<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission file number 1-12527
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BAYCORP HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0488443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
COCHECO FALLS MILLWORKS, 100 MAIN STREET, SUITE 201
DOVER , NEW HAMPSHIRE 03820-3835
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 742-3388
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes [X] No [ ]
Class Outstanding at May 7, 1998
- -------------------------------- --------------------------
Stock, $0.01 Par Value per Share 8,262,748
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BAYCORP HOLDINGS, LTD.
INDEX
PART I - FINANCIAL INFORMATION:
Item 1 - Financial Statements:
Consolidated Statements of Income and Comprehensive
Income - Three Months Ended March 31, 1998 and 1997.................. 3
Consolidated Balance Sheets at March 31, 1998
and December 31, 1997.............................................. 4-5
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1998 and 1997............................... 6
Notes to Financial Statements........................................ 7-12
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations:............................... 12-15
PART II - OTHER INFORMATION:
Item 1 - Legal Proceedings........................................... 15
Item 6 - Exhibits and Reports on Form 8-K............................ 16
Signature............................................................ 17
Exhibit Index........................................................ 18
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BAYCORP HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Operating Revenues $ 7,443 $ 8,437
Operating Expenses:
Production 4,899 4,394
Transmission 213 220
Administrative & General 1,781 1,933
Depreciation & Amortization 877 863
Taxes other than Income 1,060 1,162
---------- ----------
Total Operating Expenses 8,830 8,572
---------- ----------
Operating Loss (1,387) (135)
Other (Income) Deductions:
Interest and Dividend Income (352) (402)
Decommissioning Cost Accretion 713 666
Decommissioning Trust Fund Income (109) (111)
Unit 2 Sales and Other Deductions 26 0
---------- ----------
Total Other Deductions 278 153
---------- ----------
Loss Before Income Taxes (1,665) (288)
Income Taxes 0 0
---------- ----------
Net Loss $ (1,665) $ (288)
Other Comprehensive Income, Net of Tax
Unrealized Gains on Securities 63 9
Comprehensive Income (Loss) $ (1,602) $ (279)
========== ==========
Weighted Average Shares Outstanding 8,264,192 8,320,869
Basic and Diluted Loss Per Share $ (0.20) $ (0.03)
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
3
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BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash & Cash equivalents $ 4,351 $ 3,270
Short-term Investments, at market 9,613 15,822
Accounts Receivable 5,573 465
Materials & Supplies, net 4,289 3,816
Prepayments & Other Assets 2,662 1,570
-------- --------
Total Current Assets 26,488 24,943
-------- --------
Property, Plant, & Equipment:
Utility Plant 110,433 108,584
Less: Accumulated Depreciation (10,585) (9,758)
-------- --------
Net Utility Plant 99,848 98,826
Nuclear Fuel 15,108 15,076
Less: Accumulated Amortization (7,743) (6,717)
-------- --------
Net Nuclear Fuel 7,365 8,359
Net Property, Plant & Equipment 107,213 107,185
Other Assets:
Decommissioning Trust Fund 8,541 8,025
Deferred Debits & Other 14 5
-------- --------
Total Other Assets 8,555 8,030
-------- --------
TOTAL ASSETS $142,256 $140,158
======== ========
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
4
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BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 250 $ 270
Taxes Accrued 903 0
Miscellaneous Current Liabilities 1,910 1,594
-------- --------
Total Current Liabilities 3,063 1,864
Operating Reserves:
Decommissioning Liability 58,056 55,846
Miscellaneous Other 564 564
-------- --------
Total Operating Reserves 58,620 56,410
Other Liabilities & Deferred Credits 4,108 3,745
Commitments & Contingencies
Stockholders' Equity:
Common stock, $.01 par value,
Authorized - 20,000,000 shares,
Issued and Outstanding - 8,417,800 84 84
Less: Treasury Stock - 155,052 and 145,000 shares,
respectively, at cost (1,240) (1,168)
Additional paid-in capital 92,100 92,100
Accumulated Other Comprehensive Income 178 115
Accumulated Deficit (14,657) (12,992)
-------- --------
Total Stockholders' Equity 76,465 78,139
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $142,256 $140,158
======== ========
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
5
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BAYCORP HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Net cash flow from operating activities:
Net (Loss) $(1,665) $ (288)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation 877 863
Amortization of nuclear fuel 1,026 1,078
Decommissioning trust accretion 713 666
Decommissioning trust interest (109) (111)
(Increase) decrease in accounts receivable (5,107) 243
Increase in materials & supplies (518) (209)
Increase in prepaids and other assets (1,101) (2,844)
Decrease in accounts payable (20) (16)
Increase in taxes accrued 902 962
Other 696 (1,519)
------- --------
Net cash used in operating activities (4,306) (1,175)
------- --------
Net cash flows provided by (used in) investing activities:
Utlility plant additions (363) (476)
Nuclear fuel additions (32) (1,387)
Payments to decommissioning fund (289) (277)
Short term investments, net 6,142 1,199
------- --------
Net cash provided by (used in) investing activities 5,458 (941)
------- --------
Net cash used in financing activities:
Reacquired Capital Stock (71) (336)
------- --------
Net cash used in financing activities (71) (336)
------- --------
Net increase (decrease) in cash and cash equivalents 1,081 (2,452)
Cash and cash equivalents, beginning of period 3,270 16,412
------- --------
Cash and cash equivalents, end of period $ 4,351 $ 13,960
======= ========
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
6
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BAYCORP HOLDINGS, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE A - THE COMPANY
BayCorp Holdings, Ltd. ("BayCorp" or the "Company") serves as a holding
company for Great Bay Power Corporation ("Great Bay"). Great Bay is an electric
generating company whose principal asset is a 12.1% joint ownership interest in
the Seabrook Nuclear Power Project in Seabrook, New Hampshire (the "Seabrook
Project"). Great Bay is an exempt wholesale generator ("EWG") under the Public
Utility Holding Company Act of 1935 ("PUHCA"). Unlike regulated public
utilities, Great Bay has no franchise area or captive customers. Great Bay sells
its power in the competitive wholesale power markets.
Great Bay became a wholly-owned subsidiary of BayCorp in a corporate
reorganization that involved a merger of a newly-formed wholly-owned subsidiary
of BayCorp with and into Great Bay on January 24, 1997. The consolidated assets
and liabilities of Great Bay and its subsidiaries immediately before the
reorganization were the same as the consolidated assets and liabilities of
BayCorp and its subsidiaries immediately after the reorganization. Currently,
Great Bay is the sole subsidiary of BayCorp. BayCorp's principal asset is its
100% equity interest in Great Bay. The new corporate structure enables BayCorp,
either directly or through subsidiaries other than Great Bay, to engage in
businesses that Great Bay would be prohibited from pursuing due to its status as
an EWG under the PUHCA. BayCorp may in the future enter into new businesses or
acquire existing businesses, both in energy related fields and possibly in
unrelated fields.
BayCorp was incorporated in Delaware in 1996. Great Bay was
incorporated in New Hampshire in 1986 and was formerly known as EUA Power
Corporation (the "Predecessor"). Great Bay sells its share of the electricity
output of the Seabrook Project in the wholesale electricity market, primarily in
the Northeast United States. Neither BayCorp nor Great Bay has operational
responsibilities for the Seabrook Project. Great Bay's share of the Seabrook
Project capacity is approximately 140 megawatts ("MW"). Great Bay currently
sells all but 10 MW of its share of the Seabrook Project capacity in the
short-term market.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements included herein have been prepared
on behalf of the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC") and include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of interim period results. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted or
condensed pursuant to such rules and regulations. The Company believes, however,
its disclosures herein, when read in conjunction with the Company's audited
financial statements for the year ended December 31, 1997, are adequate to make
the information presented not misleading. The results for the interim periods
are not necessarily indicative of the results to be expected for the full fiscal
year.
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BAYCORP HOLDINGS, LTD.
The Company adopted SFAS No. 130, Reporting Comprehensive Income,
effective January 1, 1998. Accumulated Other Comprehensive Income and the
current period charge are as follows:
<TABLE>
<CAPTION>
Unrealized Gains Accumulated Other
on Securities Comprehensive Income
<S> <C> <C>
Beginning Balance $115,000 $115,000
Current Period Charge 63,000 63,000
-------- --------
Ending Balance $178,000 $178,000
======== ========
</TABLE>
NOTE C - COMMITMENTS AND CONTINGENCIES
NUCLEAR POWER, ENERGY AND UTILITY REGULATION
The Seabrook Project and Great Bay, as part owner of a licensed nuclear
facility, are subject to the broad jurisdiction of the Nuclear Regulatory
Commission ("NRC"), which is empowered to authorize the siting, construction and
operation of nuclear reactors after consideration of public health and safety,
environmental and antitrust matters. Great Bay has been, and will be, affected
to the extent of its proportionate share by the cost of any NRC requirements
applicable to Seabrook Unit I.
Great Bay is also subject to the jurisdiction of the Federal Energy
Regulatory Commission ("FERC") under Parts II and III of the Federal Power Act
and, as a result, is required to file with FERC all contracts for the sale of
electricity. FERC has the authority to suspend the rates at which Great Bay
proposes to sell power, to allow such rates to go into effect subject to refund
and to modify a proposed or existing rate if FERC determines that such rate is
not "just and reasonable." FERC's jurisdiction also includes, among other
things, the sale, lease, merger, consolidation or other disposition of
facilities, interconnection of certain facilities, accounts, service and
property records.
Because it is an EWG, Great Bay is not subject to the jurisdiction of
the SEC under PUHCA. In order to maintain its EWG status, Great Bay must
continue to engage exclusively in the business of owning and/or operating all or
part of one or more "eligible facilities" and to sell electricity only at
wholesale (i.e. not to end users) and activities incidental thereto. An
"eligible facility" is a facility used for the generation of electric energy
exclusively at wholesale or used for the generation of electric energy and
leased to one or more public utility companies. The term "facility" may include
a portion of a facility. In the case of Great Bay, its 12.1% joint ownership
interest in the Seabrook Project comprises an "eligible facility."
