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2
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, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12527
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BAYCORP HOLDINGS, LTD.
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(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.)
20 INTERNATIONAL DRIVE, SUITE 301
PORTSMOUTH, NEW HAMPSHIRE 03801-6809
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 431-6600
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, 1999
- --------------------------------------- --------------------------
Common Stock, $0.01 Par Value per Share 8,191,948
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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, 1999 and 1998 .............................3
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998.................................................4-5
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1999 and 1998....................................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
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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)
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
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Operating Revenues $ 10,103 $ 7,443
Operating Expenses:
Production 4,758 4,899
Transmission 212 213
Purchased Power 2,007 0
Administrative & General 1,177 1,781
Depreciation & Amortization 938 877
Taxes other than Income 1,034 1,060
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Total Operating Expenses 10,126 8,830
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Operating Loss (23) (1,387)
Other (Income) Deductions:
Interest and Dividend Income (169) (352)
Decommissioning Cost Accretion 753 713
Decommissioning Trust Fund Income (175) (109)
Unit 2 Sales and Other Deductions 6 26
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Total Other Deductions 415 278
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Loss Before Income Taxes (438) (1,665)
Income Taxes 0 0
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Net Loss ($ 438) ($ 1,665)
Other Comprehensive Income, Net of Tax
Unrealized Gains (Loss) on Securities (215) 63
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Comprehensive Income (Loss) ($ 653) ($ 1,602)
=========== ===========
Weighted Average Shares Outstanding 8,191,948 8,264,192
Basic and Diluted Loss Per Share ($ 0.05) ($ 0.20)
(The accompanying notes are an integral part of these consolidated statements.)
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BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
March 31, December 31,
1999 1998
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ASSETS:
Current Assets:
Cash & Cash equivalents $ 3,170 $ 2,559
Short-term Investments, at market 10,845 9,496
Accounts Receivable 3,183 3,051
Materials & Supplies, net 3,396 3,633
Prepayments & Other Assets 3,424 3,177
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Total Current Assets 24,018 21,916
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Property, Plant, & Equipment:
Utility Plant 112,827 112,325
Less: Accumulated Depreciation (13,676) (12,785)
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Net Utility Plant 99,151 99,540
Nuclear Fuel 19,630 19,390
Less: Accumulated Amortization (11,813) (10,821)
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Net Nuclear Fuel 7,817 8,569
Net Property, Plant & Equipment 106,968 108,109
Other Assets:
Decommissioning Trust Fund 10,691 10,329
Deferred Debits & Other 4 4
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Total Other Assets 10,695 10,333
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TOTAL ASSETS $ 141,681 $ 140,358
========= =========
(The accompanying notes are an integral part of these consolidated statements.)
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BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
March 31, December 31,
1999 1998
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 874 $ 394
Taxes Accrued 880 0
Miscellaneous Current Liabilities 3,263 3,761
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Total Current Liabilities 5,017 4,155
Operating Reserves:
Decommissioning Liability 61,027 60,274
Miscellaneous Other 502 502
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Total Operating Reserves 61,529 60,776
Other Liabilities & Deferred Credits 4,429 4,068
Commitments & Contingencies 0 0
Stockholders' Equity:
Common stock, $.01 par value,
Authorized - 20,000,000 shares,
Issued and Outstanding - 8,417,800 84 84
Less: Treasury Stock - 225,852 shares at cost (1,629) (1,629)
Additional paid-in capital 92,100 92,100
Accumulated Other Comprehensive Income 350 565
Accumulated Deficit (20,199) (19,761)
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Total Stockholders' Equity 70,706 71,359
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 141,681 $ 140,358
========= =========
(The accompanying notes are an integral part of these consolidated statements.)
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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, 1999 March 31, 1998
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<S> <C> <C>
Net cash flow from operating activities:
Net Loss ($ 438) ($1,665)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation 938 877
Amortization of nuclear fuel 992 1,026
Decommissioning trust accretion 753 713
Decommissioning trust interest (156) (109)
Increase in accounts receivable (130) (5,107)
(Increase)decrease in materials & supplies 192 (518)
Increase in prepaids and other assets (247) (1,101)
Increase(decrease) in accounts payable 480 (20)
Increase in taxes accrued 880 902
Increase(decrease) in other accruals (127) 696
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Net cash provided by (used in) operating activities 3,137 (4,306)
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Net cash flows provided by (used in) investing activities:
Utility plant additions (504) (363)
Nuclear fuel additions (240) (32)
Payments to decommissioning fund (397) (289)
Short term investments, net (1,385) 6,142
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Net cash provided by (used in) investing activities (2,526) 5,458
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Net cash used in financing activities:
Reacquired Capital Stock 0 (71)
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Net cash used in financing activities 0 (71)
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Net increase in cash and cash equivalents 611 1,081
Cash and cash equivalents, beginning of period 2,559 3,270
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Cash and cash equivalents, end of period $ 3,170 $ 4,351
======= =======
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
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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. In addition, BayCorp owns
Little Bay Power Corporation ("Little Bay"). Little Bay was formed in connection
with a pending acquisition of an additional 3% interest in the Seabrook Project.
