<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, 2000
--------------
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
-------
BAYCORP HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
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
---- ----
Class Outstanding at May 10, 2000
- --------------------------------------- ---------------------------
Common Stock, $0.01 Par Value per Share 8,273,500
<PAGE> 2
BAYCORP HOLDINGS, LTD.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1 - Financial Statements:
Consolidated Statements of Income and Comprehensive Income
- Three Months Ended March 31, 2000 and 1999...................... 3
Consolidated Balance Sheets at March 31, 2000
and December 31, 1999............................................. 4-5
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2000 and 1999.............................. 6
Notes to Financial Statements......................................... 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations:........................................ 14-17
PART II - OTHER INFORMATION:
Item 6 - Exhibits and Reports on Form 8-K............................. 17
Signature............................................................. 18
Exhibit Index......................................................... 19
</TABLE>
2
<PAGE> 3
BAYCORP HOLDINGS, LTD.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(Dollars in Thousands, except shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------ ------------------
<S> <C> <C>
Operating Revenues $ 14,334 $ 10,103
Operating Expenses
Production 5,683 4,758
Transmission 233 212
Purchased Power 1,878 2,007
Administrative & General 4,288 1,177
Depreciation & Amortization 1,342 938
Unrealized Loss on Firm Forward Contracts 4,130 0
Taxes other than Income 1,151 1,034
----------- -----------
Total Operating Expenses 18,705 10,126
Operating Loss (4,371) (23)
Other (Income) Deductions:
Interest and Dividend Income (108) (169)
Decommissioning Cost Accretion 908 753
Decommissioning Trust Fund Income (295) (175)
Other Deductions (235) 6
----------- -----------
Total Other Deductions 270 415
Loss Before Income Taxes (4,641) (438)
Income Taxes 0 0
----------- -----------
Net Loss Before Minority Interest (4,641) (438)
Less: Minority Interest in Loss of Subsidiary (830) 0
----------- -----------
Net Loss (3,811) (438)
Other Comprehensive Income, Net of Tax
Unrealized Loss on Securities (272) (215)
----------- -----------
Comprehensive Loss $ (4,083) $ (653)
=========== ===========
Weighted Average Shares Outstanding 8,269,932 8,191,948
Basic and Diluted Loss Per Share $ (0.46) $ (0.05)
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
3
<PAGE> 4
BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash & Cash Equivalents $ 12,222 $ 3,180
Restricted Cash - Escrow 2,545 2,503
Short-term Investments, at market 381 381
Accounts Receivable 5,060 4,564
Materials & Supplies, net 4,842 4,611
Prepayments & Other Assets 4,580 3,162
--------- ---------
Total Current Assets 29,630 18,401
Property, Plant, & Equipment:
Utility Plant Assets 121,587 121,043
Non-Utility Plant Assets 8,804 3,203
--------- ---------
Total Property, Plant and Equipment 130,391 124,246
Less: Accumulated Depreciation (17,532) (16,331)
--------- ---------
Net Utility Plant 112,859 107,915
Nuclear Fuel 22,121 20,243
Less: Accumulated Amortization (13,106) (11,863)
--------- ---------
Net Nuclear Fuel 9,015 8,380
Net Property, Plant & Equipment and Fuel 121,874 116,295
Other Assets:
Decommissioning Trust Fund 24,951 24,483
Deferred Debits & Other 13 5
--------- ---------
Total Other Assets 24,964 24,488
TOTAL ASSETS $ 176,468 $ 159,184
========= =========
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
4
<PAGE> 5
BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ 3,179 $ 3,060
Unrealized Losses on Firm Forward Energy Contracts 4,777 0
Miscellaneous Current Liabilities 3,125 3,663
--------- ---------
Total Current Liabilities 11,081 6,723
Operating Reserves:
Decommissioning Liability 80,351 79,443
Miscellaneous Other 545 545
--------- ---------
Total Operating Reserves 80,896 79,988
Other Liabilities & Deferred Credits 6,342 6,227
Minority Interest in Subsidiary 2,170 0
Preferred Stock of Subsidiary 13,600 0
Commitments & Contingencies 0 0
Stockholders' Equity:
Common stock, $.01 par value,
Authorized - 20,000,000 shares,
Issued and Outstanding - 8,499,300 85 84
Less: Treasury Stock - 225,800 shares at cost (1,629) (1,629)