Great Bay is subject to regulation by the New Hampshire Public
Utilities Commission ("NHPUC") in many respects, including the issuance of
securities, the issuance of debt, contracts with affiliates, forms of accounts,
transfers of utility properties, mortgaging of utility property and other
matters. The NHPUC does not regulate rates charged for sales of electricity at
wholesale.
UTILITY DEREGULATION; PUBLIC CONTROVERSY CONCERNING NUCLEAR POWER PLANTS
The NHPUC and the regulatory authorities with jurisdiction over
utilities in New Hampshire and state legislatures of several other states in
which Great Bay sells electricity are considering or have
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BAYCORP HOLDINGS, LTD.
implemented initiatives relating to the deregulation of the utility industry.
Simultaneously with the deregulation initiatives occurring in each of the New
England states, the New England Power Pool ("NEPOOL") is restructuring to create
and maintain open, non-discriminatory, competitive, unbundled markets for
energy, capacity, and ancillary services. NEPOOL's restructuring is designed to
function efficiently in a changing electric power industry and to permit
regional transmission at rates that do not vary with distance. In conjunction
with NEPOOL's restructuring, a new entity, ISO New England, Inc., has been
formed to insure system reliability and to oversee the newly formed deregulated
generation markets. All of the deregulation initiatives open electricity markets
to competition in the affected states. While Great Bay believes it is a low-cost
producer of electricity and will benefit from the deregulation of the electric
industry, it is not possible to predict the impact of these various initiatives
on Great Bay.
Nuclear units in the United States have been subject to widespread
criticism and opposition, which has led to construction delays, cost overruns,
licensing delays and other difficulties. Various groups have sought to prohibit
the completion and operation of nuclear units and the disposal of nuclear waste
by litigation, legislation and participation in administrative proceedings. The
Seabrook Project was the subject of significant public controversy during its
construction and licensing and remains controversial. An increase in public
concerns regarding the Seabrook Project or nuclear power in general could
adversely affect the operating license of Seabrook Unit 1. While the Company
cannot predict the ultimate effect of such controversy, it is possible that it
could result in a premature shutdown of the unit.
In the event of a permanent shutdown of any unit, NRC regulations
require that the unit be completely decontaminated of any residual
radioactivity. While the owners of the Seabrook Project are accumulating a trust
fund to pay decommissioning costs, if these costs exceed the amount of the trust
fund, the owners, including Great Bay, will be liable for the excess.
DECOMMISSIONING LIABILITY
Based on the Financial Accounting Standards Board's ("FASB") tentative
conclusions, Great Bay has recognized as a liability its proportionate share of
the estimated Seabrook Project decommissioning. The initial recognition of this
liability was capitalized as part of the Fair Value of the Utility Plant at
November 23, 1994. The current estimated cost to decommission the Seabrook
Project, based on a study performed for the lead owner of the Seabrook Project,
is approximately $473 million in 1997 dollars and $2.2 billion in 2026 dollars,
assuming a remaining 28 year life for the facility and a future escalation rate
of 5%. Based on this estimate, the present value of Great Bay's share of this
liability as of March 31, 1998 is approximately $58.1 million.
During the first quarter of 1996, Great Bay began to accrete its share
of the Seabrook Project's decommissioning liability. This accretion is a
non-cash charge and recognizes Great Bay's liability related to the closure and
decommissioning of its nuclear plant in current year dollars over the licensing
period of the plant. As a result of this accretion, Great Bay's share of the
estimated decommissioning cost increased from $50.2 million as December 31, 1995
to $58.1 million as of March 31, 1998.
The Seabrook Project's decommissioning estimate and funding schedule is
subject to review each year by the New Hampshire Nuclear Decommissioning Finance
Committee ("NDFC"). This estimate is based on a number of assumptions. Changes
in assumptions based on factors such as labor
9
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BAYCORP HOLDINGS, LTD.
and material costs, technology, inflation and timing of decommissioning could
cause these estimates to change, possibly materially, in the near term.
The Staff of the Securities and Exchange Commission (the "SEC") has
questioned certain of the current accounting practices of the electric utility
industry regarding the recognition, measurement and classification of
decommissioning costs for nuclear generating stations and joint owners in the
financial statements of these entities. In response to these questions, the FASB
has agreed to review the accounting for nuclear decommissioning costs. In 1996,
the FASB issued an Exposure Draft entitled "Accounting for Certain Liabilities
Related to Closure and Removal of Long-Lived Assets." The FASB continues to work
on this project. Either a revised exposure draft or a final statement may be
issued in 1998. Great Bay's accounting for decommissioning was based on the
FASB's original tentative conclusions. If the current exposure draft is adopted
or accounting practices for nuclear power plant decommissioning are changed,
Great Bay's decommissioning liability and annual provision for decommissioning
could change relative to amounts reflected in the financial statements. The
Company is unable to predict the impact, if any, changes in the current
accounting will have on the Company's financial statements.
Although the owners of Seabrook are accumulating funds in an external
trust to defray decommissioning costs, these costs could substantially exceed
the value of the trust fund, and the owners, including Great Bay, would remain
liable for the excess. The amount required to be deposited in the trust fund is
subject to periodic review and adjustment by the NDFC, which could result in
material increases in such amounts. Based on the currently approved funding
schedule, Great Bay's decommissioning payments will be approximately$1.2 million
in 1998 and escalate at 4% each year thereafter through 2026.
On November 15, 1992, Great Bay, the Bondholder's Committee and the
Predecessor's former parent, Eastern Utilities Associates ("EUA"), entered into
a settlement agreement that resolved certain proceedings against EUA brought by
the Bondholder's Committee. Under the settlement agreement EUA reaffirmed its
guarantee of up to $10 million of Great Bay's future decommissioning costs of
Seabrook Unit 1.
In January 1997 and July 1997, the NRC staff ruled that Great Bay did
not satisfy the NRC definition of "electric utility." If the NRC does not
reverse its ruling, Great Bay would have to comply with the NRC regulations
applicable to non "electric utility" owners of interests in nuclear power
plants, including less favorable decommissioning funding requirements.
In January 1998, Great Bay filed a petition with the NRC seeking NRC
approval of Great Bay's proposal to fund decommissioning obligations. Great
Bay's petition also sought, in the alternative, an NRC permanent exemption from
the obligation of Great Bay to comply with the NRC regulations applicable to non
"electric utility" owners of interests in nuclear power plants.
The Company cannot predict whether Great Bay's funding proposal will be
acceptable to the NRC or whether the NRC will grant a permanent exemption to
Great Bay. Failure to obtain relief may have a material adverse effect on Great
Bay's business, financial condition, liquidity or results of operation.
10
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BAYCORP HOLDINGS, LTD.
LIQUIDITY AND CAPITAL EXPENDITURES
BayCorp anticipates that its share of the Seabrook Project's capital
expenditures for the 1998 fiscal year will total approximately $7.4 million,
primarily for nuclear fuel and various capital projects. This estimate is based
on the latest projections provided by the managing agent of the Seabrook
Project.
An unscheduled outage began on December 5, 1997 and lasted until
January 15, 1998. The Seabrook Project from time to time experiences both
scheduled and unscheduled outages. The Company incurs losses during outage
periods due to the loss of all operating revenues and additional costs
associated with the outages as well as continuing operating and maintenance
expenses and depreciation.
For each of the tax years 1994, 1995, 1996 and 1997, Great Bay filed
property tax abatement applications with the town of Seabrook and two other New
Hampshire towns in which the Seabrook Project is located. Great Bay paid the
1994, 1995 and half of the 1996 property taxes billed by the Towns of Seabrook,
Hampton and Hampton Falls, New Hampshire (collectively, the "Towns") but
withheld payment of the second half of the 1996 property taxes billed by the
Towns, based on Great Bay's position that the portion of 1996 property taxes
paid to the Towns exceeded the amount of the total 1996 property taxes
appropriately payable by Great Bay to the Towns. Great Bay also withheld the
first half of its 1997 property taxes to the Towns. The abatement request for
tax years 1994, 1995 and 1996 were denied. Great Bay filed appeals for each of
those years with the New Hampshire Board of Tax and Land Appeals. The appeals
are currently pending and a hearing on the first phase of these appeals is
scheduled for May 12, 1998.
Proposed NRC regulations and a review of Great Bay's status as an
"electric utility" by the NRC are currently in process and may adversely effect
BayCorp's and Great Bay's liquidity, possibly materially. See "Decommissioning
Liability."
On February 12, 1998, Great Bay sent a letter to PECO Energy Company
("PECO") informing PECO that Great Bay intended to terminate PECO as Great Bay's
exclusive marketing agent. On February 24, 1998, Great Bay filed suit against
PECO in the United States District Court for the District of New Hampshire
seeking a declaratory judgment that Great Bay properly terminated the PECO
Services Agreement and seeking damages arising out of PECO's breach of the PECO
Services Agreement. In its complaint, Great Bay alleges that (i) PECO has
entered into a number of wholesale power agreements in its own name and for its
own benefit without bringing these opportunities to Great Bay's attention or
submitting bids on behalf of Great Bay and (ii) PECO failed to offer Great Bay's
power on a firm basis to customers as required under the PECO Services
Agreement. In February 27, 1998, Great Bay sent a letter to PECO notifying PECO
that the Services Agreement was terminated.
On March 10, 1998, PECO filed a motion in the United States District
Court for the District of New Hampshire for a preliminary injunction to prevent
Great Bay from terminating the PECO Services Agreement. At that time, PECO also
filed counterclaims seeking damages for an amount in excess of $5,000,000 for
alleged breach of contract, alleged loss of goodwill and alleged harm to PECO's
reputation. PECO's counterclaim contained seven counts: breach of
contract/wrongful termination,
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BAYCORP HOLDINGS, LTD.
breach of exclusivity promise, breach of the covenant of good faith and fair
dealing, unjust enrichment, defamation, unfair trade practices and an action for
declaratory judgment.
