Newspapers Hope To Get Out Of Enron Contracts

By: Lucia Moses A condensed version of this report appears in the Dec. 10 print issue of E&P.

The collapse of the Houston-based Enron Corp. may give newspaper companies a chance to make an end run around debts to and contracts with the fallen energy-and-trading giant. While many of Enron's customers and lenders are expected to line up in bankruptcy court to force their claims, a number of newspaper companies that owe money to Enron hope that its downfall could offer a way out of their debts.

Media General Inc., Richmond, Va., tore up its newsprint financial hedge contract with Enron on Nov. 28, while other swap customers -- including the Tribune Co. in Chicago, the New York Times Co., and MediaNews Group Inc. in Denver -- are exploring their options.

An Enron spokeswoman wouldn't comment last week on Media General's actions or its other contracts. The spokeswoman said Enron is still operating, although the company is evaluating all its businesses.

It's uncertain what impact Enron's collapse will have on newspapers' interest in swaps.

"Even though it's something that's been around several years, it's something new, and there's still a level of suspicion about it," Gary Helik, director of Tradition Financial Services Inc.'s North America pulp and paper division, a Stamford, Conn.-based swap-maker, told E&P.

Enron in 1997 began offering newsprint financial hedges to newspapers to guard against fluctuations in the price of paper -- newspapers' largest cost outside of payroll, representing about 20% of costs, on average. In these deals, Enron and the company agree on a specified newsprint volume at a specified unit price.

Swap customers win when newsprint prices rise above the agreed-on price, because Enron pays them the difference. Now that prices are low, however, a number of newspaper companies have been sending checks to Enron.

Most of the swap contracts in effect were written before this year, when prices were higher and "nobody anticipated such a dramatic price slide," explained Andrew J. Battista, a senior economist with forest products forecaster Resource Information Systems Inc., Bedford, Mass. As the advertising slowdown curtailed demand for newsprint, the price of newsprint has dropped nearly 23% this year, troughing at below $500 a metric ton in the summer.

Media General said it would have had to pay Enron $11.7 million next year under its contract, which would have cost the company 25 cents in projected 2002 earnings per share. The company said Enron's financial collapse leaves it unable to fulfill the contract, which entitled Media General to cancel it.

Other Enron customers weren't so sure, including Charles W. Gibney, executive vice president, chief financial officer, and treasurer of the North Jersey Media Group Inc., parent of The Record in Hackensack, N.J., which hedges about 35% of its newsprint with Enron. Gibney said Enron continues to operate under Chapter 11 bankruptcy protection, which suggests the contracts remain valid.

Enron also sells what is believed to be a relatively small amount of newsprint through its two mills -- and trades newsprint in the spot market through its online marketplace, Clickpaper.com. Trading on Clickpaper was suspended for a few hours after Dynergy Inc. called off its planned merger with Enron, but business continues, a company spokeswoman said.

Industry experts estimate that a relatively small amount of the roughly 10.5-million-ton-newsprint market in the United States is hedged. MediaNews, the seventh-largest newspaper group by circulation in the United States, is considered one of the more active newsprint hedgers, with about 30% of its tonnage hedged. Media General had all its newsprint hedged -- a condition of its sale of the Garden State Paper Co. mill to Enron. Those companies seem to be more the exception than the rule, though.

The top four publicly owned newspaper companies said they have either little or no newsprint hedged. "If the biggest buyers had 10% [hedged], I think that would be a lot," said Peter Maier, manager of the Newsprint Buyers Consortium, Ketchum, Idaho.

North Jersey Media Group, for one, will be more careful in the future about checking a potential swap partner's creditworthiness, said Gibney, who added, "It creates a whole new level of review on our part."