Description

Description:
Newpower Holdings, which consists of The New Power Company, NewPower Holdings, Inc. and TNPC Holdings, Inc. (together referred to as “NWPW”) began as a wholly owned subsidiary of an Enron affiliate. NWPW IPO’d in October 2000 selling approximately 27 million shares of common stock. Even after the IPO, Enron parties were the dominant shareholders, holding 13,650,400 common shares and 42,134,200 Class A warrants at the time of the bankruptcy filing, and also controlled the board (holding 4 of the 7 seats). Enron was NWPW’s main supplier of services and energy. When Enron collapsed in the fall of 2001, NWPW subsequently filed for Chapter 11 on June 11, 2002. Although the company is in bankruptcy, we feel that there is significant upside potential to where the equity is currently trading.

NWPW filed its first disclosure statement in Dec ‘02, which carved out $12.8mln (approx. $0.10) for equity and warrant holders. The company then issued a revised disclosure statement calling for increased monies to equity and warrant holders of approx. $47.5mln ($0.40). During the February 12th confirmation hearing, the company handed the court an updated cash flow chart, which carved out $63.9mln ($0.53) for shareholders. As per the company, these increases were due to “increased cash inflows, lower than anticipated tax liabilities, and the elimination of a $5mln contingency reserve”. The court delayed confirmation until February 28th for TNPC and Newpower Holdings due to Enron objections. The court again delayed confirming the bankruptcy until April 4th due again to Enron objections and the initial findings from the court appointed Examiner. As it currently stands, July 14th has been set as the next court date in which the judge will hear a status report from the court appointed examiner.

One of the main shareholders, Riverside Contracting attempted to have an equity committee appointed. The court rejected this motion but did appoint an Examiner to look into the issues brought up by Riverside. These issues include, 1. Whether an Enron claim, in the amount of approx $28mln (which was paid in Dec.’02) should be reclassified as equity, 2. Whether Enron equity ownership (Class 9 – common and Class 11- warrants) are valid, 3. Certain claims asserted by Insider and Non-insider employees and 4. Challenging the validity of certain Class 8 claims.

Enron secured claim of $28mln:
The Examiner is looking into the nature of the claim against NWPW. The NWPW estate actually paid this claim in November 2002. The issue to be considered is whether this secured claim should be re-characterized as equity due to the “closeness of the relationship between Enron and NWPW. After reading the Examiner’s report, there does appear to be grounds for further investigation into this matter. If the debt were to be converted to equity, it would be converted to TNPC stock, which, according to the disclosure statement is not entitled to any recovery. The likely scenario would be that the claim would be converted to NWPW stock since any “reclassification” would likely allow some type of recovery to Enron for the conversion. The question would then be: what would the number of shares be? According to bankruptcy documents, the credit was extended to NWPW around Dec ’01. The logical approach would be to divide the claim by NWPW’s stock price at the time the credit was extended which was approximately $0.85 per share ($28mln / $0.85 = 32.95 mln shares). But this is pure conjecture.

Challenging Enron’s equity ownership:
The Enron parties hold 13.65mln shares of common stock (Class 9) and 42.13mln warrants (Class 11), totaling approximately 44% of the total equity. The issues to be considered in determining the validity of the interests are:
1. Whether NWPW was authorized to issue the interests to the Enron parties;
2. Whether the issuance of these Interests to the Enron parties was properly approved;
3. Whether Enron parties paid sufficient consideration for the Interests, and
4. Whether the Enron parties as majority shareholders satisfied their fiduciary duty in connection with the issuance of these interests.

Claims of Insiders and Non-Insider Employees:
There are numerous claims filed by current and former shareholders seeking monies for salary, bonus, health insurance, home equity loans, incentive bonuses, etc. The examiner has submitted to the court his request to further look into these claims. The Examiner should challenge many of these claims. The total claims in Class 2 and 7 are approximately $40mln. We do not know at this time what the total amount of these claims will be rejected.

Class 8 claims:
The Examiner is also challenging certain shareholders exerting claims in Class 8. Aside from the Enron parties, there are approximately 3mln shares (9 shareholders) that are subject to be rejected.

The Examiner submitted his initial report to the court on February 19th. The confirmation hearing (3rd attempt!) was set for April 4th. Judge Drake did not confirm the remaining two plans due to the issues surrounding Enron. The Judge issued a consent order, which essentially allowed the plans to be confirmed as is with court order to allow the Examiner to pursue his claims. Hopefully, the judge will comment on the Examiner’s report and provide guidance for pursuing certain findings at the July 14th court hearing.

Risks:
There is a $500mln class action suit against NWPW. According to the company, they are in negotiations. The company does have D&O insurance but believes that this suit (Class 8 – 510(b) claims) would not affect the projected payout. Therefore we see the major risk to shareholders is the time value of the investment. The company will not make a distribution until the Class action is settled.
Note: the Company has not publicly disclosed what the D&O coverage is or what its deductible is.

Catalysts:
1. Court confirms the NWPW bankruptcy on or around July 14th.
2. Court reacts favorably to Examiner’s report and sets procedures for pursuing recoveries and increasing distributions to shareholders above the $0.53
3. Company settles class action suit with D&O insurance covering the settlement triggering the distribution.

Valuation:

Base Case Scenario –

Assuming the Examiner is not successful on any fronts and the class action is settled by year-end, the real return would be 57% (76% annualized). This also assumes an ultimate payout of $0.52, assuming the Examiner’s fees are approx. $1mln.

Best Case Scenario –

$0.52 from plan minus Examiner’s fees
$0.07 Enron claim converted to equity ( $63.9 + $28)/(~120mln shrs + 33mln shrs)
$0.36 assuming Enron equity stake is cancelled
$0.05 approx. amount for rejection of certain insider and non-insider claims
$0.03 from rejection of shares in Class 8 minus an additional $0.02 for increased fees from Examiner to pursue these claims
______
$1.01.

In this scenario, we would have to assume multiple distributions - $0.50 - $0.53 after class action is settled + $0.51 to $0.48 to be paid out thru early 2005.

Worst Case Scenario –
$0 – Class action recovery wipes out remaining equity.

Conclusion:

I wrote this report in late March. I would like to add a couple of comments. It appears that it is somewhat of a long shot that the Examiner will be successful in converting the Enron claim. He will have to go head to head with the Enron litigation staff (David vs. Goliath). Lockhart (the CEO) and Jacobs (Director) recently resigned from the Board of Directors. It appears that they resigned to remove any potential conflict of interest while in pursuit of their claims, which amount to approximately $19mln combined (included in the $40mln in claims from insiders). The two remaining members of the Board are Weil and Shanks who are supposedly “independent directors”. Once the plans are confirmed and the judge lays out this game plan for the Examiner, it will be interesting to see how the Directors deal with the Examiner.

All said, this isn’t your typical VIC report, but it does offer a fair return (47% return based on $.53 recovery and a current market price of $.36 on the Pinksheets) with potential upside.

A little disclosure: My firm holds a substantial position in the equity of NWPW.

Catalyst

1. July 14th court date when Judge Drake comments on Examiner's findings.
2. Settlement of class action lawsuit, prompting a distribution.