On March 30, 1998, the Court denied PECO's motion for a preliminary
injunction. However, in its decision denying PECO's request for a preliminary
injunction, the Court found that it is likely that PECO will prevail on its
claim that Great Bay wrongfully terminated the PECO Services Agreement. Great
Bay and PECO are currently engaged in settlement negotiations. During the
pendency of these negotiations, the parties have agreed that they will not take
further action in the litigation.
NOTE D - EQUITY
On October 9, 1997, the Board of Directors of BayCorp adopted a
resolution authorizing BayCorp to repurchase up to an additional aggregate of
100,000 shares of BayCorp common stock on the open market or in negotiated
transactions. The shareholder groups controlled by Omega Advisors, Inc. and
Elliot Associates, L.P., the owners of approximately 57% of the Company's shares
outstanding in aggregate, have advised the Company that they do not intend to
sell shares in the open market or in negotiated transactions which would be
subject to repurchase by the Company under this repurchase program. As of
March 31, 1998, the Company had repurchased 10,000 shares at a cost of
approximately $71,253, or approximately $7.125 per share, as part of this
repurchase program.
Neither the Company nor Great Bay has ever paid cash dividends on its
common stock. BayCorp currently expects that it will retain all of its future
earnings and does not anticipate paying a dividend in the foreseeable future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
As a result of the corporate restructuring that occurred in January
1997, BayCorp's principal asset is its 100% equity interest in Great Bay. Great
Bay is a public utility whose principal asset is a 12.1% joint ownership
interest in the Seabrook Nuclear Power Project in Seabrook, New Hampshire.
Unless the context requires otherwise, references to BayCorp for events and time
periods before January 1997 reflect treatment of BayCorp as successor to Great
Bay.
An unscheduled outage at the Seabrook Project began on December 5, 1997
and lasted until January 15, 1998. For the three months ended March 31, 1998,
the Company has reported a loss of approximately $1,665,000 due to decreased
revenues and increased operating costs associated with this unscheduled outage.
See "Liquidity and Capital Expenditures."
RESULTS OF OPERATIONS: FIRST QUARTER OF FISCAL 1998 COMPARED TO THE FIRST
QUARTER OF FISCAL 1997
Operating Revenues
Operating Revenues decreased by approximately $994,100, or 11.8%, to
$7,443,100 in the first quarter of 1998 as compared to $8,437,200 in the first
quarter of 1997. This decrease in revenues was
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BAYCORP HOLDINGS, LTD.
primarily the result of the unscheduled outage that began in December 1997 and
ended on January 15, 1998. For the first quarter of 1998, the capacity factor at
the Seabrook plant was 81.2% versus a capacity factor of 100% for the first
quarter of 1997. The capacity factor for the first quarter of 1998 was adversely
affected by the unscheduled outage referred to above. There were no scheduled or
unscheduled outages during the first quarter of 1997. Sales of electricity
decreased by approximately 19% to 246,494,100 kilowatt-hours ("kWhs") in the
first quarter of 1998 as compared to 304,475,500 kWhs in the first quarter of
1997. During the first quarter of 1998 the average sales price per kWh
(determined by dividing total sales revenue by the total number of kWhs sold in
the applicable period) increased 9.0% to 3.02 cents per kWh as compared with
2.77 cents per kWh in the first quarter of 1997.
BayCorp's cost of power (determined by dividing total operating
expenses by BayCorp's 12.1% share of the power produced by the Seabrook Project
during the applicable period) increased 21.1% to 3.58 cents per kWh in the first
quarter of 1998 as compared to 2.82 cents per kWh in the first quarter of 1997.
This increase was primarily the result of the unscheduled outage and its
associated costs that were incurred in the first quarter of 1998 and the lower
capacity factor at the Seabrook Project during the first quarter of 1998 as
compared to the first quarter of 1997. Scheduled and unscheduled outage time
increases BayCorp's cost of power because Seabrook costs are spread over fewer
kWhs.
Expenses
Production and Transmission expenses for the first quarter of 1998
increased approximately $498,000, or 10.8%, as compared to the first quarter of
1997. This increase was primarily the result of unscheduled outage related costs
incurred in the first quarter of 1998. There were no scheduled or unscheduled
outages during the first quarter of 1997.
During the first quarter of 1998, there was an overall decrease of
approximately $240,000, or 6.1%, in depreciation and amortization, taxes, and
administrative and general expenses, from $3,958,000 in the first quarter of
1997 to $3,718,000 in the first quarter of 1998. This decrease was primarily
attributable to a decrease in general and administrative expenses at Seabrook
during the first quarter of 1998 as compared to the first quarter of 1997.
Other (Income) Deductions
Decommissioning Cost Accretion increased $47,000, to $713,000 during
the first quarter of 1998 as compared to $666,000 during the first quarter of
1997. This accretion is a non-cash charge and recognizes Great Bay's liability
related to the closure and decommissioning of the Seabrook Project in current
year dollars over the over the period during which the Seabrook Project is
licensed to operate.
During the first quarter of 1998, the Company realized $435,000 in
miscellaneous other income as compared to $513,000 for the first quarter of
1997. This income primarily reflects interest earned on the Company's cash and
decommissioning trust fund accounts. The decrease of $78,000, or 15.2%,
primarily reflects reduced interest earnings on the lower cash balances during
the first quarter of 1998 as compared to the first quarter of 1997.
13
<PAGE> 14
BAYCORP HOLDINGS, LTD.
Net Loss
As a result of the above factors, during the first quarter ended
March 31, 1998, the Company recorded a net loss of $1,665,000, or approximately
$.20 per basic and diluted share, as compared to a net loss of $288,000, or
approximately $.03 per basic and diluted share, during the first quarter ended
March 31, 1997.
Net Operating Losses
For federal income tax purposes, as of December 31, 1997, the Company
had net operating loss carry forwards ("NOLs") of approximately $196 million,
which are scheduled to expire between 2005 and 2012. Because the Company has
experienced one or more ownership changes, within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended, an annual limitation is imposed
on the ability of the Company to use $136 million of these carryforwards. The
Company's best estimate at this time is that the annual limitation on the use of
$136 million of the Company's NOLs is approximately $5.5 million per year. Any
unused portion of the $5.5 million annual limitation applicable to the Company's
restricted NOL's is available for use in future years until such NOL's are
scheduled to expire. The Company's other $60 million of NOLs are not currently
subject to such limitations.
Liquidity
BayCorp's cash and short-term investments decreased approximately
$5,128,000 during the first three months of 1998. Principal factors affecting
liquidity during the three months ended March 31, 1998 included the operating
loss of $1,665,000 discussed above and cash expenditures of approximately
$363,000 for capital plant additions and $289,000 for decommissioning trust fund
payments. The increase in accounts receivable of approximately $5,107,000
includes an outstanding receivable of approximately $2,500,000 for February
sales currently due from PECO. PECO is withholding this payment pending the
outcome of the current settlement negotiations between BayCorp and PECO. See
"Liquidity and Capital Expenditures." The remaining increase in accounts
receivable of approximately $2,600,000 is primarily due to the low 1997 year end
receivables balance resulting from the unscheduled outage in December 1997 that
reduced December sales.
Offsetting these cash charges were non-cash charges to income which
included $877,000 for depreciation, $1,026,000 for nuclear fuel amortization and
decommissioning trust fund accretion of $713,000 and an increase in Taxes
Accrued of $902,000. During the first quarter of 1998, prepaids and other assets
decreased approximately $1,101,000 and other working capital items increased
$696,000, for a net decrease of approximately $405,000 primarily related to
payments to the Seabrook Project for operating expenses.
This Quarterly Report on Form 10-Q contains forward-looking statements
that involve a number of risks and uncertainties. Any statements contained
herein (including without limitation statements to the effect that the Company,
Great Bay or their management "believes", "expects", "anticipates", "plans" and
similar expressions) that are not statements of historical fact should be
considered forward-looking statements. Among the important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements are the factors set forth in the Company's Annual
Report on Form 10-K under the caption Management's Discussion and Analysis of
Financial Condition and
14
<PAGE> 15
BAYCORP HOLDINGS, LTD.
Results of Operation - Certain Factors That May Affect Future Results, which are
incorporated by reference herein.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For each of the tax years 1994, 1995, 1996 and 1997, Great Bay filed
property tax abatement applications with the town of Seabrook and two other New
Hampshire towns in which the Seabrook Project is located. Great Bay paid the
1994, 1995 and half of the 1996 property taxes billed by the Towns of Seabrook,
Hampton and Hampton Falls, New Hampshire (collectively, the "Towns") but
withheld payment of the second half of the 1996 property taxes billed by the
Towns, based on Great Bay's position that the portion of 1996 property taxes
paid to the Towns exceeded the amount of the total 1996 property taxes
appropriately payable by Great Bay to the Towns. Great Bay also withheld the
first half of its 1997 property taxes to the Towns. The abatement request for
tax years 1994, 1995 and 1996 were denied. Great Bay filed appeals for each of
those years with the New Hampshire Board of Tax and Land Appeals. The appeals
are currently pending and a hearing on the first phase of these appeals is
scheduled for May 12, 1998.
On February 12, 1998, Great Bay sent a letter to PECO Energy Company
("PECO") informing PECO that Great Bay intended to terminate PECO as Great Bay's
exclusive marketing agent. On February 24, 1998, Great Bay filed suit against
PECO in the United States District Court for the District of New Hampshire
seeking a declaratory judgment that Great Bay properly terminated the PECO
Services Agreement and seeking damages arising out of PECO's breach of the PECO
Services Agreement. In its complaint, Great Bay alleges that (i) PECO has
entered into a number of wholesale power agreements in its own name and for its
own benefit without bringing these opportunities to Great Bay's attention or
submitting bids on behalf of Great Bay and (ii) PECO failed to offer Great Bay's
power on a firm basis to customers as required under the PECO Services
Agreement. In February 27, 1998, Great Bay sent a letter to PECO notifying PECO
that the Services Agreement was terminated.
