BUSINESSWEEK ONLINE : FEBRUARY 12, 2001 ISSUE
COVER STORY

The Enron Way


Enron makes money by trading commodities and other contracts. Here's how it works:

ENERGY DEALS

1. Enron (ENE) has a contract to provide an aluminum smelter with electricity at a fixed price for three years. Enron buys aluminum from the smelter.

2.
Prices move down for aluminum and up for electricity. Enron pays the smelter to shut down temporarily, buying cheaper aluminum in the market to meet the smelter's commitments.

3.
Enron then sells the electricity elsewhere at a higher market price.

RISK MANAGEMENT

1.
A small clothing cataloger asks Enron to create a derivative to protect against hot weather that might hurt sales of winter clothes.

2.
For every degree above normal over some period, Enron must pay the retailer a certain amount; for every degree below, the retailer pays Enron.

3.
Enron lays off its risk through a deal with a soft drink maker who benefits from hot weather.


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