Description

NewPower (NWPW) is a bankruptcy liquidation situation with substantial upside recovery remaining for equity holders in the short-term. This report updates the write-up on the same situation posted over 6 months ago – which continues to play out largely as expected - and indicates an annualized return over 30%. Most key issues have been resolved and the liquidation appears to be nearing the finish line in Bankruptcy Court in the Northern District of Georgia. For more detailed background on the history of NWPW and related issues, please see the original report (by andy805) from June and comments/updates in subsequent months. It should be noted that the key drawback for this idea is liquidity, since the daily volume tends to be light.

Liquidation/recovery summary
At this point, there are no operating businesses - NWPW represents a pure wind-down of liquid assets. Below is a summary of the recovery estimated by the Second Amended Plan of Reorganization, which was confirmed in August.

Cash available for distribution $97.2
General unsecured claims (class 7)$29.3
Contingency reserve $1.5
Total liabilities $30.8
Cash available for equity (class 8-11) $66.4
per share (diluted) $0.55

Adjusted net shares (diluted) 120.6
Common shares outstanding 62.9

It should be noted that the recovery analysis assumes the substantial number of warrants are treated as shares, as indicated by the confirmed plan. Also, the net number of diluted shares is based on the first confirmed plan which estimated $64mm in cash available for distribution and $0.53 recovery to common shareholders.

Class action lawsuit settlement
The company reached a settlement for the class action lawsuit back in September at a cost of $26mm – with $24.5mm covered by D&O insurance. This settlement resolved and quantified the only major downside risk to recovery for equity holders. The shortfall does come out of the cash available for distribution but amounts to only about $.01 per diluted share.

Insider claim settlements summary
Since confirmation, several key insiders have settled claims with the company, implying approximately $0.12 of additional recovery to equity holders. Below is a summary of key settled claims.

Key Insider Claim Settlements Claim Settlement Savings
Jacobs $11.3 $8.2 $3.1
Lockhart$7.7 $4.0 $3.7
Malone $1.2 $0.7 $0.6
Manly $7.4 $5.0 $2.4
Total $27.6 $17.9 $9.7

Other Insider Claim Settlements Claim Settlement Savings
Hermanson$1.3 $0.5 $0.9
Cronin $2.0 $0.4 $1.6
Crist $0.8 $0.2 $0.6
Corbally$0.5 $0.2 $0.3
Wyatt $1.4 $0.3 $1.1
Total $6.0 $1.5 $4.5

Mediated Settlements Claim Settlement Savings
Dolph $0.6 $0.3 $0.3
Magruder$1.5 $0.4 $1.1
Total $2.2 $0.7 $1.5

Enron issue: potential upside
Since NWPW was originally part of Enron and was carved out with Enron maintaining a substantial equity stake (almost 30% of the common shares plus additional warrants and options), it is not surprising that lingering issues remain. The key outstanding issue that the judge has given the court-appointed examiner the authority to investigate is whether Enron’s injection of cash (about $28.5mm) into NWPW prior to the bankruptcy deserved to be a secured claim. The examiner’s report (highly recommended reading) makes it clear that there existed substantial doubt about the viability of NWPW as a going concern and the lack of alternative financing options at the time of the Enron ‘loan’. As the prior VIC report indicated, any resolution of this issue should represent upside for current equity holders, since the full claim was paid out in cash previously. If the claim were ‘recharacterized’ as equity, there is still ambiguity about how it would be treated in the recovery – an estimate of an additional 5 to 10 cents appears reasonable (by increasing the cash available for distribution by the full claim amount and increasing the number of shares by a figure appropriate for the stock price at the time of the Enron investment). While the examiner might have a valid argument against Enron, it is not clear that the judge is entirely sympathetic nor that the teams of Enron lawyers will easily concede the issue. The most sensible outcome is for Enron to make some minor settlement to resolve the issue; or Enron could stonewall until the examiner and NWPW drop the issue and move toward finalizing the liquidation without altering Enron’s secured status in order to avoid additional cash drain to the estate from the litigation process.

Timing
The court docket indicates that the next scheduled bankruptcy court hearings are set for January 9th to approve remaining insider settlements and February 6th to approve compensation for law firms and advisers during the ch.11 process (including $300k for the examiner). Since few significant issues remain outstanding, it seems reasonable to expect a final plan of reorganization by March or April, which could be confirmed in April or May. Unexpected delays could drag the process out into June, but that would still represent less than 6 months to cash distribution.

Implied returns summary
Based on the last public filings (as of October 31st), the company indicated a cash balance of $108mm. Excluding the potentially significant (if low probability) Enron settlement, an updated recovery analysis would indicate a final recovery to common shareholders of approximately $0.65 versus the current price at $0.57 – based on the official August estimate of roughly $0.55 less class action settlement of 1 cent plus insider claim settlements of about 12 cents (rounded down an extra cent for additional court costs not in the budget). This roughly 14% gross return should be achieved in less than 6 months, implying an annualized return over 30%.

Estimated annualized returns
Recovery range
$0.55 $0.60 $0.65 $0.70 $0.75
Timing 3 -14% 21% 56% 91% 126%
(Months)4 -11% 16% 42% 68% 95%
5 -8% 13% 34% 55% 76%
6 -7% 11% 28% 46% 63%


Key risks: timing
Since most of the key issues (other than Enron) have been effectively resolved and the outstanding Enron issue essentially represents upside potential, the main risk is this situation is timing. The bankruptcy process for NWPW has successfully functioned to achieve substantial recoveries for equity holders, but unfortunately has lasted longer than originally anticipated. Beyond delays obviously lowering the annualized returns of the eventual payout, the chapter 11 process also erodes the estate’s cash available for distribution. Nonetheless, management included reserves for ongoing bankruptcy costs in the previously confirmed plan which estimated recovery of $64mm back in August – and management has consistently reserved for full claims throughout the process.

Catalyst

*Finalization of class action lawsuit settlement
*Approval of remaining insider claim settlements
*Resolution of Enron recharacterization issue (potential upside)
*Confirmation of final revised/updated plan of reorganization