Additional paid-in capital 92,510 92,295
Accumulated Other Comprehensive Income (275) (3)
Accumulated Deficit (28,312) (24,501)
--------- ---------
Total Stockholders' Equity 62,379 66,246
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 176,468 $ 159,184
========= =========
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
5
<PAGE> 6
BAYCORP HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Net cash flow from operating activities:
Net Loss ($3,811) ($438)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Minority Interest in Loss of Subsidiary (830) 0
Depreciation 1,335 938
Amortization of nuclear fuel 1,242 992
Unrealized Loss on Firm Forward Energy Contracts 4,130 0
Decommissioning trust accretion 908 753
Decommissioning trust interest (294) (156)
Increase in accounts receivable (498) (130)
(Increase)decrease in materials & supplies (277) 192
Increase in prepaids and other assets (1,426) (247)
Increase(decrease) in accounts payable 230 480
Increase in taxes accrued 0 880
Increase(decrease) in other accruals 111 (127)
-------- ------
Net cash provided by operating activities 820 3,137
Net cash flows provided by (used in) investing activities:
Purchases of Property and Equipment (6,233) (504)
Nuclear fuel additions (1,877) (240)
Payments to decommissioning fund (441) (397)
Short term investments, net 0 (1,385)
-------- ------
Net cash used in investing activities (8,551) (2,526)
Net cash provided by financing activities:
Stock Option Exercise 215 0
Proceeds from issuance of HoustonStreet Stock 16,600 0
-------- ------
Net cash provided by financing activities 16,815 0
Net increase in cash and cash equivalents 9,084 611
Cash and cash equivalents, beginning of period 5,683 2,559
-------- ------
Cash and cash equivalents, end of period $14,767 $3,170
======== ======
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
6
<PAGE> 7
BAYCORP HOLDINGS, LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE A - THE COMPANY
BayCorp Holdings, Ltd. ("BayCorp" or the "Company") is a holding
company incorporated in Delaware in 1996. Through its subsidiaries, BayCorp
operates in two business segments - an Internet-based energy trading and
information business and a wholesale electricity generation and trading
business.
The Company's majority-owned subsidiary, HoustonStreet Exchange, Inc.
("HoustonStreet") developed and operates HoustonStreet.com, an Internet-based
trading platform and information portal for wholesale energy traders. Currently,
HoustonStreet offers an online trading exchange that allows utilities,
independent power producers and power marketers to trade electricity over the
Internet. HoustonStreet plans to develop and launch trading platforms for crude
oil and refined products, natural gas and other energy-related commodities.
HoustonStreet is also exploring opportunities to license its trading platform
for use in other non-energy business-to-business markets.
HoustonStreet initially launched its Internet-based wholesale
electricity trading exchange in the Northeast in July 1999. In September 1999,
HoustonStreet launched electricity trading throughout the United States.
The Company's two other subsidiaries, Great Bay Power Corporation
("Great Bay") and Little Bay Power Corporation ("Little Bay") are electricity
generation and trading companies. BayCorp wholly owns Great Bay and Little Bay,
which in turn own a combined 15% joint ownership interest in the Seabrook
Nuclear Power Project in Seabrook, New Hampshire (the "Seabrook Project"). This
ownership interest entitles the companies to approximately 174 megawatts of the
Seabrook Project's power output. Neither BayCorp nor its subsidiaries have
operational responsibilities for the Seabrook Project. Great Bay and Little Bay
are exempt wholesale generators ("EWGs") under the Public Utility Holding
Company Act of 1935 ("PUHCA"). Unlike regulated public utilities, Great Bay and
Little Bay have no franchise area or captive customers. The companies sell their
power in the competitive wholesale power markets, including through
HoustonStreet.com.
Great Bay and Little Bay currently sell all but approximately 10 MW of
their share of the Seabrook Project capacity in the wholesale short-term market.
In addition to selling its owned generation, Great Bay may purchase power on the
open market for resale to third parties.
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, 1999 as filed in Form 10-K,
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.