This acquisition is subject to regulatory approvals, including approval by the
Nuclear Regulatory Commission ("NRC").
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 and Little Bay are the only subsidiaries 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 and Little Bay, to engage in businesses that these subsidiaries would
be prohibited from pursuing due to their status as EWG's 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. 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 its subsidiaries 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
approximately 20 MW of its share of the Seabrook Project capacity in the
wholesale short-term market. Little Bay was incorporated in New Hampshire in
1998 and currently conducts no business activity.
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, 1998, are adequate to make
the information presented not misleading.
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BAYCORP HOLDINGS, LTD.
The results for the interim periods are not necessarily indicative of the
results to be expected for the full fiscal year.
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:
Unrealized Gains Accumulated Other
on Securities Comprehensive Income
Beginning Balance $ 565,000 $ 565,000
Current Period Charge (215,000) (215,000)
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Ending Balance $ 350,000 $ 350,000
========= =========
In December 1998, the Emerging Issues Task Force reached consensus on
Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk
Management Activities ("EITF Issue 98-10"). EITF 98-10 is effective for fiscal
years beginning after December 15, 1998. EITF Issue 98-10 requires energy
trading contracts to be recorded at fair value on the balance sheet, with the
changes in fair value included in earnings. The effects of initial application
of EITF 98-10 will be reported as a cumulative effect of a change in accounting
principle. Financial statements for periods prior to initial adoption of EITF
98-10 may not be restated. The Company estimates the cumulative effect of this
accounting change as of January 1, 1999 would be to increase net income by
approximately $158,800 to recognize gains on net open physical purchase and
sales commitments considered to be trading activity. The Company intends to
adopt EITF 98-10 upon issuance of the final EITF ruling.
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 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
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BAYCORP HOLDINGS, LTD.
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."
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 are implementing
initiatives relating to the deregulation of the electric utility industry.
Simultaneously with the deregulation initiatives occurring in each of the New
England states, NEPOOL is restructuring to create and maintain open,
non-discriminatory, competitive, unbundled markets for energy, capacity, and
ancillary services. These markets commenced operation on May 1, 1999. 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. Although 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 $497 million in 1998 dollars and $2.2 billion in 2026 dollars,
assuming a remaining 27 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, 1999 is approximately $61 million.
The Company accretes 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 $53.2 million as December 31, 1996 to $61 million as of
March 31, 1999.
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BAYCORP HOLDINGS, INC.
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 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 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 and another
exposure draft is expected to be issued in 1999. The Company's accounting for
decommissioning was based on the FASB's original tentative conclusions. If a
revised 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.
Funds collected by Seabrook for decommissioning are deposited in an
external irrevocable trust pending their ultimate use. The earnings on the
external trusts also accumulate in the fund balance. The trust funds are
restricted for use in paying the decommissioning of Unit 1. The investments in
the trust are available for sale. The Company has therefore reported its
investment in trust fund assets at market value and any unrealized gains and
losses are reflected in equity. There was an unrealized holding gain of $360,850
as of March 31, 1999.
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.
Great Bay's 1999 decommissioning payments will total approximately $1.6
million. The decommissioning funding schedule is determined by the NDFC, which
reviews the schedule for the Seabrook Project at least annually. Great Bay
expects to use revenues from the sale of power to make these decommissioning
payments. In June 1998, the New Hampshire State legislature enacted legislation
that provides that in the event of a default by Great Bay on its payments to the
decommissioning fund, the other Seabrook joint owners would be obligated to pay
their proportional share of such default. In response to the New Hampshire
legislation, Great Bay has agreed to make accelerated payments to the Seabrook
decommissioning fund such that Great Bay will have contributed sufficient funds
by the year 2015 to allow sufficient monies to accumulate, with no further
payments by Great Bay to the fund, to the full estimated amount of Great Bay's
decommissioning obligation by the time the current Seabrook operating license
expires in 2026. As a result of these developments, the NRC staff found that
Great Bay complies with the decommissioning funding assurance requirements.
