Enron and the New Integration Model

Jeff Skilling

ISDA-16th Annual General Meeting

April 5, 2001

Evolution of the Economic Trade-Off

BarterEconomy

Creation of Money

Transportation &Communication

Internet &InfoTech

1300’s

1800’s

2000’s

Specialization& Firms

Integrated, HierarchicalFirm

“VirtuallyIntegrated” Firm

Interaction Costs

Time

Types of Interaction Costs

Price ofSuccessfulEconomicTransactions

Legal &Regulatory

InformationSeeking &Gathering Inventory

Payments

Logistics

Credit

Cost of Interaction

Mining FinancialInstitutions

U.S.

India

30-40% 60-70% 55%

40-50%

Source: McKinsey

Business Structure

.95 1.10 1.20 1.10.20 .20 .20

TransformationCosts

InteractionCosts

TotalCosts

4.35 .60 4.95

FinishedProduct

5

.90

1.0 1.0 1.0

.85

.80

.90

3.45 3.00 6.45

FinishedProduct

Transformation

Interaction

TransformationCosts

InteractionCosts

TotalCosts

Cost of Teller Transaction

$1.50

$0.30

$0.01

1985(Bank)

1995(ATM)

2000(Internet)

Length of Time to Provision Bandwidth

6-8 months

2-3 months

< 1 second

1995 Today NextYear

Length of Time to Execute a Long-Term Gas Contract

9 months

2 weeks

< 1 second

2-3 years

1981 1989 1997 2000

.95 1.10 1.20 1.10.20 .20 .20

TransformationCosts

InteractionCosts

TotalCosts

4.35 .60 4.95

FinishedProduct

9

.90

.85

.80

.90

3.45 3.00 6.45

FinishedProduct

Transformation

Interaction

Change in Economics of Business Structure

1.0 1.0 1.0

9

.10 .10 .10

3.45 .30 3.75

TransformationCosts

InteractionCosts

TotalCosts

Where’s the Opportunity?

10

.95 1.10 1.20 1.10.20 .20 .20

.90

.85

.80

.90

.10 .10 .10

Where’s the Opportunity?

11

.95 1.10 1.20 1.10.20 .20 .20

.90

.85

.80

.90

.10 .10 .10

NotCostCompetitive

Where’s the Opportunity?

12

.95 1.10 1.20 1.10.20 .20 .20

.90

.85

.80

.90

.10 .10 .10

• Commoditized• Overcapitalized• GlobalizedCan’t make compensatoryreturn in traditional assetbusiness

Where’s the Opportunity?

13

.95 1.10 1.20 1.10.20 .20 .20

.90

.85

.80

.90

.10 .10 .10

Creating low cost, dependablemarket interfaces

• Market making• Logistics• Back office• Trade finance

Where’s the Opportunity?

14

.95 1.10 1.20 1.10.20 .20 .20

.90

.85

.80

.90

.10 .10 .10

“Virtual” Integration

Providing packaged turnkeysolutions for customers

• Complex structures• Differentiation• Customization

Enron Opportunity

Traditional Model

New Model

• Asset intensive• Vertically integrated• Slow moving and rigid• Hierarchical

• Brain power intensive• Networked• “Real options” oriented• Fast moving & entrepreneurial

Enron–Accelerating Market Development

Commodity

Product

Financial

* Lighter shading indicates a developing market Darker shading indicates a mature market

1985 1990 1995 20001991 1992 1993 1994 1996 1997 1998 19991986 1987 1988 1989

Australian Power & Gas

Bandwidth

Metals

NaturalGas

Electricity

UK Power & Gas

Financials (interest rate, equity)

Emissions

Plastics

Scandinavian Power & Gas

Weather

Coal

Pulp & Paper

Currencies

CreditFreight

2001

Pulp and Paper

14 73

436

1,131

Transactions

1997 1998 1999 2000

Volumes

314

4,480

6,311

12,051

1997 1998 1999 2000

(Thousand Tonnes)

• 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

Financial and Physical Settled Volumes

Bandwidth

• 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

Q1 Q2 Q3 Q4

Transactions(2000)

323

59

236

DS 3 Month Equivalents

(2000)

432

985

1,399

2,393

Q1 Q2 Q3 Q4

Steel

Market Overview

• Highly Fragmented

• Producer to Consumer Market

• Volatile Prices

• Lack of Price Transparency

• Limited Forward Price Signals

Sheet Market Size - $122 Billion*

N.A.22%

Europe24%

Other20%

Asia34%*Annual Revenues

Source: Enron, PMAG, WEFA, Metal Bulletin

Market Size*(Billions)

Initial Rollout in U.S.

Hot Rolled

Cold Rolled

Galvanized

Total

$7.9

$6.7

$7.3

$21.9

Sheet Products

MetalsTransactions

4,9115,746

8,357

1998 1999 2000

Volumes

1998 1999 2000

(Thousand Tonnes)

2,8553,254

4,269

• Acquired Leading Merchant of Base Metals with Worldwide Warehousing Operations

• Significant Customer Overlap With Existing Energy Customers

Copper39%

Copper Concentrates23%

Aluminum25%

Recycled Metal5%

Nickel2%

Other6%

Enron’s Metals Mix

Enron Credit

• 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

Innovative Credit Risk Management Product for Customers

Freight

• 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