7
<PAGE> 8
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:
Unrealized Accumulated
Income (Loss) Other Comprehensive
on Securities Income(Loss)
Beginning Balance $( 3,000) $( 3,000)
Current Period Charge (272,100) (272,100)
--------- ---------
Ending Balance $(275,100) $(275,100)
--------- ---------
Great Bay has entered into certain firm forward sale and purchase
commitments to help ensure stable cash flow, favorable prices and income, as
well as capture any long-term increases in value. 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 98-10"). EITF
98-10 was effective for fiscal years beginning after December 15, 1998. EITF
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 have been reported as a cumulative effect
of a change in accounting principle. Financial statements for periods prior to
initial adoption of EITF 98-10 have not been restated. The cumulative effect of
this accounting change as of January 1, 1999 was an increase in net income of
approximately $159,000 to recognize gains on net open firm purchase and sales
commitments considered to be trading activity. As of March 31, 2000, the Company
had a net unrealized loss of approximately $4,776,800 included in accrued
expenses. The net change in unrealized loss on firm forward contracts for the
first quarter ended March 31, 2000 was $4,130,000 and is included in the
accompanying consolidated statements of income.
Minority interest and preferred stock of subsidiary consists of equity
securities issued by the Company's subsidiary, HoustonStreet. No gain or loss
was recognized as a result of the issuance of these securities, and the Company
owned the majority of all of the voting equity of the subsidiary both before and
after the transactions.
NOTE C - COMMITMENTS AND CONTINGENCIES
NUCLEAR POWER, ENERGY AND UTILITY REGULATION.
The Seabrook Project and Great Bay and Little Bay, as part owners 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 and Little Bay
have been, and will be, affected to the extent of their proportionate share by
the cost of any such requirements made applicable to the Seabrook Project.
Great Bay and Little Bay are 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, are required to file with FERC all contracts
for the sale of electricity. FERC has the authority to suspend the rates at
which
8
<PAGE> 9
BAYCORP HOLDINGS, LTD.
Great Bay and Little Bay propose 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 they both are EWG's, Great Bay and Little Bay are not subject
to the jurisdiction of the Securities and Exchange Commission ("SEC") under
PUHCA. In order to maintain their EWG status, Great Bay and Little 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 and Little Bay, their combined
15% joint ownership interest in the Seabrook Project comprises an "eligible
facility."
UTILITY DEREGULATION; PUBLIC CONTROVERSY CONCERNING NUCLEAR POWER PLANTS
The New Hampshire Public Utilities Commission ("NHPUC") and the
regulatory authorities with jurisdiction over utilities in New Hampshire and
state legislatures of several other states in which Great Bay and Little Bay
sell 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
restructured to create and maintain open, non-discriminatory, competitive,
unbundled markets for energy, capacity, and ancillary services. These markets
commenced operation in May 1999. All of the deregulation initiatives open
electricity markets to competition in the affected states. While Great Bay and
Little Bay believe they are low-cost producers 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 the companies.
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 monies
in a trust fund to pay decommissioning costs, if these costs exceed the amount
of the trust fund, the owners, including Great Bay and Little Bay, will be
liable for the excess.
DECOMMISSIONING LIABILITY
Based on the Financial Accounting Standards Board's ("FASB") tentative
conclusions, Great Bay and Little Bay have recognized as a liability their
proportionate share of the present value of the estimated cost of the Seabrook
Project decommissioning. For Great Bay, the initial recognition of this
liability was capitalized as part of the Fair Value of the Utility Plant at
November 23, 1994. For Little Bay, the amount
9
<PAGE> 10
BAYCORP HOLDINGS, LTD.
was provided for in the purchase price allocation. 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 for such things as labor and material costs, technology, inflation
and timing of decommissioning could cause these estimates to change, possibly
materially, in the near term.
During April 1999, the NDFC issued an order that adjusted the
decommissioning collection period and funding levels based on the NDFC's opinion
that the anticipated energy producing life was twenty-five years from the time
it went into commercial operation. This is eleven years earlier than the service
life established by Seabrook's NRC operating license. The order also updated
Seabrook's decommissioning estimate to $565 million (in 2000 dollars.) Based on
this estimate, the value of Great Bay's and Little Bay's share of the
decommissioning estimate in 2000 dollars is approximately $84.8 million.