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BAYCORP HOLDINGS, INC.
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.
LIQUIDITY AND CAPITAL EXPENDITURES
BayCorp anticipates that its share of the Seabrook Project's capital
expenditures for 1999 will total approximately $3.5 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.
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.
A scheduled refueling outage began on March 26, 1999 at the Seabrook
Project. The plant resumed operation on May 14, 1999. Based on estimates
provided by the managing agent of the Seabrook Project, the Company's portion
of the costs associated with this outage is expected to be approximately $3.5
million.
Little Bay and Montaup Electric Company, a subsidiary of EUA, are
working to obtain required regulatory approvals in connection with Little Bay's
agreement with Montaup to purchase Montaup's 3% interest in the Seabrook
Project. If the parties obtain all required regulatory approvals, the parties
intend to complete the transaction and Little Bay would pay approximately $3.2
million to Montaup. In addition, upon closing, the Company will reimburse
Montaup for certain prepaid items as part of a purchase price adjustment. This
purchase price adjustment primarily reflects adjustments for nuclear fuel and
capital expenditures. The Company currently expects that this reimbursement will
be approximately $1.5 million to $2.0 million.
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. 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
"BTLA"). On December 7, 1998, Great Bay announced that it had reached an
agreement with the town of Seabrook to settle its outstanding property tax
litigation. As a result of the settlement, Great Bay received approximately $1.3
million from the town of Seabrook in 1998. In addition, the parties agreed that
the assessed value of the Seabrook Project will be reduced over the five-year
period of the settlement agreement from $2.3 billion in 1998 to $1.2 billion in
2002. Great Bay and the other joint owners are currently engaged in settlement
negotiations with the towns of Hampton and Hampton Falls.
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
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BAYCORP HOLDINGS, INC.
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, 1999, the Company had repurchased 80,800
shares at a cost of approximately $460,689, or approximately $5.70 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
BayCorp's principal asset is its 100% equity interest in 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.
A scheduled refueling outage began March 26, 1999 at the Seabrook
Project. The plant resumed operation on May 14, 1999.
For the three months ended March 31, 1999, the Company has reported a
loss of approximately $438,000 primarily due to decreased revenues associated
with this scheduled refueling outage.
RESULTS OF OPERATIONS: FIRST QUARTER OF FISCAL 1999 COMPARED TO THE FIRST
QUARTER OF FISCAL 1998
Operating Revenues
Operating Revenues increased by approximately $2,660,000, or 35.7%, to
$10,103,000 in the first quarter of 1999 as compared to $7,443,000 in the first
quarter of 1998. This increase in revenues was due in part to higher generation
during the first quarter of 1999 as compared to the first quarter of 1998. For
the first quarter of 1999, the capacity factor at the Seabrook plant was 94.1%
versus a capacity factor of 81.2% for the first quarter of 1998. The capacity
factor for the first quarter of 1999 was adversely affected by the refueling
outage that began on March 26, 1999. The capacity factor for the first quarter
of 1998 was adversely affected by an unscheduled outage that began on December
5, 1997 and continued until January 15, 1998. The increase in revenues was also
due in part to the resale of purchased power during the first quarter of 1999.
In addition to selling its generation from the Seabrook Project, the Company
purchased approximately 68,200 megawatt hours of power for resale during the
first quarter of 1999. The Company did not purchase any power for resale during
the first quarter of 1998.
Sales of electricity increased by approximately 43% to 353,670,240
kilowatt-hours ("kWhs") in the first quarter of 1999 as compared to 246,494,100
kWhs in the first quarter of 1998. During the first quarter of 1999 the average
sales price per kWh (determined by dividing total sales revenue by the total
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BAYCORP HOLDINGS, LTD.
number of kWhs sold in the applicable period) decreased 6% to 2.84 cents per kWh
as compared with 3.02 cents per kWh in the first quarter of 1998.
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) decreased 19% to 2.90 cents per kWh in the first
quarter of 1999 as compared to 3.58 cents per kWh in the first quarter of 1998.
This decrease was primarily the result of the unscheduled outage and its
associated costs, and the resulting lower capacity factor, at the Seabrook
Project during the first quarter of 1998 as compared to the first quarter of
1999. 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 1999
decreased approximately $142,000, or 2.3%, as compared to the first quarter of
1998.
