. Skilling received grants of 9,440 options in 1996, and 27,910 options in 1997; and Mr. Rice received grants of 31,800 options in 1996, and 19,280 options in 1997. Additionally, Mr. Skilling received a grant of 972,090 stock options on October 13, 1997 which vested 20% on the date of grant and vest 20% on each grant date anniversary thereafter. (14) Reflects project completion bonus payments through the Project Participation Plan. Included for Mr. Sutton are buyout payments of $147,200 paid in 1996 and 1997, representing buyout value for Mr. Sutton's Enron Power Corp. phantom appreciation grant. STOCK OPTION GRANTS DURING 1998 The following table sets forth information with respect to grants of stock options pursuant to the Enron Corp. 1991 Stock Plan to the Named Officers reflected in the Summary Compensation Table. No stock appreciation rights ("SARs") were granted during 1998. INDIVIDUAL GRANTS ------------------------------------ NUMBER OF SECURITIES POTENTIAL REALIZABLE VALUE AT UNDERLYING % OF TOTAL ASSUMED ANNUAL RATES OF OPTIONS/ OPTIONS/SARS EXERCISE STOCK PRICE APPRECIATION SARS GRANTED TO OR BASE FOR OPTION TERM(1) GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------------------------- NAME (#)(2) FISCAL YEAR ($/SH) DATE 0%(3) 5% 10% ---- ---------- ------------ -------- ---------- ----- -------------- -------------- Kenneth L. Lay....... 79,490(4) 1.01% $40.1250 1/19/05.. $0 $ 1,298,462 $ 3,025,968 295,325(5) 3.76% $57.0625 12/31/05 $0 $ 6,860,450 $ 15,987,765 Jeffrey K. Skilling........... 102,565(4) 1.31% $40.0000 1/5/08 $0 $ 2,580,104 $ 6,538,488 56,415(4) 0.72% $40.1250 1/19/05 $0 $ 921,534 $ 2,147,566 134,185(5) 1.71% $57.0625 12/31/05 $0 $ 3,117,141 $ 7,264,262 Rebecca P. Mark...... 100,000(6) 1.27% $50.0625 5/4/08 $0 $ 3,148,404 $ 7,978,674 350,000(7) 4.46% $50.0625 5/4/08 $0 $ 11,019,414 $ 27,925,357 Joseph W. Sutton..... 100,000(7) 1.27% $49.6250 6/22/08 $0 $ 3,120,890 $ 7,908,947 100,000(8) 1.27% $49.6250 6/22/08 $0 $ 3,120,890 $ 7,908,947 74,390(9) 0.95% $57.0625 12/31/08 $0 $ 2,669,582 $ 6,765,245 Kenneth D. Rice...... 100,000(10) 1.27% $49.2500 8/10/08 $0 $ 3,097,307 $ 7,849,182 148,775(10) 1.90% $57.0625 12/31/08 $0 $ 5,338,985 $ 13,530,035 All Employee and Director Optionees.......... 7,850,833(11) 100% $49.9120(12) N/A $0 $ 246,432,938(13) $ 624,509,428(13) All Shareholders..... N/A N/A N/A N/A $0 $10,386,143,976(13) $26,320,527,193(13) Optionee Gain as % of Gain............... N/A N/A N/A N/A N/A 2.37% 2.37% (See Notes on following page) 20 23 - --------------- (1) The dollar amounts under these columns represent the potential realizable value of each grant of options assuming that the market price of 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 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 5, 1998, or January 19, 1998. Options vested 20% on date of grant, and will vest 20% on each grant date anniversary thereafter. (5) Represents stock options awarded under the Long-Term Incentive Program for 1999. Stock options awarded on December 31, 1998 vested 25% on the date of grant and will vest 25% on each grant date anniversary thereafter. (6) Represents stock options awarded on May 4, 1998, which vested 33 1/3% on January 1, 1999, and will vest 33 1/3% on each grant date anniversary thereafter. (7) Represents stock options awarded on May 4, 1998 for Ms. Mark and June 22, 1998 for Mr. Sutton, which will vest 33 1/3% on May 4, 1999, and 33 1/3% on each grant date anniversary thereafter. (8) Represents stock options awarded on June 22, 1998, which vested 25% on December 31, 1998, and will vest 25% on each December 31 thereafter. (9) Represents stock options awarded on December 31, 1998, which vest 25% on December 31, 1999, and 25% on each grant date anniversary thereafter. (10) Represents 100,000 stock options awarded on August 10, 1998 and 148,775 stock options awarded on December 31, 1998 which vested 20% on December 31, 1998 and will vest 20% on each December 31 thereafter. (11) Includes options awarded on December 31, 1998 under the All Employee Stock Option Program to employees hired during 1998. (12) Weighted average exercise price of all Enron stock options granted to employees in 1998. (13) 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 ($49.9120) and the number of shares of Common Stock acquired and outstanding on December 