Great Bay and Little Bay accrete their share of the Seabrook Project's
decommissioning liability. This accretion is a non-cash charge and recognizes
their liability related to the closure and decommissioning of their nuclear
plant in current year dollars over the licensing period of the plant.
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 agreed to review the accounting for
nuclear decommissioning costs. On February 7, 1996, the FASB issued an Exposure
Draft entitled "Accounting for Certain Liabilities Related to Closure and
Removal of Long-Lived Assets." On February 17, 2000, the FASB issued a "Revision
of Exposure Draft issued February 7, 1996, Proposed Statement of Financial
Accounting Standards: Accounting for Obligations Associated with the Retirement
of Long-Lived Assets." Great Bay and Little Bay's accounting for decommissioning
is based on the FASB's original tentative conclusions. The proposed statement
requires that an obligation associated with the retirement of a tangible
long-lived asset be recognized as a liability when incurred, and that the amount
of the liability resulting from (a) the passage of time and (b) revisions to
either the timing or the amount of estimated cash flows should also be
recognized. The proposed statement also requires that, upon initial recognition
of a liability for an asset retirement obligation, an entity capitalize that
cost by recognizing an increase in the carrying amount of the related long-lived
asset. Upon adoption, the proposed statement would be effective for financial
statements issued for fiscal years beginning after June 15, 2001.
Great Bay and Little Bay, based on the initial exposure draft, have
been recognizing a liability based on the present value of the estimated future
cash outflows required to satisfy their obligations using a risk free rate. The
proposed Statement requires the initial measurement of the liability to be based
on fair value, where the fair value is the amount that an entity would be
required to pay in an active market to settle the asset retirement obligation in
a current transaction in circumstances other than a forced liquidation or
settlement. Because in most circumstances, a market for settling asset
retirement obligations does not exist, the FASB described an expected present
value technique for estimating fair value. If the proposed Statement is adopted,
Great Bay's and Little Bay's decommissioning liability and annual provision for
decommissioning accretion could change relative to 1999. Great Bay and Little
Bay have not quantified the impact, if any, that the revised statement will have
on their 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
10
<PAGE> 11
BAYCORP HOLDINGS, LTD.
trust funds are restricted for use in paying the decommissioning of Unit 1. The
investments in the trust are available for sale. Great Bay and Little Bay have
therefore reported their investment in trust fund assets at market value and any
unrealized gains and losses are reflected in equity. There was an unrealized
holding loss of $225,800 as of March 31, 2000.
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 and Little Bay,
would remain liable for the excess.
Based on the currently approved funding schedule and Great Bay's
funding schedule, Great Bay's decommissioning payments will be approximately
$1.8 million in 2000 and escalate at 4% each year thereafter through 2015.
Little Bay's share of decommissioning costs was prefunded by Montaup Electric
Company, the owner of the 2.9% interest in the Seabrook Project that Little Bay
acquired in November 1999. As part of that acquisition, Montaup Electric Company
transferred approximately $12.4 million into Little Bay's decommissioning
account, an irrevocable trust earmarked for Little Bay's share of Seabrook Plant
decommissioning expenses.
On November 15, 1992, Great Bay, the Bondholder's Committee and the
Predecessor's former parent, Eastern Utilities ("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.
NOTE D - HOUSTON STREET FINANCING ACTIVITY AND RELATIONSHIPS
EQUIVA RELATIONSHIP
In February 2000, HoustonStreet sold $6.0 million of its common stock
and Series A convertible preferred stock to Equiva Trading Company ("Equiva").
Equiva is a hydrocarbon supply and trading partnership jointly-owned by Equilon
Enterprises LLC ("Equilon") and Motiva Enterprises LLC ("Motiva"). Equilon is
owned by Shell Oil Company and Texaco Inc. Motiva is owned by Shell Oil Company,
Texaco Inc. and Saudi Refining Inc., an affiliate of Saudi Aramco.
Also in February 2000, HoustonStreet announced plans to launch of the
first Web exchanges for wholesale crude oil and refined products trading. At
that time, HoustonStreet entered into agreements with Equiva under which Equiva
will share its knowledge of the oil trading industry with HoustonStreet and will
pay HoustonStreet at least $1.5 million over the next two years as minimum
trading commissions generated through Equiva's use of HoustonStreet's crude and
refined oil products trading exchange, once it is created and operated.