The Company had purchased power costs of approximately $2,007,000 in
the first quarter of 1999. There were no purchased power costs in the first
quarter of 1998. As Great Bay enters into more sales transaction agreements to
supply firm power, Great Bay's expenses to purchase power to cover firm power
obligations during unscheduled outages may increase. Purchased power expenses
may also increase as Great Bay may purchase power in the open market to resell
to third parties.
During the first quarter of 1999, there was a decrease of approximately
$604,000, or 33.9%, in administrative and general expenses, from $1,781,000 in
the first quarter of 1998 to $1,177,000 in the first quarter of 1999. This
decrease was primarily attributable to outside marketing fees of approximately
$597,200 in the first quarter of 1998. There were no outside marketing expenses
in the first quarter of 1999. There was an increase of approximately $35,000, or
1.8%, in depreciation and amortization and taxes other than income, from
$1,937,000 in the first quarter of 1998 to $1,972,000 in the first quarter of
1999.
Other (Income) Deductions
Decommissioning Cost Accretion increased $40,000, to $753,000 during
the first quarter of 1999 as compared to $713,000 during the first quarter of
1998. 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 1999, the Company realized $338,000 in
interest and miscellaneous other income as compared to $435,000 during the first
quarter of 1998. This income primarily reflects interest earned on the Company's
cash and decommissioning trust fund accounts. The decrease of $97,000, or 22.3%,
primarily reflects reduced interest earnings on the lower cash balances during
the first quarter of 1999 as compared to the first quarter of 1998.
13
<PAGE> 14
BAYCORP HOLDINGS, INC.
Net Loss
As a result of the above factors, during the first quarter ended March
31, 1999, the Company recorded a net loss of $438,000, or approximately $.05 per
basic and diluted share, as compared to a net loss of $1,602,000, or
approximately $.20 per basic and diluted share, during the first quarter ended
March 31, 1998.
Net Operating Losses
For federal income tax purposes, as of December 31, 1998, the Company
had net operating loss carry forwards ("NOLs") of approximately $210 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 $74 million of NOLs are not currently
subject to such limitations.
Liquidity
BayCorp's cash and short-term investments increased approximately
$1,960,000 during the first three months of 1999. Principal factors affecting
liquidity during the three months ended March 31, 1999 included the operating
loss of $438,000 discussed above and cash expenditures of approximately $744,000
for capital plant and nuclear fuel additions and $397,000 for decommissioning
trust fund payments.
Offsetting these cash charges were non-cash charges to income which
included $938,000 for depreciation, $992,000 for nuclear fuel amortization,
$753,000 decommissioning trust fund accretion and an increase in Taxes Accrued
of $880,000. During the first quarter of 1999, prepaids and other assets
increased approximately $247,000 and other working capital items decreased
$127,000.
Year 2000
The Company's Annual Report on Form 10-K filed on March 31, 1999
describes the "Year 2000" issue and its potential affect on the Company's
business, operations, financial results and liquidity. The following information
regarding year 2000 issues supplements the information contained in the
Company's Form 10-K and should be read in conjunction with that information.
According to April 1999 estimates provided by North Atlantic Energy
Service Corporation ("NAESCO"), the managing agent of the Seabrook Project,
Great Bay's share of costs to address year 2000 issues at the Seabrook Project
will be approximately $410,000. As of March 31, 1999, Great Bay's share of costs
to address year 2000 issues at the Seabrook Project was approximately $243,000.
Great Bay has funded these expenses from its operating revenues.
14
<PAGE> 15
BAYCORP HOLDINGS, INC.
As of March 31, 1999, NAESCO identified approximately 1,325 separate
millennium items and determining that 78.5% can be accepted as modified to date
or without modification and 21.5% require further testing, modification or
replacement.
NAESCO has defined a schedule to implement all year 2000 corrective
actions. A number of critical remediation tasks still must be accomplished, most
of which are scheduled for completion by July 1, 1999 and some of which are
scheduled for completion by September 1999.
The dates on which NAESCO believes its year 2000 compliance efforts
will be completed are based on NAESCO management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved or that there will not be a delay in, or increased costs associated
with, the implementation of the year 2000 compliance efforts. Specific factors
that might cause differences between the estimates and actual results include,
but are not limited to, the availability and cost of personnel trained in these
areas, the ability to locate and correct all relevant computer code, timely
responses to and corrections by third parties and suppliers, the ability to
implement interfaces between the new systems and the systems not being replaced,
and similar uncertainties. Due to the general uncertainty inherent in the year
2000 problem, resulting in part from the uncertainty of the year 2000 readiness
of third-parties and the interconnection of global businesses, the Company
cannot ensure that efforts to timely and cost-effectively resolve year 2000
issues will be successful. If year 2000 compliance efforts are unsuccessful or
incomplete, or if costs exceed NAESCO's estimates, the Company's business,
operations, financial results and liquidity could be materially and adversely
affected.
