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Enron Mail |
On Tuesday of this week I visited our Helsinki oil trading office. Set out
below are some general observations. There are about 8 people in the office: 3 traders; 2 logistics people; 1 accounting/risk management person; and a couple secretaries. The office is headed by Ilkka Kokko, a fairly young Finn. We bought the business in September of last year. The basic activity is the purchase of various oil products from Russian refineries; the transportation of the products by RTC (railroad tank car) from the refinery to various Baltic ports; the storage of the products at the ports; and the loading of the products onto vessels for sale in other markets. Many of the vessels are ocean-going because the products are sold in non-European markets. The products are normally purchased on a DAF (delivered at frontier) basis, which means that title passes to Enron when the RTC crosses the Russian border. As a result, Enron must arrange for the transport of the products from the border to the port. This is arranged for us by the company that will store the products at the port. In other words, the contract we have with the terminal operator provides for transportation of the products from the Russian border to the port, the unloading from the RTCs into storage, storage, the unloading from storage into our vessels and all related customs, measurement and testing services. We have these deals with about 5 different Baltic companies. About 20-30 vessels a month are chartered. About 25-40 product purchases a month are done, some of which are term deals up to one year. About 300,000 tonnes a month is purchased. Payments and settlements are done from London. We pay in dollars. The money is almost always paid into accounts outside of Russia. Because the business results in a long position, the Helsinki office hedges its position by doing deals with Enron's book in London -- no hedging is done with anyone else. The business experienced some earnings volatility late last year (had a negative gross margin of $200,000 in November and a positive gross margin of $350,000 in December). This was largely because the position wasn't effectively hedged. Hedging is difficult because the hedges are dirty (due to basis and to product differences) and because it is difficult to predict the amount of product that will be delivered in any given time period (due to transportation bottlenecks and to flexibility in the Russians' delivery obligations to us). The business historically prepaid for part of the products it purchased. The financing was historically arranged through a bank that would require a 10% margin on funds it advanced -- $10 million deposited with the bank would mean up to $100 million advanced to the Russians. The bank also insisted on having recourse against Greenergy (the company we acquired) for all amounts outstanding. Enron has given Ilkka a $20 million limit on our exposure on these prepaid deals. Because the bank wants to have recourse against Enron for all amounts outstanding, the old method of financing these prepaid deals no longer works given the amount of prepaid financing Ilkka would like to do. Ilkka is trying to come up with another financing structure where the banks look solely to the Russians for payment for at least part of the outstanding amount. Ilkka is also thinking about buying products from the Russians at the refinery gate. This would require Enron to arrange transportation from the refinery, not just from the Russian border under the current DAF deals. Ilkka thinks this will help him control the deliveries more and, as a result, facilitate his hedging program. Ilkka is also looking at buying some terminal assets in Estonia. The London corporate development team is looking at this. Ilkka confirmed to me that he has never paid any bribes in connection with the business (even before the acquisition by Enron) and that he understands the FCPA restrictions. Robert Quick has made about three visits to the office and is working on a variety of issues related to this business. Robert, please correct me if I've made any errors or add something if I've left it out. Thanks!
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