Pursuant to additional agreements, Equiva committed to make markets and
promote liquidity for all of the primary products traded on HoustonStreet's
crude and refined oil products trading exchange. HoustonStreet's management
believes that Equiva's reputation as a leader in the energy trading markets,
coupled with Equiva's commitment to make markets on HoustonStreet, increases the
probability of success for HoustonStreet's crude and refined oil products
exchange.
Notwithstanding HoustonStreet's relationship with Equiva or any other
strategic partner or financial investor, HoustonStreet provides a neutral,
secure and anonymous trading platform.
11
<PAGE> 12
BAYCORP HOLDINGS, LTD.
HoustonStreet does not take title to any products traded on HoustonStreet.com
nor compete with any users of the system.
OTHER SERIES A AND SERIES B FINANCING ACTIVITY
In addition to sales of its capital stock to Equiva, HoustonStreet sold
$10.6 million of its common stock and Series A convertible preferred stock in
February and March to other investors including Williams Energy Marketing and
Trading Company, Omega Advisors, Inc., Elliot Associates, L.P., Thomas H. Lee
Company and Sapient Corporation. Collectively with the Equiva investments,
HoustonStreet raised $16.6 million in gross proceeds through these stock sales.
As of March 31, 2000, BayCorp owned approximately 53% of HoustonStreet capital
stock (on an as converted to common stock basis.)
Subsequent to March 31, 2000, HoustonStreet sold an additional $13.5
million of its capital stock in the form of Series A and Series B Convertible
Preferred Stock to other investors including K Road Ventures, L.P., Vivendi,
S.A. and Conoco, Inc. As of May 10, 2000, HoustonStreet raised $30.1 million in
gross proceeds from all stock sales. As a result, BayCorp owned approximately
50.2% of HoustonStreet stock (on an as converted to common stock basis) as of
May 10, 2000.
NOTE E - EQUITY
BayCorp has never paid cash dividends on its common stock and currently
expects that it will retain all of its future earnings and does not anticipate
paying a dividend in the foreseeable future.
NOTE F - SEGMENT INFORMATION
BayCorp is a holding company for Great Bay, Little Bay and
HoustonStreet. The Company operates primarily in two segments, each of which is
managed separately because each segment sells distinct products and services.
Great Bay and Little Bay constitute the electricity generation and trading
business segment, whose principal asset is a combined 15% joint ownership
interest in the Seabrook Nuclear Power Project and sell their combined power in
the competitive wholesale power markets. HoustonStreet, the Internet-based
energy trading and information business, operates a Web portal for trading
wholesale electric power and charges commissions for megawatt hours traded on
its site HoustonStreet.com.
Management utilizes more than one measurement and multiple views of
data to measure segment performance and to allocate resources to the segments.
However, the dominant measurements are consistent with the company's
consolidated financial statements and, accordingly, are reported on the same
basis herein. Management evaluates the performance of its segments and allocates
resources to them primarily based on cash flows and overall economic returns.
Intersegment sales are generally accounted for at amounts comparable to sales to
unaffiliated customers and are eliminated in consolidation.
12
<PAGE> 13
BAYCORP HOLDINGS, LTD.
<TABLE>
<CAPTION>
As of and for the
three months ended Great Bay and
March 31 ($000's) Little Bay HoustonStreet Corporate Eliminations Total
- -------------------- -------------- --------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C>
2000
Revenues $ 15,735 $ 21 $ 686 $ (2,108) $ 14,334
Depreciation &
amortization 993 349 0 0 1,342
Operating Expenses 17,054 3,271 490 (2,110) 18,705
Interest expense (4) 0 0 0 (4)
Segment net income
(loss) (1,607) (2,398) 194 0 (3,811)
Total Assets 173,491 12,684 67,474 -77,181 176,468
Capital expenditures 632 5,601 0 0 6,233
- -------------------- -------------- --------------- ------------ -------------- ---------------
1999
Revenues $ 10,103 $ 0 $ 505 $ (505) $ 10,103
Depreciation &
amortization 931 0 7 0 938
Operating Expenses 10,310 0 321 (505) 10,127
Interest expense (2) 0 0 0 (2)
Segment net income
(loss) (625) 0 187 0 (438)
Total Assets 139,192 0 70,818 (68,329) 141,681
Capital expenditures 504 0 0 0 504
- -------------------- -------------- --------------- ------------ -------------- ---------------
</TABLE>
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
SFAS 133, as amended by SFAS 137, will be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. A company may also
implement SFAS 133 as of the beginning of any fiscal quarter after issuance
(that is, fiscal quarters beginning June 16, 1998 and thereafter.) SFAS 133
cannot be applied retroactively. SFAS 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the company's election, before January 1, 1998.)