31, 1998. AGGREGATED STOCK OPTION/SAR EXERCISES DURING 1998 AND STOCK OPTION/SAR VALUES AS OF DECEMBER 31, 1998 The following table sets forth information with respect to the Named Officers concerning the exercise of SARs and options during the last fiscal year and unexercised options and SARs held as of the end of the fiscal year: NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS AT SHARES DECEMBER 31, 1998 DECEMBER 31, 1998 ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ----------- ----------- ------------- ----------- ------------- Kenneth L. Lay........... 347,900 $13,094,776 3,155,462 1,264,043 $66,384,312 $15,031,658 Jeffrey K. Skilling...... 187,298 $ 2,886,028 655,751 1,102,284 $11,627,090 $19,602,307 Rebecca P. Mark.......... 40,919 $ 464,332 207,403 775,115 $ 3,467,078 $ 8,588,037 Joseph W. Sutton......... -- $ -- 198,530 473,013 $ 3,193,590 $ 5,054,586 Kenneth D. Rice.......... 16,620 $ 341,086 195,257 306,999 $ 3,113,772 $ 2,769,976 21 24 LONG-TERM INCENTIVE PLAN -- AWARDS IN 1998 The following table provides information concerning Long-Term Incentive Plan awards for the 1998-2001 performance period: PERFORMANCE NUMBER OF OR OTHER ESTIMATED FUTURE PAYOUTS SHARES, UNITS PERIOD UNTIL UNDER NON-STOCK PRICE-BASED PLANS OR OTHER MATURATION -------------------------------------- NAME RIGHTS(#) PAYOUT THRESHOLD($) TARGET($) MAXIMUM($) - ---- ------------- ------------ ------------ ---------- ---------- Kenneth L. Lay.................. 2,500,000(1) 4 years $ -- $2,500,000 $5,000,000 Jeffrey K. Skilling............. 1,000,000(1) 4 years $ -- $1,000,000 $2,000,000 - --------------- (1) Represents performance units awarded under the Performance Unit Plan of Enron for the 1998-2001 performance period. Grants were made at the beginning of the fiscal year 1998 and each unit was assigned a value of $1.00. The units are subject to a four-year performance period, at the end of which Enron's total shareholder return is compared to that of the 11 peer companies included in the current peer group. At that time, the units are assigned a value ranging from $0 to $2.00 based on the rank of Enron's shareholder return within the current peer group. To be valued at the maximum of $2.00, Enron must rank first, and to be valued at the target of $1.00, Enron must rank third. Regardless of Enron's rank, Enron's shareholder return must be above the return on 90-day U.S. Treasury Bills over the same performance period in order for any value to be assigned. RETIREMENT AND SUPPLEMENTAL BENEFIT PLANS Enron maintains the Enron Corp. Cash Balance Plan (the "Cash Balance Plan") which is a noncontributory defined benefit 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 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. 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 assure payments to certain employees of that retirement income that would be provided under the Cash Balance Plan except for the dollar limitation on accrued benefits imposed by the Internal Revenue Code of 1986, as amended (the "Code") and a pension program for deferral plan participants that provides supplemental retirement benefits equal to any reduction in benefits due to deferral of salary into Enron's Deferral Plans. 22 25 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 COVERED PAYABLE UPON NAME SERVICE AT AGE 65 BY PLANS RETIREMENT ---- -------- --------- ------------ -------------- Kenneth L. Lay.......................... 21.9 30.2 $1,266,667 $473,556 Jeffrey K. Skilling..................... 8.4 28.3 $ 816,667 $277,226 Rebecca P. Mark......................... 15.7 36.3 $ 660,833 $295,283 Joseph W. Sutton........................ 6.5 20.2 $ 512,084 $100,731 Kenneth D. Rice......................... 18.0 42.6 $ 362,500 $215,446 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). Mr. Lay has an agreement which was entered into with Houston Natural Gas Corporation ("HNG") for an annual benefit equal to 30% of his annual base salary upon death before retirement, paid for the life of his spouse. 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 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 5% 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. 