On March 10, 1998, PECO filed a motion in the United States District
Court for the District of New Hampshire for a preliminary injunction to prevent
Great Bay from terminating the PECO Services Agreement. At that time, PECO also
filed counterclaims seeking damages for an amount in excess of $5,000,000 for
alleged breach of contract, alleged loss of goodwill and alleged harm to PECO's
reputation. PECO's counterclaim contained seven counts: breach of
contract/wrongful termination, breach of exclusivity promise, breach of the
covenant of good faith and fair dealing, unjust enrichment, defamation, unfair
trade practices and an action for declaratory judgment.
On March 30, 1998, the Court denied PECO's motion for a preliminary
injunction. However, in its decision denying PECO's request for a preliminary
injunction, the Court found that it is likely that PECO will prevail on its
claim that Great Bay wrongfully terminated the PECO Services Agreement. Great
Bay and PECO are currently engaged in settlement negotiations. During the
pendency of these negotiations, the parties have agreed that they will not take
further action in the litigation.
15
<PAGE> 16
BAYCORP HOLDINGS, LTD.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index
(b) There were no reports on Form 8-K submitted for the three months
ended March 31, 1998.
16
<PAGE> 17
BAYCORP HOLDINGS, LTD.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BAYCORP HOLDINGS, LTD.
May 12, 1998 By: /s/ Frank W. Getman Jr.
-------------------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
17
<PAGE> 18
BAYCORP HOLDINGS, LTD.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.27 Employment Agreement between Frank W. Getman Jr. and BayCorp
Holdings, Ltd., dated May 5, 1998.
10.28 Employment Agreement between John A. Tillinghast and BayCorp
Holdings, Ltd., dated May 5, 1998.
27.1 Financial Data Schedule
99.1 Certain Factors That May Affect Future Results, set out on
pages 18-22 of the Company's Annual Report on Form 10-K for
the period ended December 31, 1997. Such Form 10-K shall not
be deemed to be filed except to the extent that portions
thereof are expressly incorporated by reference herein.
18
<PAGE> 1
Exhibit 10.27
EMPLOYMENT AGREEMENT
AGREEMENT made as of this 5th day of May, 1998, by and between BayCorp
Holdings, Ltd., a Delaware corporation with its principal place of business
located at 100 Main Street, Suite 201, Dover, New Hampshire 03820 (the
"Company"), and Frank W. Getman, Jr., residing at 410 Richards Avenue,
Portsmouth, New Hampshire 03801 ("Executive").
RECITAL
The Company and Executive are parties to an Employment Agreement dated
as of July 31, 1995, as amended (the "Prior Agreement"). The parties hereto wish
to enter into this Agreement in substitution for the Prior Agreement.
1. EMPLOYMENT.
The Company hereby employs Executive, and Executive hereby
accepts such employment, in accordance with the terms and subject to the
conditions set forth in this Agreement.
2. POSITION AND DUTIES.
a. Subject to the provisions of this Agreement, the
Company shall employ Executive, and Executive shall serve the Company, as
President and Chief Executive Officer and/or any other titles as may be
designated from time to time by the Board of Directors (the "Board") of the
Company. Executive shall report to the Board.
b. Executive shall have primary authority and
responsibility for operational, management and general business matters of the
Company and shall perform such executive duties and responsibilities on behalf
of the Company and its Affiliates (as defined below) as may be prescribed from
time to time by the Board. Executive shall devote his full-time best efforts to
the business of the Company so as to increase the profitability and shareholder
value of the Company; and Executive shall not during the term of this Agreement
be engaged in any other business activity, unless written approval is first
secured from the Board. The preceding sentence shall not be deemed to prohibit
Executive's activities relating to his ownership and management of a certain
residential apartment building located in Oneonta, New York and a certain
condominium located in Brighton, Massachusetts, provided that the ownership and
management of such building and condominium does not interfere with Executive's
duties hereunder. As used herein, "Affiliates" shall mean entities controlling,
controlled by or under common control with the Company. The Executive agrees
upon the Board's request, to serve on the Board (or any Affiliates's boards of
directors) for no additional consideration. The Executive acknowledges and
agrees that, incident to a material transaction involving the Company, his title
and duties may be shared with a "Co-Chief Executive Officer"
<PAGE> 2
(and the same, in and of itself, shall not constitute a "Material Adverse
Change," as defined below).
3. TERM OF EMPLOYMENT. Unless sooner terminated as provided in
Section 6 below, the term of this Agreement shall be approximately two (2)
years, commencing on May 5, 1998 (the "Commencement Date") and ending on
July 31, 2000 (the "Expiration Date"). As used herein, the word "Term" shall
refer to the period beginning on the Commencement Date and ending on the
effective date of the termination of Executive's employment with the Company as
provided in this Agreement.
4. COMPENSATION; BENEFITS. For all services rendered by Executive
pursuant to this Agreement, the Company shall compensate Executive, during the
Term of Executive's employment hereunder, as follows:
a. ANNUAL SALARY; DISCRETIONARY BONUS. From and after
the Commencement Date, Executive shall be paid an annual base salary of $150,000
per year, which shall be payable in equal bi-weekly installments. After the
first anniversary of the Commencement Date, such base salary shall be increased
to $160,000 per year. The Executive shall also be eligible to receive, from time
to time, one or more discretionary bonuses to be determined by the Board. All
salary and bonus payments to Executive shall be subject to payroll tax and
related deductions as required by law.
b. LOAN. The Company shall lend to Executive the sum of
$25,000 (the "Loan Amount"), which sum shall be paid to Executive promptly after
the Commencement Date, and of which at least 80% of which shall be used to
purchase common stock of the Company on the open market. One-half (1/2) of the
Loan Amount (or $12,500) shall be forgiven, and Executive shall have no
obligation to repay the Company with respect to such forgiven amount (a
"Forgiven Loan Amount"), on each anniversary of the Commencement Date.
Notwithstanding the foregoing sentence, in the event that the employment of
Executive is terminated by the Company for "Cause" (as defined in Section 6.c.
below) or by Executive in violation of the terms of this Agreement prior to the
Expiration Date, Executive shall, within thirty (30) days following such
termination, repay to the Company the Loan Amount, less any Forgiven Loan Amount
(the "Adjusted Loan Amount"), together with interest accrued on the Adjusted
Loan Amount, as calculated from the Commencement Date through the date of such
termination, at the rate of six percent (6%) per annum.
c. INSURANCE. During the Term, the Company shall
continue to pay life insurance and disability insurance premiums with respect to
the Executive, consistent with past practices and subject to the Executive's
continued eligibility for coverage at reasonable rates.
d. EXECUTIVE BENEFITS; VACATION. During the term of his
employment hereunder, Executive shall be entitled to participate in all employee
pension and welfare benefit plans and programs made
<PAGE> 3
available to executive employees of the Company, as such plans or programs may
be in effect from time to time and as determined by the Board, including,
without limitation, 401(K) plans and health insurance and life insurance plans
not covered above. Executive shall be entitled to three (3) weeks of paid
vacation per calendar year or a pro rata number of vacation days for a period
that is less than a complete calendar year in accordance with the Company's
vacation policy in effect from time to time.
e. REIMBURSEMENT OF EXPENSES. Executive shall be
reimbursed for reasonable business expenses incurred in connection with carrying
out the business of the Company, subject to authorization and documentation in
accordance with the Company's policies in effect from time to time.
5. CONFIDENTIAL INFORMATION; NON-COMPETITION; ANTI-RAIDING.
a. Executive agrees that all operating and/or financial
data and projections, plans, contracts, agreements, literature, manuals,
brochures, books, schedules, correspondence and other materials furnished,
disclosed or otherwise made available to Executive by the Company or its
Affiliates, or secured through the efforts of Executive, relating to the
business conducted by the Company and/or its Affiliates, are and shall remain
the property of the Company and/or its Affiliates, and Executive agrees to
deliver all such materials, including all copies or abstracts thereof, to the
Company upon the termination of Executive's employment hereunder, or at any
other time at the Company's request.
b. Executive agrees that, except in the good faith
performance of his duties and responsibilities under this Agreement or as
required by order of a court or governmental agency having jurisdiction, he will
not at any time during or after his employment with the Company use, reveal,
divulge or make known to any person or entity any confidential or proprietary
knowledge or information concerning the Company or its Affiliates, including
without limitation any such information concerning any equipment, facilities,
contracts, leases, operating and/or financial data and projections, processes,
developments, schedules, lists, plans or other matters relating to the business
of the Company or its Affiliates and will retain all knowledge and information
Executive acquired during his employment therewith relating to the business of
the Company or its Affiliates in trust in a fiduciary capacity for the sole
benefit of the Company, its Affiliates and their respective successors and
assigns. Executive's obligations under this Section 5.b. shall not apply to any
information that (i) is or becomes known to the general public under
circumstances involving no breach by Executive of this Agreement, (ii) is
generally disclosed to third parties (excluding counsel, accountants, financial
advisors, employees, agents and material creditors of the Company) by the
Company without restriction on such third parties, or (iii) is approved for
release by written authorization of the Board.
c. During the Term and for a period of one (1) year
<PAGE> 4
thereafter, Executive shall not (i) enter into the employment of, or act as a
consultant, director, officer, or employee of, or render any service or advice
to, any other business, partnership, association, corporation or other entity
engaged in the "public utility" industry within one or more of the six New
England States, other than the Company or any Affiliate (a "Competing
Business"), or (ii) invest or otherwise acquire any interest, whether as a
shareholder, lender, partner, proprietor, vendor or otherwise, in any Competing
Business (excluding ownership of less than 2% of a class of securities of a
publicly-traded company). "Public utility" shall mean for the purposes of this
Section 5.c. any company which directly or indirectly owns or operates
facilities used for the generation, transmission, or distribution of electric
energy for sale.