13
<PAGE> 14
BAYCORP HOLDINGS, LTD.
The Company has not yet quantified the impact of adopting SFAS 133 on
its financial statements and has not determined the timing of or method of
adoption of SFAS 133. However, SFAS 133 could increase volatility in earnings
and other comprehensive income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
Currently, BayCorp derives substantially all of its revenue through its
energy trading activities and its 100% equity interest in Great Bay and Little
Bay. Great Bay and Little Bay are electric generating companies whose principal
asset is a combined 15% joint ownership interest in the Seabrook Nuclear Power
Project in Seabrook, New Hampshire. The Company anticipates that it will derive
additional revenues from HoustonStreet. HoustonStreet began charging
commissions in September 1999 on wholesale power trades made on
HoustonStreet.com.
The following discussion focuses solely on operating revenues and
operating expenses that are presented in a substantially consistent manner for
all of the periods presented.
RESULTS OF OPERATIONS: FIRST QUARTER OF 2000 COMPARED TO THE FIRST QUARTER
OF 1999
Operating Revenues
BayCorp's operating revenues increased by approximately $4,231,000, or
41.9%, to $14,334,000 in the first quarter of 2000 as compared to $10,103,000 in
the first quarter of 1999. This increase in operating revenues was primarily
attributable to an increase in megawatt-hours sold and in average selling prices
in the first quarter of 2000 as compared to the first quarter of 1999. During
the first quarter of 2000, BayCorp's subsidiaries, Great Bay and Little Bay,
owned a combined 15.03% joint ownership interest in the Seabrook Project, or
approximately 174 megawatts of the Seabrook Projects power output. During the
first quarter of 1999, Great Bay's ownership in the Seabrook Project was 12.13%,
or approximately 140 megawatts. The capacity factor at the Seabrook Project for
the first quarter of 2000 was 96% of the rated capacity as compared to a
capacity factor of 94.1% for the first quarter of 1999. Operating revenues and
capacity factor were adversely impacted in the first quarter of 2000 by an
unplanned outage from January 8 through January 11. Operating revenues and
capacity factor were adversely impacted in the first quarter of 1999 by the
scheduled refueling outage at the Seabrook Project that began on March 27, 1999.
Substantially all of the Company's operating revenues were earned by its
wholesale electricity generation and trading business. HoustonStreet revenues
for the first quarter of 2000 were nominal.
Sales of electricity increased by approximately 18% to 417,336,000
kilowatt-hours ("kWhs") in the first quarter of 2000 as compared to 353,670,240
kWhs in the first quarter of 1999. During the three months ended March 31, 2000,
the average sales price per kWh (determined by dividing total sales revenue by
the total number of kWhs sold in the applicable period) increased 20.8% to 3.43
cents per kWh as compared with 2.84 cents per kWh for the three months ended
March 31, 1999.
Expenses
14
<PAGE> 15
BAYCORP HOLDINGS, LTD.
Production and Transmission expenses increased approximately $946,000,
or 19.0%, to $5,916,000 in the first quarter of 2000 as compared to $4,970,000
in the first quarter of 1999. Taxes other than Income increased approximately
$117,000, or 11.3%, during the first quarter of 2000 as compared to the same
period in 1999. These increases were primarily attributable to the Company's
increased ownership in the Seabrook Project, from 12.13% in the first quarter of
1999 to 15.03% in the first quarter of 2000. Administrative and general expenses
increased approximately $3,111,000, or 264%, to $4,288,000 in the first quarter
of 2000 compared to $1,177,000 in the first quarter of 1999. This increase was
primarily attributable to expenses associated with developing and operating
HoustonStreet. Depreciation and amortization increased approximately $404,000,
or 43.1%, to $1,342,000 in the first quarter of 2000 as compared to $938,000 in
the first quarter of 1999. The increase in depreciation expense was primarily
due to depreciating the assets of HoustonStreet.
