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

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

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

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

Business Structure Transformation Costs Interaction Costs Total Costs Finished Product Finished Product Transformation Interaction Transformation Costs Interaction Costs Total Costs

Cost of Teller Transaction $1.50 $0.30 $ (Bank) 1995 (ATM) 2000 (Internet)

Length of Time to Provision Bandwidth 6-8 months 2-3 months < 1 second 1995TodayNext Year

Length of Time to Execute a Long-Term Gas Contract 9 months 2 weeks < 1 second 2-3 years

Transformation Costs Interaction Costs Total Costs Finished Product Finished Product Transformation Interaction Change in Economics of Business Structure Transformation Costs Interaction Costs Total Costs

Wheres the Opportunity?

Wheres the Opportunity? Not Cost Competitive

Wheres the Opportunity? Commoditized Overcapitalized Globalized Cant make compensatory return in traditional asset business

Wheres the Opportunity? Creating low cost, dependable market interfaces Market making Logistics Back office Trade finance

Wheres the Opportunity? Virtual Integration Providing packaged turnkey solutions 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 Australian Power & Gas Bandwidth Metals Natural Gas Electricity UK Power & Gas Financials (interest rate, equity) Emissions Plastics Scandinavian Power & Gas Weather Coal Pulp & Paper Currencies Credit Freight 2001

Pulp and Paper ,131 Transactions Volumes 314 4,480 6,311 12, (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 Q1Q2Q3Q4 Transactions (2000) DS 3 Month Equivalents (2000) ,399 2,393 Q1Q2Q3Q4

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% Europe 24% Other 20% Asia 34% * 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

Metals Transactions 4,911 5,746 8, Volumes (Thousand Tonnes) 2,855 3,254 4,269 Acquired Leading Merchant of Base Metals with Worldwide Warehousing Operations Significant Customer Overlap With Existing Energy Customers Copper 39% Copper Concentrates 23% Aluminum 25% Recycled Metal 5% Nickel 2% Other 6% Enrons 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 Enrons 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