d. During the Term and for a period of two (2) years
thereafter, Executive will not, directly or indirectly, entice, induce or in any
manner influence any person who is, or shall have been during such period, in
the service of the Company, to leave such service for the purpose of engaging in
a Competing Business, or being employed or engaged by or otherwise associated
with any person or entity which is a Competing Business.
e. The provisions of this Section 5 shall survive the
termination of this Agreement and the termination of Executive's employment with
the Company and shall run to and inure to the benefit of the Company and its
successors and assigns. Executive represents, warrants and acknowledges that he
has carefully read this Section 5, that he has had an opportunity to have the
provisions contained herein explained to him by his attorney, and that he
understands the provisions contained herein. Executive further acknowledges
that, by reason of his training, skills, experience and employment hereunder,
the services to be rendered by him under the provisions of this Agreement and
their value to the Company are of a special, unique and extraordinary character
and that it would be difficult or impossible to replace such services, and he
further acknowledges that a violation by him of any of the provisions of this
Section 5 could cause continuing material and irreparable injury to the Company
and that in such event money damages would not be readily calculable and the
Company would not have an adequate remedy at law. Executive acknowledges and
agrees that (i) the restrictions under this Section 5 are reasonable and will
not interfere with Executive's ability to earn a livelihood or impose upon him
any undue hardship, and (ii) any breach of the covenants, provisions and
restrictions contained in this Section 5 shall cause, and shall be deemed to be,
a fundamental and material breach of Executive's fiduciary and contractual
obligations to Employer. Therefore, Executive agrees that the Company shall be
authorized and entitled to obtain from any court of competent jurisdiction,
interim and permanent equitable relief, including without limitation, injunctive
relief, in the event of any such breach or threatened breach, together with
payment of reasonable attorneys' fees and disbursements and any other costs of
enforcement incurred in connection with such breach or threatened breach. These
rights and remedies shall be cumulative and shall be in addition to any other
rights or remedies whatsoever to which the Company shall
<PAGE> 5
otherwise be entitled hereunder, at law or otherwise, including the right to
seek damages (including any consequential damages) which any court of competent
jurisdiction may deem appropriate.
6. TERMINATION OF EMPLOYMENT. The term of employment may
terminate upon the occurrence of any of the following events:
a. TERMINATION DUE TO DEATH. Executive's employment
hereunder shall terminate upon his death. In such event his estate or his
beneficiaries, as the case may be, shall be entitled to:
(1) Salary accrued through the date of death;
and
(2) The right to exercise his 125,000 stock
options (the "Options"), subject to the
terms of the Stock Option Agreements dated
as of July 31, 1995 and September 17, 1996
(the "Option Agreements") and the applicable
Stock Option Plans.
b. TERMINATION DUE TO DISABILITY. The Company may
terminate Executive's employment at any time on written notice after his
"Disability." "Disability" shall mean Executive's inability by reason of illness
or injury substantially to perform his duties and responsibilities under this
Agreement, as reasonably determined by a majority of the Board based upon the
report of a reputable physician designated by the Board (whom Executive shall
permit to examine him), for a period of eight- four (84) consecutive days or one
hundred (100) days in any twelve (12) month period. In the event Executive's
employment is terminated due to his Disability, he shall be entitled to receive
the following:
(1) The amount of any disability or retirement
benefits provided to Executive by the
Company under the provisions of any Company
plan for its employees with respect to which
Executive is qualified; and
(2) Any accrued and unpaid salary through the
effective date of termination.
c. INVOLUNTARY TERMINATION FOR CAUSE. The Company may
terminate Executive's employment at any time for "Cause" on written notice.
"Cause" shall mean (i) Executive is convicted of a felony, or a misdemeanor
involving moral turpitude; or (ii) the Board determines in good faith, after
reasonable notice to Executive and an opportunity for Executive to present his
views of the relevant facts and circumstances, that Executive has (A) materially
failed or refused to perform competently his duties and responsibilities (after
notice and opportunity to cure if such material failure or refusal can be cured)
as provided in this Agreement; (B) has breached his duty of loyalty to, or
committed any act of fraud, theft or dishonesty against, the Company or any of
its Affiliates; or (C) has violated any of his material obligations under this
Agreement after
<PAGE> 6
written notice and a reasonable opportunity (not to be less than ten (10) days)
to cure such default. In the event of such termination for Cause, all rights and
benefits of Executive under this Agreement (including without limitation all
unexercised Options) shall immediately terminate and in no event shall the
Company be obligated to pay Executive any compensation (other than salary and
accrued and vested benefits through the date of termination) with respect to any
period before or after the date of such termination.
d. VOLUNTARY TERMINATION BY EXECUTIVE. Executive may
terminate this Agreement in a "Qualifying Termination" (as defined in Section
7.d. below).
e. OTHER TERMINATION. In the event of the termination of
Executive's employment (i) by the Company other than pursuant to the provisions
of Subsection 6.a., b. or c. above, or (ii) by Executive following a material
breach by the Company of its obligations under this Agreement which remains
uncured after written notice to the Company and a reasonable opportunity (not to
be less than ten (10) days) to cure such breach:
(1) Executive shall be entitled to receive in cash an
amount equal to his annual salary (excluding loan
forgiveness) from the effective date of such
termination through the Expiration Date; PROVIDED,
however, that such sum shall be offset by the amount
of any compensation earned by Executive through other
employment from the effective date of such
termination through the Expiration Date (it being
understood that Executive shall be under no
obligation to mitigate his damages in such event);
(2) The Loan Amount (to the extent not then forgiven),
together with any interest thereon, shall be
immediately forgiven, and Executive shall have no
obligation to repay the same;
(3) All Options previously issued to Executive (other
than the 25,000 "contingent options" awarded to the
Executive in 1996 (the "Contingent Options")) shall
immediately become exercisable (as provided in the
Option Agreements); and
(4) The covenants contained in Subsections 5.c. and 5.d.
shall not apply.
If this Agreement expires by its terms on the Expiration Date, the
covenant contained in Subsection 5.c. shall only remain in force (i) for (6)
months instead of one year and then only if (ii) the Company elects, in its sole
discretion, to continue paying the Executive 50% of his then-currently bi-weekly
base salary during such restricted period.
<PAGE> 7
7. CHANGE OF CONTROL.
a. In the event that Executive's employment by the
Company terminates in a Qualifying Termination (as defined in Subsection 7.d.
below):
(1) Executive shall be entitled to receive in
cash upon the Qualifying Termination an
amount equal to the greater of (a) the sum
of his annual salary (excluding loan
forgiveness) from the date of the Qualifying
Termination through the Expiration Date or
(b) twice his annual salary (excluding loan
forgiveness) immediately prior to the date
of the Change in Control;
(2) The Loan Amount (to the extent not then
forgiven), together with any interest
thereon, shall be immediately forgiven, and
Executive shall have no obligation to repay
the same;
(3) All Options (including the Contingent
Options) previously issued to Executive
shall immediately become exercisable in
accordance with the Option Agreements; and
(4) The covenants contained in Subsections 5.c
and 5.d. shall not apply;
PROVIDED, HOWEVER, that if $500,000 exceeds the sum of (a) the amount payable to
Executive under Section 7.a(1), plus (b) the Net Value of the Options (as
defined below) exercisable under 7.a(3), the Company will also, subject to
subsection 7.b. below, make a cash payment to the Executive equal to the amount
of such excess. As used herein, the "Net Value of the Options" shall be equal to
the difference obtained by subtracting the aggregate exercise price payable by
Executive upon the exercise of the Options from the aggregate fair market value
(as of the date of Change of Control) of the Common Shares issuable upon such
exercise.
b. Payments under this Subsection 7.a. shall be made
without regard to whether the deductibility of such payments (or any other
"parachute payments," as that term is defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), to or for the Executive's
benefit) would be limited or precluded by Section 280G and without regard to
whether such payments (or any other "parachute payments" as so defined) would
subject the Executive to the federal excise tax levied on certain "excess
parachute payments" under Section 4999 of the Code; provided that if the total
of all "parachute payments" to or for the Executive's benefit, after reduction
for all federal, state and local taxes (including the tax described in Section
4999 of the Code, if applicable) with respect to such payments (the "Total
After-Tax Payments"), would be increased by the limitation or elimination of any
payment under this Subsection 7.a., amounts payable under this Subsection 7.a.
shall be reduced to the extent, and only to the extent, necessary to maximize
the Total After-Tax Payments. The determination as to whether and to what extent
payments under this Subsection 7.a. are required to be reduced in accordance
with the preceding sentence shall be made at the Company's expense by Arthur
Andersen or by such other certified public accounting or law firm as the Board
may designate prior to a Change of Control of the Company. In the event of any
underpayment or overpayment under this Subsection
<PAGE> 8
7.a. as determined by Arthur Andersen (or such other firm as may have been
designated in accordance with the preceding sentence), the amount of such
underpayment or overpayment shall forthwith be paid to the Executive or refunded
to the Company, as the case may be, with interest at the applicable federal rate
provided for in Section 7872 of the Code.
c. For purposes of this Agreement, a "Change of Control"
occurs upon the occurrence prior to the Expiration Date of any event specified
below:
(1) any corporation, person or other entity
(other than the Company, a majority-owned
subsidiary of the Company, any employee
benefit plan maintained by the Company or
any subsidiary or one of the three largest
shareholders as of the Commencement Date
(any such person, a "Permitted Acquiror")
acquires or becomes the holder of more than
fifty percent (50%) of the Company's voting
equity securities, or
(2) the stockholders of the Company approve a
definitive agreement to merge or consolidate
the Company with or into another corporation
(other than a subsidiary of the Company) or
to sell or otherwise dispose of all or
substantially all of its assets.
d. For purposes of this Agreement, a "Qualifying
Termination" occurs if, prior to the earlier of the Expiration Date or the
second anniversary of a Change of Control, (a) the employment of Executive is
terminated other than for Cause or (b) Executive resigns following any material
impairment or material adverse change in his working conditions, authority,
autonomy, compensation or benefits immediately prior to the Change of Control,
as the same may from time to time have been improved, or otherwise altered with
the written consent of Executive such that his position within the Company or
its successor is no longer reasonably comparable (a "Material Adverse Change").