In the first quarter of 2000, Great Bay recorded unrealized losses on
forward firm energy contracts of $4,130,000. 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 98-10"). EITF
98-10 requires energy-trading contracts to be recorded at fair market value on
the balance sheet, with the changes in fair value included in earnings. Power
prices in the Northeast increased significantly in the first quarter of 2000.
This enabled Great Bay to realize significantly higher selling prices for its
uncommitted capacity in the first quarter of 2000 as compared to the first
quarter of 1999, but resulted in a non-cash charge to earnings for unrealized
losses on forward firm energy contracts.
Decommissioning cost accretion increased $155,000, or 20.6%, and
decommissioning trust fund income increased $120,000, or 68.6%, in the first
quarter of 2000 as compared to the same period in 1999. These increases reflect
the Company's increased ownership in the Seabrook Project in the first quarter
of 2000 as compared to the first quarter of 1999. This accretion is a non-cash
charge that reflects Great Bay's liability related to the closure and
decommissioning of the Seabrook Project in current year dollars over the
licensing period during which the Seabrook Project is licensed to operate. Other
deductions decreased approximately $145,000, or 34.9%, in the first quarter of
2000 as compared to the first quarter of 1999. This decrease in deductions was
primarily attributable to other income derived from gains on disposal of
miscellaneous property at the Seabrook project in the first quarter of 2000.
Net Loss
As a result of the above factors, during the first quarter of 2000, the
Company recorded a net loss of $3,811,000, or approximately $0.46 per basic and
diluted share, as compared to a net loss of approximately $438,000, or $0.05 per
basic and diluted share, during the first quarter of 1999. Excluding
HoustonStreet expenses and the non-cash charge related to losses on forward firm
energy contracts, BayCorp would have reported net income of $2,715,900 in the
first quarter of 2000.
Liquidity and Capital Resources
As of March 31, 2000, BayCorp's consolidated cash position was
approximately $15,148,000 in cash and equivalents, restricted cash and short
term investments. A significant factor affecting BayCorp's consolidated cash
position during the first quarter of 2000 was the receipt of approximately $16.6
million in cash for HoustonStreet from investors in HoustonStreet. Excluding
cash held by HoustonStreet, the Company had cash and cash equivalents,
restricted cash and short term investments of approximately $10.6 million at
March 31, 2000.
15
<PAGE> 16
BAYCORP HOLDINGS, LTD.
BayCorp's wholesale electricity generation and trading business, Great
Bay and Little Bay, generated cash from electricity sales during the first
quarter of 2000 that was less than the ongoing cash requirements of BayCorp's
wholesale electricity generation and trading business for this period. The
Company may continue to incur cash deficits.
The Company intends to cover such deficits with cash and short-term
investments held by BayCorp, Great Bay and Little Bay, which totaled
approximately $10,613,000 at March 31, 2000. If the Seabrook Project operates 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 would be required to raise additional capital, either through a debt
financing or an equity financing, to meet its ongoing cash requirements.
Nonetheless, there can be no assurance that BayCorp will be able to raise
additional capital on acceptable terms or at all.
BayCorp's subsidiary, HoustonStreet, began charging commissions for its
services in September 1999. The cash generated from commission revenues earned
on HoustonStreet.com have been significantly less than the Company's ongoing
cash requirements. The Company expects that HoustonStreet expenses and capital
expenditures will substantially exceed HoustonStreet's revenues while
HoustonStreet is in the early stages of development and operation and that
HoustonStreet will incur additional cash deficits.
The Company intends to cover such deficits during the early stages of
development and operation at HoustonStreet with invested capital. As of March
31, 2000, HoustonStreet had received approximately $16.6 million in cash from
investors in HoustonStreet. As of May 10, 2000, HoustonStreet had received a
total of $30.1 million in cash from investors in HoustonStreet.
