Enron and the new integration model
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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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Enron and the new integration model

Enron and the New Integration Model

Jeff Skilling

ISDA-16th Annual General Meeting

April 5, 2001


Enron and the new integration model

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


Enron and the new integration model

Types of Interaction Costs

Legal &

Regulatory

Credit

Logistics

Information

Seeking &

Gathering

Payments

Inventory

Price of

Successful

Economic

Transactions


Enron and the new integration model

Cost of Interaction

Financial

Institutions

Mining

U.S.

30-40%

60-70%

55%

India

40-50%

Source: McKinsey


Enron and the new integration model

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


Enron and the new integration model

Cost of Teller Transaction

$1.50

$0.30

$0.01

1985

(Bank)

1995

(ATM)

2000

(Internet)


Enron and the new integration model

Length of Time to Provision Bandwidth

6-8 months

2-3 months

< 1 second

1995

Today

Next

Year


Enron and the new integration model

Length of Time to Execute a Long-Term Gas Contract

2-3 years

9 months

2 weeks

< 1 second

1981

1989

1997

2000


Enron and the new integration model

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


Enron and the new integration model

Where’s the Opportunity?

.90

.10

.10

.10

.85

.90

.80

.95

1.10

1.20

1.10

.20

.20

.20

10


Enron and the new integration model

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


Enron and the new integration model

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


Enron and the new integration model

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


Enron and the new integration model

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


Enron opportunity

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


Enron and the new integration model

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


Pulp and paper

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


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

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


Steel

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


Metals

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


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

Enron Credit

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

Freight


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