An assignment by the Company of all rights and obligations hereunder to an
entity into or with which the Company merges or consolidates or to which the
Company transfers substantially all of its assets shall not constitute a
Material Adverse Change in and of itself so long as such entity fully assumes
the Company's obligations under this Agreement. In the event that both
Subsection 6.e. and this Subsection 7.d. are applicable, the provisions of this
Section shall exclusively govern Executive's
<PAGE> 9
rights and remedies.
8. MISCELLANEOUS.
a. This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of New Hampshire without
reference to principles of conflict of laws. Any dispute, action or proceeding
arising hereunder shall be maintained in the state or federal courts located in
New Hampshire and each party hereto consents to service of process in the manner
provided in Subsection b. of this Section 8 (which shall constitute "personal
service").
b. Any notice given to a party shall be in writing and
shall be deemed to have been given when delivered personally or sent by
certified or registered mail, postage prepaid, return receipt requested, duly
addressed to the party concerned at the address indicated below or to such other
address as to which such party may subsequently give such notice:
If to the Company:
BayCorp Holdings, Ltd.
200 Main Street
Dover, New Hampshire 03820
Attention: John Tillinghast, Chairman
If to Executive: 410 Richards Avenue
Portsmouth, New Hampshire 03801
Copies of all notices to the Company shall be sent to Martin D. Sklar, Esq.,
Kleinberg, Kaplan, Wolff & Cohen, P.C., 551 Fifth Avenue, 18th Floor, New York,
New York 10176. Copies of all notices to Executive shall be sent to Andrew R.
Menard, Esq., Peabody & Arnold, 50 Rowes Wharf, Boston, Massachusetts 02110.
c. This Agreement is personal to Executive and shall not
be assignable by Executive, except that Executive's rights to compensation and
benefits may be transferred in the event of death or Disability by will or
operation of law (subject to the terms hereof and of the applicable plans).
Subject to the provisions of Section 7.d. above, the Company may assign (without
Executive's consent) all rights and obligations hereunder to an entity into or
with which the Company merges or consolidates or to which the Company transfers
substantially all of its assets. This Agreement shall be binding upon and inure
to the benefit of Executive's heirs and legal representatives and shall be
binding upon and inure to the benefit of the Company and its successors and
assigns.
d. Executive and the Company each represents and
warrants to the other that such party is fully authorized and empowered to enter
into this Agreement and that the entry into and
<PAGE> 10
performance of such party's obligations hereunder will not violate any agreement
between such party and any other person or entity. Executive represents and
warrants that he has made a thorough investigation of and is knowledgeable about
the facts and circumstances affecting the business and prospects of the Company.
e. This Agreement contains the entire understanding and
agreement between the parties concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the parties with respect thereto.
No provision hereof may be amended unless such amendment is agreed to in writing
and signed by Executive and an authorized officer of the Company acting at the
direction of the Board. No waiver by either party of any breach by the other
party of any condition or provision contained herein to be performed by such
other party shall be deemed a waiver of a similar or dissimilar condition or
provision at the same or any prior or subsequent time. Any waiver must be in
writing and signed by Executive or an authorized officer of the Company, as the
case may be.
f. Any provision of this Agreement that may be
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions thereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by law, the parties hereby waive any provision of law that renders any provision
of this Agreement prohibited or unenforceable in any respect. In addition, in
the event of any such prohibition or unenforceability, the parties agree that it
is their intention and agreement that any such provision, as written, in any
jurisdiction shall nonetheless be in force and binding to the fullest extent
permitted by the law of such jurisdiction as though such provision had been
written in such a manner and to such an extent as to be enforceable therein
under the circumstances. Without limitation of the foregoing, with respect to
the restrictive covenant contained herein, if it is determined that any such
provision is excessive as to duration, scope or area, it is intended that it
nonetheless be enforced for such shorter duration or with such narrower scope or
area as will render it enforceable, and the court making such determination
shall have the power to modify such duration, scope or area, or all of them,
and/or to delete specific words or phrases, and such provision shall then be
applicable and enforceable in such modified form.
g. The Prior Agreement (except with respect to Section
4.b thereof) is hereby terminated and of no further force or effect.
The parties hereto have signed this Employment Agreement as of the date
first written above.
BAYCORP HOLDINGS, LTD.
By: /s/ Charles Leeds
------------------------------------
Charles Leeds, Director
/s/ Frank W. Getman Jr.
------------------------------------
Frank W. Getman Jr.
<PAGE> 1
Exhibit 10.28
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made this 5th day of May,
1998 is entered into by BayCorp Holdings, Ltd., a Delaware corporation with its
principal place of business at 100 Main Street, Suite 201, Dover, New Hampshire
03820 (the "Company"), and John A. Tillinghast, residing at 77 Exeter Road,
North Hampton, New Hampshire 03862 (the "Employee").
RECITALS
A. Great Bay Power Corporation, the Company's subsidiary, has
previously employed the Employee pursuant to an Employment Agreement dated
October 8, 1996 (the "Prior Agreement").
B. In lieu of the Prior Agreement, the Company desires to employ
the Employee, and the Employee desires to be employed by the Company. In
consideration of the mutual covenants and promises contained herein, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the parties agree as follows:
I. TERM OF EMPLOYMENT. The Company hereby agrees to employ the
Employee, and the Employee hereby accepts employment with the Company, upon the
terms set forth in this Agreement, for the period commencing on the date hereof
(the "Commencement Date") and ending on May 4, 1999 (such period, as it may be
extended, the "Employment Period"), unless sooner terminated in accordance with
the provisions of Section 4. The term of this Employment Agreement shall
automatically "roll over" for an additional period of one year commencing on
May 5, 1999 unless either party wishes to terminate this
<PAGE> 2
Agreement and then, in that event, either party, at its sole discretion, shall
give notice to the other party no later than February 4, 1999 that this
Agreement shall terminate on May 4, 1999.
2. TITLE; CAPACITY. The Employee shall serve as Chairman of the
Board of Directors of the Company (the "Board") and Chief Engineer. The Employee
shall be subject to the supervision of, and shall have such authority as is
delegated to him by, the full Board and the Company's President and Chief
Executive Officer (the "CEO"). The Employee hereby accepts such employment and
agrees to undertake the duties and responsibilities inherent in such positions.
The Employee agrees to devote his time. attention and energies to the business
and interests of the Company during the Employment Period, subject to the
following provisions. The Employee will perform such duties commensurate with
his positions and titles and shall perform said duties as may be assigned to him
by the Board or the CEO for approximately 400 hours per year. The Company may
require that such hours be divided in such a way that the Employee performs at
least 80 hours of services during each three-month period during the Employment
Period. Subject to the foregoing, the Employee will use his best judgment and
his knowledge of the Company's needs in determining the specific days upon which
the agreed upon hours will be performed. The Employee may be required to work in
excess of 400 hours per year only upon mutual consent. The Company acknowledges
and agrees that the Employee shall be permitted to serve as a director of other
corporations and businesses to the extent that such service (i) does not
conflict or interfere in any way with the Employee's obligations and duties
under this Agreement, and (ii) is not for or on behalf of any person or entity
engaged in a business which is directly competitive with the business of the
Company.
<PAGE> 3
3. COMPENSATION.
3.1 COMPENSATION. The Company shall pay the Employee, in
monthly installments, compensation of $250 per hour for the Employment Period.
The Employee shall also receive the Company's standard compensation for serving
as a director.
3.2 BENEFITS. The Employee shall be entitled (subject to
eligibility) to any employee benefits that the Board has adopted or that may be
adopted during the Employment Period for the benefit of employees of the Company
generally. The Employee shall not be entitled to the benefit of any provisions
of the Company vacation policy.
3.3 REIMBURSEMENT OF EXPENSES. The Company shall
reimburse the Employee for all reasonable travel, entertainment and other
expenses incurred or paid by the Employee in connection with, or related to, the
performance of his duties, responsibilities or services under this Agreement,
upon presentation by the Employee of documentation, expense statements, vouchers
and/or such other supporting information as the Company may request; provided,
however, that the amount available for such travel, entertainment and other
expenses may be fixed in advance by the Board.
3.4 DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. During
the Employment Period, the Company shall maintain in force and effect, a
directors' and officers' liability insurance policy in form and substance
reasonably satisfactory to the Employee and the Employee's personal legal
counsel.
4. EMPLOYMENT TERMINATION. The employment of the Employee by the
Company pursuant to this Agreement shall terminate upon the occurrence of any of
the following:
4.1 Expiration of the Employment Period in accordance
with Section 1;
4.2 At the election of the Company, for cause,
immediately upon written
<PAGE> 4
notice by the Company to the Employee. For the purposes of this Section 4.2,
cause for termination shall be deemed to exist upon (a) a good faith finding by
the Board of failure of the Employee to perform his assigned duties of the
Company, dishonesty, gross negligence or misconduct, or (b) the conviction of
the Employee of, or the entry of a pleading of guilty or nolo contendere by the
Employee to, any crime involving moral turpitude or any felony;
4.3 Thirty (30) days after the death or disability of the
Employee. As used in this Agreement, the term "disability" shall mean the
inability of the Employee, due to a physical or mental disability, for a period
of 90 days, whether or not consecutive, during any 360-day period to perform the
services contemplated under this Agreement. A determination of disability shall
be made by a physician satisfactory to both the Employee and the Company,
PROVIDED THAT if the Employee and the Company do not agree on a physician, the
Employee and the Company shall each select a physician and these two together
shall select a third physician, whose determination as to disability shall be
binding on all parties.