23 26 EMPLOYMENT CONTRACTS Mr. Lay entered into an employment agreement with Enron in December, 1996, which provides for a minimum salary effective January 1, 1997, of $1,200,000. To preserve tax deductibility, any base salary in excess of $1,000,000 must be deferred into Enron's 1994 Deferral Plan. The agreement provides for a grant of 1,275,000 stock options, 50% granted in December, 1996 and 50% granted in January, 1997, at market value on each date of grant. The stock options vested 20% on date of grant and will be 100% vested on November 1, 2003. However, the vesting schedule may be accelerated if Enron's total shareholder return equals or exceeds 120% of the S&P 500 in calendar years 1997, 1998, and 1999. The 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. In addition, the maturity date on Mr. Lay's $4,000,000 interest bearing line of credit was extended to December 31, 2001 under the agreement. The highest outstanding principal balance on the line of credit during 1998 was $2,215,000, which was repaid on February 25, 1998. Loans totaling $1,775,000 were issued during the period beginning June 18, 1998 through September 4, 1998. Total accrued interest on the loan in 1998 was $60,522, calculated at an average interest rate of 5.44% (representing the mid-term AFR), and such interest has been repaid by Mr. Lay. In the event of his involuntary termination, Mr. Lay will receive amounts prescribed in the agreement, offset against amounts payable under the severance plan maintained by Enron, through the term of the agreement, which expires on December 31, 2001. 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, provides for a minimum annual salary of $750,000. In January, 1997, the agreement was amended to reflect Mr. Skilling's enhanced duties as President and Chief Operating Officer of Enron. The amended agreement provides for a revision of the vesting schedule on 500,000 stock options granted on August 29, 1994, such that one-third of the options will vest on each May 1 in 1997, 1998, and 1999. In the event of his involuntary termination, Mr. Skilling will receive amounts prescribed in the agreement through the term of the agreement. In order to tie Mr. Skilling's compensation more closely to Enron stock performance as opposed to any one Enron operating company, in October, 1997, his contract was renegotiated and extended through December 31, 2001. As a result, Mr. Skilling received on October 13, 1997, a grant of 972,090 Enron stock options with standard vesting of 20% at grant and 20% on each of the following four anniversary dates, a grant of 263,158 shares of restricted stock to vest 33 1/3% on each of the first three grant date anniversaries and a $4,000,000 loan to accrue interest at the October, 1997 mid-term AFR of 6.24% compounded semiannually until maturity date of December 31, 2001. The terms of the contract specify that if Mr. Skilling fully performs all the duties and responsibilities expected of him in his position and under his employment agreement through December 31, 2001, then 50% of the loan amount will be forgiven and the remaining 50% shall be repaid to Enron by Mr. Skilling. Mr. Skilling is responsible for 100% of the loan interest. Through September, 1998, the loan accrued interest totaling $215,664 which has been repaid by Mr. Skilling. If Mr. Skilling voluntarily terminates employment, or is terminated for cause prior to December 31, 2001, the entire loan amount and interest is due and payable. The loan is collateralized with Enron Common Stock, Enron Oil & Gas Common Stock and 1994 Deferral Plan benefits. As an additional benefit to Mr. Skilling, 24 27 Enron has entered into an agreement with Mr. Skilling to provide split-dollar life insurance whereby Enron will pay a portion of the annual premiums on a life insurance policy owned by Mr. Skilling, with recovery of the cost of such premiums upon Mr. Skilling's death. In 1998, the insurance premium paid by Enron was $110,192 which generates no imputed income as Mr. Skilling 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 employment agreement contains noncompete provisions in the event of Mr. Skilling's termination of employment. Effective May, 1998, Ms. Mark entered into an employment agreement with Enron through December 31, 2001 as Chairman of EI and Vice Chairman, Enron. The employment agreement was further amended when it was assigned to, and assumed by both Enron and Azurix Corp. ("Azurix") effective February 1, 1999, when Ms. Mark assumed the role