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Enron and the New Integration Model

Enron and the New Integration Model. Jeff Skilling ISDA-16th Annual General Meeting April 5, 2001. Evolution of the Economic Trade-Off. 1300’s. Interaction Costs. Creation of Money. 1800’s. 2000’s. Barter Economy. Transportation & Communication. Internet & InfoTech.

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Enron and the New Integration Model

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  1. Enron and the New Integration Model Jeff Skilling ISDA-16th Annual General Meeting April 5, 2001

  2. Evolution of the Economic Trade-Off 1300’s Interaction Costs Creation of Money 1800’s 2000’s Barter Economy Transportation & Communication Internet & InfoTech Specialization & Firms Integrated, Hierarchical Firm “Virtually Integrated” Firm Time

  3. Types of Interaction Costs Legal & Regulatory Credit Logistics Information Seeking & Gathering Payments Inventory Price of Successful Economic Transactions

  4. Cost of Interaction Financial Institutions Mining U.S. 30-40% 60-70% 55% India 40-50% Source: McKinsey

  5. Business Structure Transformation Interaction 1.0 1.0 1.0 .90 .85 Finished Product Transformation Costs Interaction Costs Total Costs .90 3.45 3.00 6.45 .80 Finished Product Transformation Costs Interaction Costs Total Costs .95 1.10 1.20 1.10 .20 .20 .20 4.35 .60 4.95 5

  6. Cost of Teller Transaction $1.50 $0.30 $0.01 1985 (Bank) 1995 (ATM) 2000 (Internet)

  7. Length of Time to Provision Bandwidth 6-8 months 2-3 months < 1 second 1995 Today Next Year

  8. Length of Time to Execute a Long-Term Gas Contract 2-3 years 9 months 2 weeks < 1 second 1981 1989 1997 2000

  9. Change in Economics of Business Structure Transformation Interaction .90 1.0 1.0 1.0 .10 .10 .10 Finished Product .85 Transformation Costs Interaction Costs Total Costs .90 3.45 3.00 6.45 3.45 .30 3.75 .80 Finished Product Transformation Costs Interaction Costs Total Costs .95 1.10 1.20 1.10 .20 .20 .20 4.35 .60 4.95 9 9

  10. Where’s the Opportunity? .90 .10 .10 .10 .85 .90 .80 .95 1.10 1.20 1.10 .20 .20 .20 10

  11. Where’s the Opportunity? Not Cost Competitive .90 .10 .10 .10 .85 .90 .80 .95 1.10 1.20 1.10 .20 .20 .20 11

  12. Where’s the Opportunity? • Commoditized • Overcapitalized • Globalized • Can’t make compensatory • return in traditional asset • business .90 .10 .10 .10 .85 .90 .80 .95 1.10 1.20 1.10 .20 .20 .20 12

  13. Where’s the Opportunity? .90 .10 .10 .10 • Creating low cost, dependable • market interfaces • Market making • Logistics • Back office • Trade finance .85 .90 .80 .95 1.10 1.20 1.10 .20 .20 .20 13

  14. Where’s the Opportunity? .90 .10 .10 .10 .85 .90 .80 • Providing packaged turnkey • solutions for customers • Complex structures • Differentiation • Customization “Virtual” Integration .95 1.10 1.20 1.10 .20 .20 .20 14

  15. Enron Opportunity Traditional Model • Asset intensive • Vertically integrated • Slow moving and rigid • Hierarchical New Model • Brain power intensive • Networked • “Real options” oriented • Fast moving & entrepreneurial

  16. Enron–Accelerating Market Development Freight Credit Metals Bandwidth Commodity Product Financial Australian Power & Gas Pulp & Paper Coal Weather Scandinavian Power & Gas Plastics Emissions Financials (interest rate, equity) UK Power & Gas Electricity Currencies Natural Gas 2001 1989 1985 1986 1987 1988 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 * Lighter shading indicates a developing market Darker shading indicates a mature market

  17. Pulp and Paper Transactions 1,131 • Acquired Garden State Paper Company • 210,000 Tons/Yr. Newsprint Facility • 4 Recycling Centers • Location in Key Market Areas • Gained Logistics Personnel and Industry Experience • Launched Clickpaper.com • Offers Over 100 Financial and Physical Products • Tailored to Paper Industry Participants 436 73 14 1997 1998 1999 2000 Volumes (Thousand Tonnes) 12,051 6,311 4,480 314 1997 1998 1999 2000 Financial and Physical Settled Volumes

  18. Commoditizing and creating liquid markets in circuits, IP capacity and managed storage capacity Major ramp-up in transaction activity with broad range of counterparties Significant growth in both transactions and volumes of data delivered expected in 2001 DS 3 Month Equivalents (2000) 2,393 1,399 985 432 Q1 Q2 Q3 Q4 Transactions (2000) Bandwidth 236 59 23 3 Q1 Q2 Q3 Q4

  19. Steel Market Overview Initial Rollout in U.S. Market Size* (Billions) Sheet Products • Highly Fragmented • Producer to Consumer Market • Volatile Prices • Lack of Price Transparency • Limited Forward Price Signals $7.9 Hot Rolled Cold Rolled Galvanized Total $6.7 $7.3 $21.9 Sheet Market Size - $122 Billion* Other 20% N.A. 22% Europe 24% Asia 34% *Annual Revenues Source: Enron, PMAG, WEFA, Metal Bulletin

  20. Metals Transactions • Acquired Leading Merchant of Base Metals with Worldwide Warehousing Operations • Significant Customer Overlap With Existing Energy Customers 8,357 5,746 4,911 1998 1999 2000 Enron’s Metals Mix Volumes Nickel 2% (Thousand Tonnes) Other 6% Recycled Metal 5% 4,269 3,254 2,855 Copper 39% Aluminum 25% Copper Concentrates 23% 1999 2000 1998

  21. Market demands real time credit decisions as more businesses transact online Enron launched Enron Credit in February 2000 Enron provides credit services to customers Real time evaluation and management of credit exposure Market-based risk management products (bankruptcy swaps) Reference prices for more than 10,000 public companies Firm prices for more than 400 public companies 293 transactions with $4.8 billion notional value completed to date Enron Credit Innovative Credit Risk Management Product for Customers

  22. Enron Freight Markets was formed to bring Enron’s expertise in logistics to the transportation market EFM will provide traditional intermediary services buy and sell firm and spot, forward capacity across modes, matching shipper and carrier and tracking the loads EFM plans to introduce risk management products to address: volatile freight prices exposure to diesel fuel prices best efforts delivery contracts lack of firm, forward price signals Freight

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