This Quarterly Report on Form 10-Q 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", "expects", "anticipates", "plans",
"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. 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 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. 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
"BTLA"). On December 7, 1998, Great Bay announced that it had reached an
agreement with the town of Seabrook to settle its outstanding property tax
litigation. As a result of the settlement, Great Bay received approximately $1.3
million from the town of Seabrook. In addition, the parties agreed that the
assessed
15
<PAGE> 16
BAYCORP HOLDINGS, INC.
value of the Seabrook Project will be reduced over the five-year period of the
settlement agreement from $2.3 billion in 1998 to $1.2 billion in 2002. Great
Bay and the other joint owners are currently engaged in settlement negotiations
with the towns of Hampton and Hampton Falls.
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, 1999.
16
<PAGE> 17
BAYCORP HOLDINGS, INC.
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 17, 1999 By: /s/ Frank W. Getman Jr.
---------------------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
17
<PAGE> 18
BAYCORP HOLDINGS, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
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, 1998. 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BAYCORP HOLDINGS, LTD. FOR THE THREE MONTHS ENDED MARCH
31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,170
<SECURITIES> 10,845
<RECEIVABLES> 3,183
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,018
<PP&E> 106,968
<DEPRECIATION> 13,676
<TOTAL-ASSETS> 141,681
<CURRENT-LIABILITIES> 5,017
<BONDS> 0
0
0
<COMMON> 84
<OTHER-SE> 70,706
<TOTAL-LIABILITY-AND-EQUITY> 141,681
<SALES> 10,103
<TOTAL-REVENUES> 10,103
<CGS> 10,126
<TOTAL-COSTS> 10,126
<OTHER-EXPENSES> 759
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344
<INCOME-PRETAX> (438)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (438)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</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 its 100% 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.
History of Losses. BayCorp has never reported an operating profit for any
year since its incorporation. Historically, sales at short-term rates have not
resulted in sufficient revenue to enable BayCorp to meet its cash requirements
for operations, maintenance and capital related costs. There can be no assurance
that Great Bay will be able to sell power at prices that will enable it to meet
its cash requirements.
Liquidity Needs. As of December 31, 1998, BayCorp had approximately $12.1
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
<PAGE> 2
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 the New England Wholesale Power Market. During recent years in
New England, the combination of (1) increased competition in the wholesale power
market, (2) small increases in the demand for electricity and (3) electric
industry deregulation has resulted in increased uncertainty regarding the price
of electricity in the wholesale power market. Although Great Bay's average
selling price per kWh (determined by dividing total sales revenue by the total
number of kWhs sold in the applicable period) increased from 2.58 cents in 1996
to 2.76 cents in 1997 and 3.04 cents in 1998, there can be no assurance that
Great Bay will be able to sell its power at these prices or higher prices in the
future.
Risks in Connection with Joint Ownership of Seabrook Project. Great Bay is
required under the JOA to pay its share of Seabrook Unit I and Seabrook Unit 2
expenses, including without limitation operations and maintenance expenses,
construction and nuclear fuel expenditures and decommissioning costs, regardless
of Seabrook Unit l'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. For example, Great Bay could opt 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 opt to pay
a greater portion of Seabrook Project expenses in order to preserve the value of
its share of the Seabrook Project, 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.
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'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. Noncompliance with NRC requirements may result,
among other things, in a shutdown or the Seabrook Project.
<PAGE> 3
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.
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. 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.
The joint owners of the Seabrook Project, through their managing agent
NAESCO, entered into contracts with the DOE for high level waste disposal in
accordance with the NWPA. Under these contracts and the NWPA, the DOE was
required to take title to and dispose of the Seabrook Project's high level waste
beginning no later than January 31, 1998. However, the DOE has announced that
its first high level waste repository will not be in operation until 2010 at the
earliest.
The Seabrook Project increased its on-site storage capacity for low level
waste ("LLW") in 1996 and that capacity is expected to be sufficient to meet the
Project's storage requirements through 2006. In addition, the managing agent of
the Seabrook Project has advised Great Bay that the Seabrook Project has
adequate on-site storage capacity for high level waste until approximately 2010.