as Chairman and CEO, Azurix, in addition to her responsibilities as Vice Chairman, Enron. The agreement with Enron and Azurix provides for an annual salary of not less than $710,000. Under the terms of the agreement, in May, 1998, Ms. Mark was granted 100,000 Enron stock options that have a ten-year term and vest 33 1/3% on each of January 1, 1999, January 1, 2000 and January 1, 2001, and 350,000 Enron Corp. stock options which have a ten-year term that vest 33 1/3% on each of May 4, 1999, May 4, 2000, and May 4, 2001. The agreement also stipulated Ms. Mark's 1998 bonus target to be one percent of EI's after-tax net income subject to adjustment in the sole discretion of Enron's Chairman and CEO taking into consideration after-tax net income and funds flow targets set each year by the Board of Directors, as well as other performance criteria. The agreement further stipulates that bonus calculations for 1999 through 2001 will be determined prospectively. Further, the agreement provides that Ms. Mark is eligible to participate in either the Enron Corp. executive compensation long-term incentive program or the Azurix Corp. 1999 Stock Plan. During the term of this agreement, Ms. Mark was granted 2,000,000 Azurix stock options from the Azurix Corp. 1999 Stock Plan, effective February 2, 1999, which will vest 25% per year over the next four-year period. The agreement also provides for full vesting of specific grants and awards made to Ms. Mark under long term incentive plans maintained by Enron in the event of involuntary termination, death or disability and, as amended in February, 1999, precludes full vesting of long term grants made under the Azurix Corp. 1999 Stock Plan in the event of involuntary termination or termination. The agreement as amended provides 100% of base pay and unpaid bonuses through the contract term in the event of involuntary termination. The employment agreement contains noncompete provisions in the event of Ms. Mark's termination of employment. Ms. Mark received a personal executive loan from Enron in the amount of $900,000 on May 7, 1997. The principal and accrued interest totaling $955,343 on the outstanding loan as evidenced by a note dated May 7, 1997, was forgiven in May, 1998 in consideration of Ms. Mark's increased responsibilities. Due to revised vesting provisions tied to a restricted stock grant made by Enron in 1997, which triggered constructive receipt for income tax purposes, a $2.5 million loan was approved which was collateralized with Enron stock and which accrues interest compounded semiannually on the unpaid principal and interest of the loan at the short-term AFR in effect during each month that the loan is outstanding. Ms. Mark has repaid $550,000 of the principal of this loan, and an additional $700,000 has been forgiven in consideration for Ms. Mark's performance in 1998. As per the terms of the loan agreement, the remaining principal balance of $1.25 million plus 100% of the accrued interest is to be repaid as of January 31, 2000. Accrued interest through December 31, 1998 was $84,617.13 which was accrued at an average rate of 5.23% for 1998. Effective June, 1998, Mr. Sutton entered into an employment agreement with Enron through June 30, 2003. The agreement provides for an annual salary of not less than $535,000. Pursuant to the terms of the agreement, Mr. Sutton was granted 100,000 Enron stock options on June 22, 1998, that have a ten-year term 25 28 and that vest 33 1/3% on each of May 4, 1999, May 4, 2000 and May 4, 2001, and an additional 100,000 Enron stock options on June 22, 1998, that have a ten-year term and vest 25% on December 31, 1998, December 31, 1999, December 31, 2000 and December 31, 2001. Mr. Sutton received a grant of 74,390 stock options on December 31, 1998 and will also receive grants of stock options in years 1999, 2000, and 2001 valued at $1,060,000 which will vest, conditioned on continued employment, in 25% increments on December 31 of the four years following the date of grant. Mr. Sutton received a grant of 16,061 shares of restricted stock on January 31, 1999 and will also receive grants of restricted stock in January 2000, 2001, 2002 and 2003, or in January of a subsequent year but no subsequent year later than January, 2003, if the following cumulative provisions apply, each grant having a value of $1,060,000, conditioned upon EI meeting at least 80% of its 1998 after tax net income target; such that the 80% target shall be a cumulative percentage over a five-year period beginning with 1998 so that if Mr. Sutton misses a target in any single year, he shall have the ability to receive such grant in a future year based on a cumulative year average. Such grants of restricted stock will vest, conditioned on Mr. Sutton's continued employment with EI, in 25% increments each year beginning on the anniversary date of each date of grant. Mr. Sutton's agreement further stipulated a 1998 bonus amount equivalent to .75% of EI's after-tax net income through June 30, 1998, plus a $500,000 annual bonus target for the last six months of 1998. In addition, the agreement stipulates that if the Enron Wholesale Group met its financial targets, Mr. Sutton would be eligible for an additional $300,000 bonus target. As a result of the increased emphasis on long-term performance and long-term compensation as part of the total compensation mix, for 1999 forward through the remainder of the term, Mr. Sutton will have a $500,000 annual bonus target based on achievement of EI's financial targets plus an additional $300,000 annual bonus target based on the Enron Wholesale Group meeting its financial targets. All targets are established by Enron Board of Directors. The agreement provides 125% of base pay through the contract term in the event of involuntary termination. The employment agreement contains noncompete provisions in the event of Mr. Sutton's termination of employment. Effective January 31, 1998, Mr. Rice entered into an employment agreement with Enron for a three-year term ending January 31, 2001 which provides for an annual salary of not less than $400,000, as of June 1, 1998. In the employment agreement, Mr. Rice was granted 100,000 Enron stock options that have a ten-year term and vests in increments of 20% on December 31 of each of the next five years, and 40,051 restricted shares that vest based upon the ratio of ECT's actual earnings to ECT's target earnings achieved for the year ending on December 31, 1998 and each subsequent December 31 ending on or before December 31, 2002, and will be released on January 31 following the end of the calendar year as follows: 0% if the earnings ratio is less than 80%; 15% if the ratio is more than 80% but less than 95%; 20% if the ratio is more than 95% but less than 105%; 33 1/3% if the ratio is more than 105%, but less than 120%; and 40% if the ratio is more than 120%. On January 31, 1999, 33 1/3% of the shares became vested and were released. In both 1999 and 2000, Mr. Rice will be granted stock options having a grant value of $2,120,000 for each year. These options were granted on December 31, 1998 for 1999 and will be granted on December 31, 1999 for 2000, and shall vest 20% on the date of grant and 20% on December 31 of each of the next four years following the date of grant. As a result of the increased emphasis on long-term performance and long-term compensation as part of the total compensation mix, Mr. Rice shall be eligible for annual bonuses, with an annual target of $500,000 based on achievement of ECT's financial targets, plus an additional $300,000 annual bonus target based on Enron Wholesale Group meeting its financial targets. All targets are established by the Enron Board of Directors. In the event of Mr. Rice's voluntary or involuntary termination, Mr. Rice will receive amounts prescribed in the agreement through the term of the agreement which expires on January 31, 2001. The employment agreement contains noncompete provisions in the event of Mr. Rice's termination of employment. In the event of involuntary termination, all grants, excluding the grant made to Mr. Rice under the All Employee Stock 26 29 Option Program, shall continue to vest during the ninety-day period following the date of Mr. Rice's termination. In the event of involuntary termination, the terms of Mr. Rice's contract provide for a lump-sum payment of $800,000 in consideration of non-compete obligations, as well as 100% of base salary through the term of the agreement. In the event of voluntary termination, the contract provides a lump-sum payment of $800,000. 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 which amendments was effective as of December 31, 1998, to provide for an extension of the agreement through December 31, 1999. 