enron and the new integration model jeff skilling isda-16th annual general meeting april 5, 2001
TRANSCRIPT
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