Subject: Continental Briefing for Enron/Continental meeting December 12th from 1:30-2:30/trading floor tour 2:30-3:00
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked]
Date: Mon, 11 Dec 2000 00:35:00 -0800 (PST)

Mr. Shankman:

In preparation for the meeting on December 12th with Larry Kellner, CFO, 
Continental Airlines, I have noted below some background on the 
Enron/Continental relationship and the purpose for the meeting.  Mr. 
Shankman, please advise if you would like me to distribute this to the 
attendees.    

EXECUTIVE SUMMARY:

Over the past several years Enron has been hedging Continental's crude oil.  
The relationship has been beneficial to both sides.  As a result, since 1999 
Enron has made over $9 million and Continental has saved over $45 million.  

The purpose for the December 12th meeting is to address three initiatives in 
order of economic value:  (1) fuel management, (2) weather derivatives, and 
(3) plastics hedging -- VaR analysis.   Several new initiatives being 
proposed to Continental include the following:   

exchanging call options on crude oil for airline tickets (Craig Breslau, 
Originator)  
transacting financial swaps on line (Larry Gagliardi, Originator)  
creating a weather derivative product for the airline industry (Mark Tawney 
and Gary Taylor, Originators)
outsourcing Continental's antifreeze and plastics risks by hedging these 
products with Enron (Alan Engberg, Originator)

Meeting Attendees from Continental Airlines:

Ron Howard, Vice President, Food Services
Larry Kellner, Chief Financial Officer
Greg Hartford, Vice President, Fuel Management Company
Jeff Misner, Vice President and Treasurer (tentative)

Meeting Attendees from Enron:
Jeff Shankman, President and COO, Enron Global Markets
John Nowlan, Vice President, Enron Global Markets
Craig Breslau, Vice President, Enron North America
Mark Tawney, Director, Enron Global Markets (tentative) 

DISCUSSION: 
(Developed through conversations with Alan Engberg, Larry Gagliardi, Gary 
Taylor, Craig Breslau, Tracy Ramsey and Lucy Ortiz.)

Enron Buy Side with Continental:

Current Enron verifiable spend on Continental airline tickets was 
approximately $40 million in FY 1999 and $17.5 million for the first six 
months of 2000.  

Enron Sell Side with Continental:

(1) FUEL MANAGEMENT: 

Current Business:  Over the past 2 years, Craig Breslau and others have been 
managing a strong relationship with Greg Hartford, VP, Continental Fuel 
Management, hedging Continental's crude oil.  The first transaction was on 
January 14, 1998 -- a one month Forward on Kero.  Since then, Enron has 
completed 29 transactions with two commodities:  KERO and Crude.  Current 
business consists of three crude call options, settling in December 2000 
($31.00) and January, 2001 ($34.00 and $35.00)

Value to Enron: Enron has earned $9,682,084 (1999-October 6, 2000)

Value to Continental:  Continental has saved $45,001,744 (1999-October 6, 
2000)

Possible next steps:    (a) A transaction where Enron exchanges call options 
on crude oil for airline tickets.

(b) Financial jet swaps on line:  Larry Gagliardi has already spoken with 
Rick Pressly, Director, Continental Fuel Management, regarding financial jet 
swaps on line.   At the time, Pressly was not interested in pursuing this 
product offering.  

Value to Continental for (b):  a more perfect hedge as opposed to hedging 
with crude oil since hedging jet fuel with jet is a more perfect hedge.  
Enron could offer services for the whole year and explore multi-year options 
as well both with financial and physical jet fuel.

Possible next steps:  Would Larry Kellner be interested in (a) or (b)?  Enron 
could also supply Continental with jet fuel physical in the following 
locations such as the US Gulf Coast, New York harbor, the US West Coast, and 
Europe.  (Enron is doing this now with Delta airlines in New York harbor).  
If so, Gagliardi could provide a guest password and Enron Online 
identification number if Kellner's office wanted to review the product.

(2) WEATHER DERIVATIVE  PRODUCT:

Business proposition:  Create a basket of weather related risks - such that 
aggregate bad weather above a tolerable level would result in payment from 
Enron to Continental.

Continental Airlines clearly has exposure to weather as indicated in their 
annual reports and periodic press releases - particularly those discussing 
earnings.  It is extremely difficult to envision the perfect weather hedge 
for all of Continental's weather related exposure.  However, it is not 
difficult to envision simple ways to reduce a large portion of it.  
Continental has hubs in Houston, Newark, and Cleveland.  The weather 
conditions that create delays and increased costs in these areas include - 
rainfall above certain amounts, snowfall above certain amounts, temperatures 
below freezing (de-icing costs), winds above a certain speed, etc.  

Value to us:  Create value by designing a basket of these risks.  

Value to them:  Creation of a weather hedge to protect Continental's exposure.

Possible next steps:   Upper management would need to issue a directive to 
various groups within Continental to describe what weather conditions affect 
the bottom line, how much they affect the bottom line, and then ask each 
group to attach a "confidence level" to each of their estimates - Continental 
could start a weather risk management program by only hedging a weighted 
average of their exposure x their confidence level - or some portion thereof.

Exposure areas would be categorized according to the following:

Clear exposure.  Quantifiable.
Clear exposure.  Difficult to quantify
Potential exposure.  Quantifiable
Potential exposure.  Difficult to quantify

For each of the above categories, Enron would also need an indication of 
whether Continental has historical cost data against which we can regress 
historical weather data.

Enron's weather derivatives team could then sit down with Kirk Rummel, 
Director and Airport Services Division Controller, and some of his team (or 
others designated by Kellner) and brainstorm about different types of weather 
that cause increased cost to Continental.  (Gary Taylor made a brief 
presentation to Rummel on November 6th; no follow up action with Enron has 
taken place to date)  

(3)  PLASTICS:

Business proposition:    Alan Engberg proposed that Continental outsource 
their antifreeze risk (ethylene glycol / propylene glycol) and plastics (high 
impact polystyrene, polyethylene) by hedging those products with Enron.

Value to Continental: Cost/Budget certainty (assuming a perfect hedge whereby 
their purchase contracts are linked to the index used for hedging) and 
associated reduction in volatility of cash flows

Value to Enron:  The value is approximately $2 million notional value if they 
hedged 100% of their 4 million pound polystyrene exposure.  Since Continental 
has not yet shared the size of their antifreeze buy, Engberg cannot comment 
on the potential value to Enron though he is fairly certain it would be much 
larger than $2 million.

Possible next steps
This proposition is being considered by Ron Howard's team at Continental.  
Continental needs to share their antifreeze spend with Enron.  Enron could 
then develop a proposal to Continental that includes perceived benefits of 
outsourcing their commodity risk to Enron.  Could a follow-up meeting with 
Ron Howard's team and Larry Kellner's designated contact be arranged to 
facilitate this process?

Alan Engberg also recommends working with Continental on a strategic approach 
to modelling their overall exposures using VaR may prove extremely powerful 
and rewarding to both companies.  David Port is already (x-39823)  looking at 
ways to outsource Enron's expertise in this area.  Continental could be a 
pioneer in the effort.  Factors to model would
include jet fuel, natural gas, electricity, currency, interest rates, 
plastics, antifreeze, paper, and, metal.