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 $33,075 per month for providing up to 90 days of consulting services annually and a daily rate of $4,410 for days in excess of 90 days annually. In August, 1995, the agreement was amended to provide for a grant of 50,000 Enron phantom stock options at a grant price equal to the December 29, 1995 Enron closing stock price, or $38.125. 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, 1999, the expiration date of the 50,000 Enron phantom stock options granted on December 29, 1995 was extended to December 31, 2000. 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 1998, Enron paid Mr. Urquhart $410,106 for services rendered (including reimbursement of expenses) under the Consulting Services Agreement. Mr. Urquhart is a member of the Managing Board of Amoco/Enron Solar Partnership, Chairman and Chief Executive Officer of Enron Solar Energy Inc. and a director of Enron Renewable Energy Corp. ("EREC"). On January 2, 1997, Mr. Urquhart was awarded 67,495 EREC stock options at a grant price of $15.00, granted in tandem with 23,750 Enron stock options with an exercise price of $42.625, 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 will become 20% vested on each anniversary of the date of grant through January 2, 2001. The exercise of either the EREC or Enron options will cancel the tandem options of the other security. These stock options will expire on January 2, 2007. 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 1998, Enron paid Lord Wakeham $72,000 for services rendered to Enron Europe Limited. Enron Property & Services 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 March 31, 2001. TAP is owned 50% by 27 30 Sharon Lay, sister of Kenneth L. Lay, Chairman of the Board and Chief Executive Officer of Enron. During 1998, TAP received gross commissions in the amount of $2,504,781 attributable to Enron employee travel. Herbert S. Winokur, Jr., a director of Enron, is an affiliate of National Tank Company ("NATCO"), a privately owned company that is a provider of wellhead equipment, systems and services used in the production of oil and gas. During the calendar years ended December 31, 1997 and 1998, NATCO recorded revenues of $1,035,000 and $643,793, respectively, 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 1999. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Until April 1986, Mr. Belfer was an officer of Belco Petroleum Corporation, a wholly owned subsidiary of Enron. During 1996, Belco Oil & Gas Corp. ("BOGC") entered into natural gas and crude oil commodity swap agreements and option agreements with ECT. BOGC is a publicly traded corporation, approximately 77% of the outstanding common stock of which is owned by Mr. Belfer and members of his family. These agreements were entered into in the ordinary course of business of ECT and are on terms that ECT believes are no less favorable than the terms of similar arrangements with third parties. Pursuant to the terms of these agreements, Enron received from BOGC a net amount of approximately $1,682,110 in 1998. The amount of future payments (as well as whether payments are made by ECT to BOGC or vice versa) is affected by fluctuations in energy commodity prices. Enron believes that BOGC and ECT will continue to enter into similar arrangements throughout 1999. Enron retains the law firm of Bracewell & Patterson L.L.P. for certain legal services. During the last fiscal year, Enron and its subsidiaries paid Bracewell & Patterson L.L.P., from which Mr. Foy is a retired partner, legal fees which Enron believes to be reasonable for the services rendered. Until 1979, Mr. Foy was President of HNG, a predecessor of Enron. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (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 reports of ownership and changes in ownership concerning the Common Stock or the Preferred Convertible Stock with the SEC 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 1998 were timely made, except that Lawrence Ruben did not timely file two reports relating to a total of six transactions and Kenneth D. Rice did not timely file his Initial Statement of Beneficial Ownership. 