If the Seabrook Project were unable to store nuclear waste on site or make other
disposal provisions, the Company's business, results of operations and financial
condition would be materially and adversely affected. See "Business-Nuclear
Waste Disposal."
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 monies in a trust fund to defray
decommissioning costs, these costs could substantially exceed the value of the
trust 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.
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
<PAGE> 4
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.
Year 2000. The "Year 2000" issue relates to computer systems and software
that cannot determine whether "00" means the year 1900 or 2000. Systems or
software that cannot properly process year 2000 dates could give rise to
failures or create erroneous results that in turn could have a material adverse
effect on the Company's business, operations, financial results and liquidity.
The Company relies on the operation of the Seabrook Project for nearly all
of its revenue. Accordingly, the Company's major exposure for year 2000 problems
is the effect of a plant shutdown partially or completely caused by a year 2000
problem. In addition, year 2000 issues could adversely affect electricity
metering, transmission, billing or other business processes.
The Company does not operate the Seabrook Project. Rather, the joint owners
of the plant, including Great Bay, have contracted with NAESCO, a subsidiary of
Northeast Utilities, to operate the plant. Northeast Utilities, in conjunction
with certain of its affiliates, holds the largest joint ownership interest in
the Seabrook Project.
According to January 1999 estimates provided by NAESCO, Great Bay's share
of costs to address year 2000 issues at the Seabrook Project will be
approximately $410,000. As of December 31, 1998, Great Bay's share of costs to
address year 2000 issues at the Seabrook Project was approximately $229,000.
Great Bay has funded these expenses from its operating revenues.
In assessing year 2000 issues associated with the Seabrook Project, NAESCO,
as of December 31, 1998:
o developed and implemented a detailed millennium project plan;
o completed its inventory, analysis and planning for millennium items,
identifying approximately 1,325 separate items and determining that 71%
can be accepted as modified to date or without modification and 29%
require further testing, modification or replacement; and
o worked with the NRC in connection with the NRC's year 2000 audit of the
Seabrook plant, which occurred from September 29, 1998 through October 1,
1998.
NAESCO has defined a schedule to implement all year 2000 corrective
actions. A number of critical remediation tasks still must be accomplished, most
of which are scheduled for completion by June 1999 and some of which are
scheduled for completion by September 1999. Some of the more important remaining
tasks include NAESCO's plans to:
o upgrade IBM mainframe software, and IDMS and INQUIRE database management
systems, to year 2000-compliant releases;
o develop contingency plans; and
o complete critical supplier and embedded systems remediation projects.
NAESCO commenced year 2000 efforts relating to the Seabrook Project in
October 1996. NAESCO's Seabrook millennium project plan acknowledges that if,
for example, a technical requirement or regulatory commitment is missed or if,
for example, a critical supplier does not provide a service, NAESCO, as operator
of the Seabrook Project, will need to take collective action, which could
include an unscheduled shutdown of the plant.
In April 1998 the NRC requested that all licensed nuclear power plant
operators provide to the NRC, by July 1, 1999, written certification that their
facilities are year 2000-ready and in compliance with the terms and conditions
of their licenses, NRC regulations and the principles outlined in an August 1997
NRC nuclear utility year 2000 readiness document. If the plant is not ready,
plans and schedules to become ready must be submitted to the NRC. The Company
believes that NAESCO's year 2000 efforts at the Seabrook Project are designed to
meet or exceed NRC requirements.
The dates on which NAESCO believes its year 2000 compliance efforts will be
completed are based on NAESCO management's best estimates, which were derived
utilizing numerous assumptions of future events,
<PAGE> 5
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved or that there will not be a delay in, or
increased costs associated with, the implementation of the year 2000 compliance
efforts. Specific factors that might cause differences between the estimates and
actual results include, but are not limited to, the availability and cost of
personnel trained in these areas, the ability to locate and correct all relevant
computer code, timely responses to and corrections by third parties and
suppliers, the ability to implement interfaces between the new systems and the
systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-parties and the interconnection
of global businesses, the Company cannot ensure that efforts to timely and
cost-effectively resolve year 2000 issues will be successful. If year 2000
compliance efforts are unsuccessful or incomplete, or if costs exceed NAESCO's
estimates, the Company's business, operations, financial results and liquidity
could be materially and adversely affected.
The majority of the necessary modifications to the Company's centralized
financial, customer and operational information systems (as opposed to those at
the Seabrook Project) were completed by the end of 1998. The Company believes it
will incur minimal year 2000 remediation costs associated with its centralized
systems.
