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Enron files to negotiate derivatives termination

Hobbled energy giant Enron Corp filed an emergency motion in bankruptcy court earlier this week to allow it to negotiate with counterparties to terminate derivatives contracts as soon as possible, according to court documents obtained by Reuters.

However, several parties have filed objections to the motion, said Deborah Reperowitz, a lawyer at Reed Smith LLP Reperowitz represents The Wiser Oil Company, which filed one of the objections.

She argued that Enron should be required to settle these contracts under the supervision of the bankruptcy courts and all of the creditors, rather than on a bilateral basis, or perhaps with the supervision of an unsecured creditors committee.

Enron filed for bankruptcy on December 2 after questions about highly-leveraged off-balance sheet partnerships raised concerns about the transparency of the company's finances and its potential future solvency.

"We're not interested in early termination," said Reperowitz. Her client had $6.08 million in potential unrealized undiscounted gains in oil and gas derivatives, according to a company press release.

Wiser is still looking to keep its contracts in place, because it is interested in having those hedges on its books.

"The financial and business judgment of the people in this company has been questioned. Until the situation stabilises, and creditors get comfortable with the company, it should not be looking to circumvent the notice procedure," she said.

The hearing for the motion is scheduled for Friday.

ENRON SEEKS FLEXIBILITY

Enron is looking to be able to cash in on derivatives assets it holds as soon as possible, because the amounts it is owed could erode or turn into deficits given market volatility, it said in the filing. A derivative is a security whose value is dependent on the performance of an underlying asset.

It would not necessarily seek to terminate all its agreements, but it is applying for the ability to do so, according to the filing.

A spokeswoman for Enron declined to elaborate on the filing.

The emergency motion, filed on Monday, shows that Enron is trying to collect on assets it is owed, an industry lawyer said. It is not an unusual motion for a bankrupt party to file, he said.

Several derivatives traders were surprised that any parties had yet to terminate the contracts, but although Enron does not mention an amount it is owed, it said in the filing that they constitute "significant assets of the debtors' estates."

"Debtors" refers to Enron Corp and direct and indirect subsidiaries that have filed for reorganisation under Chapter 11 of the bankruptcy code.

Derivatives counterparties to a bankrupt company typically terminate the contracts themselves to extract themselves from the potentially messy bankruptcy process and to establish their positions as early as possible, said Seth Grosshandler, partner at Cleary, Gottlieb, Steen & Hamilton in New York. He declined to comment on Enron, due to client relationships.

The Enron debacle has prompted lawsuits from investors, Congressional hearings and an investigation by the Securities and Exchange Commission.

Enron said on Wednesday that it plans to realign its business, sell up to $6 billion of assets, and sell a controlling stake in its key energy trading unit.

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