5. EFFECT OF TERMINATION; SURVIVAL.
5.1 EFFECT OF TERMINATION. In the event the Employee's
employment is terminated pursuant to Section 4 above, the Company shall pay to
the Employee the compensation and benefits otherwise payable to him under
Section 3 through the last day of his actual employment by the Company, except
that the option previously granted to the Employee shall be payable as set forth
in the Incentive Stock Option Agreement dated April 24, 1995.
5.2 SURVIVAL. The provisions of Sections 6 and 7 shall
survive the termination of this Agreement.
6. RESTRICTIONS.
(a) During the Employment Period and for a period of one
(1) year after the
<PAGE> 5
termination or expiration thereof, the Employee will not directly or indirectly:
(i) recruit, solicit or induce, or attempt to
induce, an employee or employees of the Company to terminate their employment
with, or otherwise cease their relationship with, the Company; or
(ii) solicit, divert or take away, or attempt to
divert or to take away, the business or patronage of any of the clients,
customers or accounts, or prospective clients, customers or accounts, of the
Company which were contacted, solicited or served by the Employee while employed
by the Company, or engage in a business directly competitive with the Company's
business, whether as a partner, employee, consultant, or otherwise.
(b) If any restriction set forth in this Section 6 is
found by any court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too great a range of activities or
in too broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which it
may be enforceable.
(c) The restrictions contained in this Section 6 are
necessary for the protection of the business and goodwill of the Company and are
considered by the Employee to be reasonable for such purpose. The Employee
agrees that any breach of this Section 6 will cause the Company substantial and
irrevocable damage and therefore, in the event of any such breach, in addition
to such other remedies which may be available, the Company shall have the right
to seek specific performance and injunctive relief.
7. PROPRIETARY INFORMATION AND DEVELOPMENTS.
7.1 PROPRIETARY INFORMATION.
(a) Employee agrees that all information and
know-how, whether or
<PAGE> 6
not in writing, of a private, secret or confidential nature concerning the
Company's business or financial affairs (collectively, "Proprietary
Information") is and shall be the exclusive property of the Company. By way of
illustration, but not limitation, Proprietary Information may include projects,
developments, plans, research data, financial data, personnel data, computer
programs, and customer and supplier lists. Employee will not disclose any
Proprietary Information to others outside the Company or use the same for any
unauthorized purposes without written approval by an officer of the Company,
either during or after his employment, unless and until such Proprietary
Information has become public knowledge without fault by the Employee.
(b) Employee agrees that all files, letters,
memoranda, reports, records, data, or other tangible material containing
Proprietary Information, whether created by the Employee or others, which shall
come into his custody or possession, shall be and are the exclusive property of
the Company to be used by the Employee only in the performance of his duties for
the Company.
(c) Employee agrees that his obligation not to
disclose or use information, know-how and records of the types set forth in
paragraphs (a) and (b) above, also extends to such types of information,
know-how, records and tangible property of customers of the Company or suppliers
to the Company or other third parties who may have disclosed or entrusted the
same to the Company or to the Employee in the course of the Company's business.
7.2 OTHER AGREEMENT. The Prior Agreement is hereby
terminated from and after the date hereof. Employee hereby represents that he is
not bound by the terms of any agreement with any previous employer or other
party to refrain from using or disclosing any
<PAGE> 7
trade secret or confidential or proprietary information in the course of his
employment with the Company or to refrain from competing, directly or
indirectly, with the business of such previous employer or any other party.
Employee further represents that his performance of all the terms of this
Agreement and as an employee of the Company does not and will not breach any
agreement to keep in confidence proprietary information, knowledge or data
required by him in confidence or in trust prior to his employment with the
Company.
8. NOTICES. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the United States Post Office, by registered or
certified mail, postage prepaid, addressed to the other party at the address
shown above, or at such other address or addresses as either party shall
designate to the other in accordance with this Section 8.
9. PRONOUNS. Whenever the context may require, any pronouns used
in this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural,
and vice versa.
10. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties and supersedes all prior agreements and
understandings, whether written or oral, relating to the subject matter of this
Agreement.
11. AMENDMENT. This Agreement may be amended or modified only by a
written instrument executed by both the Company and the Employee.
12. GOVERNING LAW. This Agreement shall be construed, interpreted
and enforced in accordance with the internal laws of the State of New Hampshire.
13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of both parties and their respective successors and
assigns, including any corporation
<PAGE> 8
with which or into which the Company may be merged or which may succeed to its
assets or business, provided, however, that the obligations of the Employee are
personal and shall not be assigned by him.
<PAGE> 9
14. MISCELLANEOUS.
14.1 No delay or omission by the Company in exercising any
right under this Agreement shall operate as a waiver of that or any other right.
A waiver or consent given by the Company on any one occasion shall be effective
only in that instance and shall not be construed as a bar or waiver of any right
on any other occasion.
14.2 The captions of the sections of this Agreement are
for convenience of reference only and in no way define, limit or affect the
scope or substance of any section of this Agreement.
14.3 In case any provision of this Agreement shall be
invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
BAYCORP HOLDINGS, LTD.
By: /s/ Frank W. Getman Jr.
-----------------------------------
Name: Frank W. Getman Jr.
Title: President & CEO
EMPLOYEE
/s/ John A. Tillinghast
-----------------------------------
John A. Tillinghast
ACCEPTED AND AGREED TO
WITH RESPECT TO SECTION 7.2
GREAT BAY POWER CORPORATION
By: /s/ Frank W. Getman Jr.
-----------------------------------
Name: Frank W. Getman Jr.
Title: President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BAYCORP HOLDINGS, LTC. FOR THE THREE MONTHS ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,351
<SECURITIES> 9,613
<RECEIVABLES> 5,573
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,488
<PP&E> 107,213
<DEPRECIATION> 10,585
<TOTAL-ASSETS> 142,256
<CURRENT-LIABILITIES> 3,063
<BONDS> 0
0
0
<COMMON> 84
<OTHER-SE> 76,382
<TOTAL-LIABILITY-AND-EQUITY> 142,256
<SALES> 7,443
<TOTAL-REVENUES> 7,433
<CGS> 8,830
<TOTAL-COSTS> 8,830
<OTHER-EXPENSES> 278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,665)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,665)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
<PAGE> 1
Exhibit 99.1
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of BayCorp and/or Great Bay to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth below and elsewhere in this Annual Report.
Ownership of a Single Asset. BayCorp's principal asset is it equity
interest in Great Bay. Great Bay owns a single principal asset, a 12.1% joint
interest in the Seabrook Nuclear Power Project in Seabrook, New Hampshire.
Accordingly, BayCorp's results of operations are completely dependent upon the
successful and continued operation of the Seabrook Project. In particular, if
the Seabrook Project experiences unscheduled outages of significant duration,
Great Bay's results of operations will be materially adversely affected.
1
<PAGE> 2
History of Losses; Implementation of Business Strategy. BayCorp has never
reported an operating profit for any year since its incorporation. The Company's
business strategy is to seek purchasers for its share of the Seabrook Project
electricity output at prices, either in the short-term market or pursuant to
medium or long-term contracts, significantly in excess of the prices currently
available in the short-term wholesale electricity market. Sales at current
short-term rates do not result in sufficient revenue to enable BayCorp to meet
its cash requirements for operations, maintenance and capital related costs.
Great Bay's ability to obtain such higher prices will depend on regional,
national and worldwide energy supply and demand factors that are beyond the
control of Great Bay. There can be no assurance that Great Bay ever will be able
to sell power at prices that will enable it to meet its cash requirements.
Liquidity Needs. As of December 31, 1997, BayCorp had approximately
$19.1 million in cash and cash equivalents and short-term investments. The
Company believes that such cash, together with the anticipated proceeds from
the sale of electricity by Great Bay, will be sufficient to enable the Company
to meet its cash requirements until the prices at which Great Bay can sell its
electricity increase sufficiently to enable the Company to cover its annual cash
requirements. However, if the Seabrook Project operated at a capacity factor
below historical levels, or if expenses associated with the ownership or
operation of the Seabrook Project, including without limitation decommissioning
costs, are materially higher than anticipated, or if the prices at which Great
Bay is able to sell its share of the Seabrook Project electricity do not
increase at the rates and within the time expected by Great Bay, Great Bay or
the Company would be required to raise additional capital, either through a debt
financing or an equity financing, to meet ongoing cash requirements. There is no
assurance that Great Bay or the Company would be able to raise such capital or
that the terms on which any additional capital is available would be acceptable.
If additional funds are raised by issuing equity securities, dilution to then
existing stockholders will result.
Changes in Power Sale Contract Terms Available in Wholesale Power
Market. In the past, wholesale sellers of electric power, which typically were
regulated electric utilities, frequently entered into medium or long-term power
sale contracts providing for prices in excess of the prices available in the
short-term market, which includes contracts of one year or less in duration. In
recent years, increased competition in the wholesale electric power market,
reduced growth in the demand for electricity, low prices in the short-term
market and the uncertainty associated with deregulation of the industry have
reduced the willingness of wholesale power purchasers to enter into medium or
long-term contracts and have reduced the prices obtainable from such contracts.
Risks in Connection with Joint Ownership of Seabrook Project. Great Bay is
required under the Agreement for Joint Ownership, Construction and Operation of
New Hampshire Nuclear Units dated May 1, 1973, as amended, by and among Great
Bay and the other 10 utility companies that are owners of the Seabrook Project
(the "JOA"), to pay its share of Seabrook Unit 1 and Seabrook Unit 2 expenses,
including without limitation operations and maintenance expenses, construction
and nuclear fuel expenditures and decommissioning costs, regardless of Seabrook
Unit 1's operations. Under certain circumstances, a failure by Great Bay to make
its monthly payments under the JOA entitles certain other joint owners of the
Seabrook Project to purchase Great Bay's interest in the Seabrook Project for
75% of the then fair market value thereof.