28 31 ITEM 2. APPROVAL OF THE ENRON CORP. ANNUAL INCENTIVE PLAN Enron currently maintains the Enron Corp. Annual Incentive Plan (the "Annual Incentive Plan") for all full-time and part-time employees, which is designed to recognize, motivate and reward exceptional accomplishment toward annual corporation objectives; to attract and retain quality employees; and to be market competitive. The following summary description of a new Annual Incentive Plan is qualified in its entirety by reference to the full text of the Annual Incentive Plan which is attached to this proxy statement as Exhibit A. Only employees who are officers of Enron subject to the short-swing profit provisions of Section 16 of the Exchange Act are eligible to receive awards under the new Annual Incentive Plan, which will be administered by the Committee. An award fund, five percent of recurring after-tax net income of Enron, has been established and recommended for approval by shareholders. Depending on facts and circumstances, the Committee has the discretion to reduce the amount of an award fund previously established. The Committee may not increase the amount of the award fund. The maximum amount of compensation that can be paid to any individual for a calendar year is one percent (1%) of the recurring after-tax net income of Enron for any calendar year. Awards payable under the Annual Incentive Plan will be paid from the general assets of Enron. No fund or trust is established or maintained under the Annual Incentive Plan for the payment of such awards. Enron may elect to pay awards in cash or other property having equivalent value, including shares of Common Stock. The Committee may modify or terminate the Annual Incentive Plan at any time without prior notice to or consent of participants; provided that, without the approval of the shareholders of Enron, no such amendment shall be made that would change the class of participants eligible to receive awards under the Annual Incentive Plan, fund total payouts at a level greater than five percent (5%) of recurring after-tax net income, base the award fund on a performance measure other than recurring after-tax net income, increase the maximum individual target award level under the Annual Incentive Plan or modify any other material terms of the Annual Incentive Plan. Shareholder approval is required if payments from the Annual Incentive Plan are to be tax deductible as performance-based compensation under Section 162(m), enacted in 1993. Section 162(m) generally disallows a tax deduction for compensation over $1 million paid to a Named Officer, unless it qualifies as performance-based. In the event shareholders do not approve the new Annual Incentive Plan attached as Exhibit A, it will not become effective. AMOUNTS GRANTED UNDER THE PLAN FOR 1998 The benefits to be received for 1999 performance under the Annual Incentive Plan are not determinable, since funding will be based on 1999 recurring after-tax net income. However, set forth below are the amounts that would have been paid for 1998 performance if the Annual Incentive Plan, as proposed to be adopted by 29 32 the shareholders, had been in effect. The maximum payout that could have been paid to any individual, based on .5% of 1998 recurring after-tax net income, was $3,485,000. ANNUAL INCENTIVE NAME PLAN PAYMENTS ---- ----------------- Kenneth L. Lay.............................................. $ 3,150,000 Jeffrey K. Skilling......................................... $ 2,250,000 Rebecca P. Mark............................................. $ 1,750,000 Joseph W. Sutton............................................ $ 1,212,250 Kenneth D. Rice............................................. $ 1,100,000 Section 16 Officers......................................... $14,000,000 Corporate and Operating Company Officers (Including Section 16 Officers)(1)........................................... $14,000,000 All Employees (Including all Officers)(1)................... $14,000,000 - --------------- (1) As described above, participants in the Annual Incentive Plan for 1999 and thereafter will be limited to Section 16 officers. REQUIRED VOTE AND RECOMMENDATION The Annual Incentive Plan will be approved at the Annual Meeting if the number of votes cast in favor of the Annual Incentive Plan 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 the new Annual Incentive Plan. THE BOARD OF DIRECTORS RECOMMENDS VOTING "FOR" THIS PROPOSAL.