enron
DardenBusinessPublishing:210838
UVA-F-1299
Rev. Feb. 8, 2011
This document is authorized for use only by Mattia Tenaglia at Tecnologico de Monterrey.
Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions.
ENRON CORPORATION’S WEATHER DERIVATIVES (A)
Everybody talks about the weather, but nobody does anything about it.1
In October 2000, Mary Watts, the chief financial officer of Pacific Northwest Electric
(PNW), a utility servicing the Pacific Northwest region of the United States, reviewed the financial plan for PNW’s 2000–01 forthcoming winter season. Winter temperatures affected the firm’s revenues: the colder the season, the greater the electricity usage. She recalled that the last few years had offered a warmer-than-average winter climate, resulting in adverse financial results for PNW. The weather, combined with rapid deregulation in PNW’s market area, meant that the firm reported substantially no EPS growth from 1995 to 1999, in an otherwise buoyant economic setting. PNW’s stock price had suffered accordingly. On her desk was a report from a weather-advisory service predicting another unseasonably warm winter.
Watts remembered a recent conversation with Mike James, a representative of Enron
Corporation. James had presented a new “weather-derivative” product from Enron that he claimed could minimize PNW’s weather-related volume risk. Watts wondered how these derivatives worked, and how they might be used to help restore PNW’s credibility in the capital markets. Should she consider purchasing Enron’s weather-protection products for the upcoming winter season? She would need to decide soon about the use of these derivatives if she wanted to put in place a hedge for the winter months ahead.
Pacific Northwest Electric
PNW was a significant producer of electric power, with primary coverage in parts of
Oregon, Washington, Northern California, Idaho, and Montana.
UVA-F-1299
Rev. Feb. 8, 2011
This document is authorized for use only by Mattia Tenaglia at Tecnologico de Monterrey.
Please do not copy or redistribute. Contact permissions@dardenbusinesspublishing.com for questions or additional permissions.
ENRON CORPORATION’S WEATHER DERIVATIVES (A)
Everybody talks about the weather, but nobody does anything about it.1
In October 2000, Mary Watts, the chief financial officer of Pacific Northwest Electric
(PNW), a utility servicing the Pacific Northwest region of the United States, reviewed the financial plan for PNW’s 2000–01 forthcoming winter season. Winter temperatures affected the firm’s revenues: the colder the season, the greater the electricity usage. She recalled that the last few years had offered a warmer-than-average winter climate, resulting in adverse financial results for PNW. The weather, combined with rapid deregulation in PNW’s market area, meant that the firm reported substantially no EPS growth from 1995 to 1999, in an otherwise buoyant economic setting. PNW’s stock price had suffered accordingly. On her desk was a report from a weather-advisory service predicting another unseasonably warm winter.
Watts remembered a recent conversation with Mike James, a representative of Enron
Corporation. James had presented a new “weather-derivative” product from Enron that he claimed could minimize PNW’s weather-related volume risk. Watts wondered how these derivatives worked, and how they might be used to help restore PNW’s credibility in the capital markets. Should she consider purchasing Enron’s weather-protection products for the upcoming winter season? She would need to decide soon about the use of these derivatives if she wanted to put in place a hedge for the winter months ahead.
Pacific Northwest Electric
PNW was a significant producer of electric power, with primary coverage in parts of
Oregon, Washington, Northern California, Idaho, and Montana.