In addition, the failure to make monthly payments under the JOA by owners
of the Seabrook Project other than Great Bay may have a material adverse effect
on Great Bay by requiring Great Bay to pay a greater proportion of the Seabrook
Project expenses in order to preserve the value of its share of the Seabrook
Project. In the past, certain of the owners of the Seabrook Project other than
Great Bay have not made their full respective payments. The electric utility
industry is undergoing significant changes as competition and deregulation are
introduced into the marketplace. Some utilities, including certain Participants,
have indicated in state regulatory proceedings that they may be forced to seek
bankruptcy protection if regulators, as part of the industry restructuring, do
not allow for full recovery of stranded costs. If a Participant other than Great
Bay filed for bankruptcy and that Participant was unable to pay its share of
Seabrook Project expenses, Great Bay might be required to pay a greater portion
of Seabrook Project expenses. In the past, the filing of bankruptcy by a
Participant has not resulted in a failure to pay Seabrook Project expenses or an
increase in the percentage of expenses paid by other Participants.
2
<PAGE> 3
On February 28, 1997, the NHPUC issued an order requiring stranded cost
recovery to be based on the average market price of electricity in New England,
rather than alternative regulatory accounting methods that are more favorable to
the Participants. On March 10, 1997, one of the Participants, Northeast
Utilities (along with three of its subsidiaries), received a temporary
restraining order from the U.S. District Court for the District of Rhode Island.
This temporary restraining order stayed the NHPUC's February 28, 1997 order to
the extent that the order established a rate methodology that is not designed to
recover the cost of providing service and would require Northeast Utilities and
certain of its affiliates to write-off any regulatory assets. If this stay or a
similar court action does not remain in effect and Northeast Utilities is unable
to pay its share of Seabrook Project expenses, Great Bay might be required to
pay a greater portion of Seabrook Project expenses.
The Seabrook Project is owned by Great Bay and the other owners thereof as
tenants in common, with the various owners holding varying ownership shares.
This means that Great Bay, which owns only a 12.1% interest, does not have
control of the management of the Seabrook Project. As a result, decisions may be
made affecting the Seabrook Project notwithstanding Great Bay's opposition.
Certain costs and expenses of operating the Seabrook Project or owning an
interest therein, such as certain insurance and decommissioning costs, are
subject to increase or retroactive adjustment based on factors beyond the
control of BayCorp or Great Bay. The cost of disposing of Unit 2 of the Seabrook
Project is not known at this time. These various costs and expenses may
adversely affect BayCorp and Great Bay, possibly materially.
Extensive Government Regulation. The Seabrook Project is subject to
extensive regulation by federal and state agencies. In particular, the Seabrook
Project and Great Bay as part owner of a licensed nuclear facility, are subject
to the broad jurisdiction of the NRC, which is empowered to authorize the
siting, construction and operation of nuclear reactors after consideration of
public health and safety, environmental and antitrust matters. Great Bay is also
subject to the jurisdiction of the FERC and, as a result, is required to file
with FERC all contracts for the sale of electricity. FERC has the authority to
suspend the rates at which Great Bay proposes to sell power, to allow such rates
to go into effect subject to refund and to modify a proposed or existing rate if
FERC determines that such rate is not "just and reasonable." FERC's jurisdiction
also includes, among other things, the sale, lease, merger, consolidation or
other disposition of facilities, interconnection of certain facilities,
accounts, service and property records. Compliance with the various requirements
of the NRC and FERC is expensive. Noncompliance with NRC requirements may
result, among other things, in a shutdown of the Seabrook Project.
The NRC has promulgated a broad range of regulations affecting all aspects
of the design, construction and operation of a nuclear facility, such as the
Seabrook Project, including performance of nuclear safety systems, fire
protection, emergency response planning and notification systems, insurance and
quality assurance. The NRC retains authority to modify, suspend or withdraw
operating licenses, such as the license pursuant to which the Seabrook project
operates, at any time that conditions warrant. For example, the NRC might order
Seabrook Unit 1 shut down (i) if flaws were discovered in the construction or
operation of Seabrook Unit 1, (ii) if problems developed with respect to other
nuclear generating plants of a design and construction similar to Unit 1, or
(iii) if accidents at other nuclear facilities suggested that nuclear generating
plants generally were less safe than previously believed.
Great Bay is also subject to the New Hampshire public utility law and
regulations of the NHPUC that affect, among other things, the issuance of
securities, transfer of utility property and contacts with affiliates as well as
the sale, lease, merger, consolidation or other disposition of facilities. The
NHPUC does not regulate wholesale electricity rates.
Risk of Nuclear Accident. Nuclear reactors have been used to generate
electric power for more than 35 years and there are currently more than 100
nuclear reactors used for electric power generation in the United States.
Although the safety record of these nuclear reactors in the United States
generally has been very good, accidents and other unforeseen problems have
occurred both in the United States and elsewhere, including the well-publicized
incidents at Three Mile Island in Pennsylvania and Chernobyl in the former
Soviet Union.
3
<PAGE> 4
The consequences of such an accident can be severe, including loss of life and
property damage, and the available insurance coverage may not be sufficient to
pay all the damages incurred.
Public Controversy Concerning Nuclear Power Plants. Substantial
controversy has existed for some time concerning nuclear generating plants and
over the years such opposition has led to construction delays, cost overruns,
licensing delays, demonstrations and other difficulties. The Seabrook Project
was the subject of significant public controversy during its construction and
licensing and remains controversial. An increase in public concerns regarding
the Seabrook Project or nuclear power in general could adversely affect the
operating license of Seabrook Unit 1. While Great Bay cannot predict the
ultimate effect of such controversy, it is possible that it could result in a
premature shutdown of the unit.
Waste Disposal; Decommissioning Cost. There has been considerable public
concern and regulatory attention focused upon the disposal of low- and
high-level nuclear wastes produced at nuclear facilities and the ultimate
decommissioning of such facilities. As to waste disposal concerns, both the
federal government and the State of New Hampshire are currently delinquent in
the performance of their statutory obligations. See "Business -- Nuclear Waste
Disposal." In April 1995, a privately owned facility in Utah was approved as a
disposal facility for certain types of LLW. Additionally, the Barnwell, South
Carolina disposal facility was reopened in July 1995 to all states except North
Carolina as a result of legislation passed by the South Carolina legislature.
The Seabrook Project began shipping certain LLW to the Utah facility in December
1995. All LLW generated by the Seabrook Project that exceeds the maximum
radioactivity level of LLW accepted by the Utah facility is stored on-site at
the Seabrook facility. Based on information provided by NAESCO, management
believes that the on-site storage capacity for LLW generated by the Seabrook
Project is adequate until at least 2006.
As to decommissioning, NRC regulations require that upon permanent shutdown
of a nuclear facility, appropriate arrangements for full decontamination and
decommissioning of the facility be made. These regulations require that during
the operation of a facility, the owners of the facility must set aside
sufficient funds to defray decommissioning costs. While the owners of the
Seabrook Project are accumulating a trust fund to defray decommissioning costs,
these costs could substantially exceed the value of the trust fund, and the
owners (including Great Bay) would remain liable for the excess. Moreover, the
amount that is required to be deposited in the trust fund is subject to periodic
review and adjustment by an independent commission of the State of New
Hampshire, which could result in material increases in such amounts.
In January 1997, the NRC issued a temporary exemption to Great Bay from the
obligation of Great Bay to comply with the NRC's regulations applicable to a non
"electric utility" owner of an interest in a nuclear power. In the exemption,
the NRC staff stated that it believes that Great Bay currently does not satisfy
the NRC definition of "electric utility." If Great Bay is an "electric utility,"
then Great Bay may satisfy the NRC decommissioning requirements through its
monthly payments into the decommissioning trust fund. If Great Bay is not an
"electric utility," the NRC could require that Great Bay provide a surety bond
or other allowable decommissioning funding mechanisms. On January 30, 1998,
Great Bay filed a petition with the NRC seeking a determination by the NRC that
acceleration of decommissioning trust fund payments provides reasonable
assurance of decommissioning funding under NRC regulations, or, in the
alternative, merits the issuance by the NRC of a permanent exemption to Great
Bay. Failure to obtain relief may have a material adverse effect on Great Bay's
business, financial condition, liquidity or results of operation. See
"Business -- Recent Developments."
Intense Competition. Great Bay sells its share of Seabrook Project
electricity primarily into the Northeast United States wholesale electricity
market. There are a large number of suppliers to this market and competition is
intense. A primary source of competition comes from traditional utilities, many
of which presently have excess capacity. In addition, non-utility wholesale
generators of electricity, such as IPPs, QFs and EWGs, as well as power
marketers and brokers, actively sell electricity in this market. Great Bay may
face increased competition, primarily based on price, from all sources in the
future.
Risk Related to Holding Company. In contrast with Great Bay, the
activities of BayCorp will not be subject to the extensive government regulation
related to public utilities and licensed nuclear facilities. Thus, BayCorp will
not receive the benefit of the scrutiny by federal and state agencies that Great
Bay receives. In
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addition, BayCorp may pursue activities with a greater business risk than those
associated with a regulated entity such as Great Bay. Depending on the success
of any new activities that BayCorp determines to pursue, it is possible that
BayCorp's earnings per share and dividends, if any, might be lower than if
BayCorp did not pursue such activities.
Year 2000. The Company has assessed the impact of the year 2000 issue on
its computer systems and applications. The Company believes that there are no
material year 2000 related costs to be incurred relative to its computer systems
and applications. However, Great Bay's share of the costs of addressing year
2000 issues at the Seabrook Project is currently estimated at $177,000,
according to NAESCO. If NAESCO is unable to complete year 2000 compliance
efforts in a timely manner or if year 2000 compliance costs exceed NAESCO's
estimate, the Company's operations, financial condition and liquidity could be
materially and adversely affected.
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