BayCorp's consolidated cash and short-term investments increased
approximately $9,084,000 during the first quarter of 2000. The Company had a
consolidated net loss of approximately $4,641,000 and cash expenditures of
approximately $6,233,000 for capital expenditures, $1,877,000 for nuclear fuel
additions and $441,000 for decommissioning fund payments. In addition, during
the first quarter of 2000, there was an increase in prepaids and other assets of
approximately $1,426,000 primarily due to the timing of payments for Seabrook
Project operating expenses. Offsetting these cash expenditures were non-cash
charges to income of approximately $1,335,000 for depreciation, $1,242,000 for
nuclear fuel amortization, $4,130,000 for unrealized losses on firm energy
trading contracts and $908,000 for decommissioning trust fund accretion.
The Company anticipates that capital expenditures for HoustonStreet for
the fiscal year 2000 will total approximately $14.4 million primarily for
software development. Great Bay anticipates that its share of the Seabrook
Project's capital expenditures for the 2000 fiscal year will total approximately
$8.4 million for nuclear fuel and various capital projects.
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 operating revenues and due to the additional costs associated with
outages as well as continuing operating and maintenance expenses and
depreciation.
16
<PAGE> 17
BAYCORP HOLDINGS, LTD.
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 it subsidiaries 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 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, 2000.
17
<PAGE> 18
BAYCORP HOLDINGS, LTD.
SIGNATURE
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 15, 2000 By: /s/ Frank W. Getman Jr.
------------------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
18
<PAGE> 19
BAYCORP HOLDINGS, LTD.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
99.1 Certain Factors That May Affect Future Results, set out on
pages 20-27 of the Company's Annual Report on Form 10-K for
the period ended December 31, 1999. Such Form 10-K shall not
be deemed to be filed except to the extent that portions
thereof are expressly incorporated by reference herein.
19
<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 its subsidiaries 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.
History of Losses
BayCorp has never reported an operating profit for any year since its
incorporation. Historically, electricity 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. In addition,
HoustonStreet has incurred substantial operating expenses and capital
expenditures, totaling approximately $6.2 million from formation to December 31,
1999, with continuing losses in 2000. These expenses and capital expenditures
greatly exceeded HoustonStreet's revenue of $59,200 for the same period.
HoustonStreet expects to continue to incur substantial operating losses for the
foreseeable future. Moreover, there can be no assurance that Great Bay or Little
Bay will be able to sell power at prices that will enable them to meet their
cash requirements.
Liquidity Needs
As of December 31, 1999, BayCorp had approximately $6.1 million in cash and
cash equivalents, restricted cash and short-term investments. The Company
believes that such cash, together with the anticipated proceeds from the sale of
electricity by Great Bay and Little Bay and additional external financing that
HoustonStreet is currently seeking, will be sufficient to enable the Company and
its subsidiaries to meet their cash requirements in 2000. However, if in 2000 or
thereafter, 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 and
Little Bay are able to sell their share of the Seabrook Project electricity do
not increase at the rates and within the time expected by Great Bay and Little
Bay, or if HoustonStreet expenses materially exceed budgeted expenses, the
Company or its subsidiaries would be required to raise additional capital,
either through a debt financing or an equity financing, to meet ongoing cash
requirements. In any event, in 2000 or shortly thereafter, the Company and its
subsidiaries will likely need to raise additional capital from outside sources.
There is no assurance that the Company or its subsidiaries 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.
20
<PAGE> 2
Factors Related to Great Bay and Little Bay
Primary Reliance on a Single Asset. BayCorp's principal source of revenue
is its wholesale electricity generation and trading business, which depends in
large part on Great Bay and Little Bay's 15% combined joint interest in the
Seabrook Nuclear Power Project in Seabrook, New Hampshire. Accordingly,
BayCorp's results of operations significantly depend on the successful and
continued operation of the Seabrook Project. In particular, if the Seabrook
Project experiences unscheduled outages of significant duration, BayCorp's
results of operations will be materially adversely affected.
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 2.76 cents in 1997
to 3.04 cents in 1998 and 3.13 cents in 1999, there can be no assurance that
Great Bay or Little Bay will be able to sell their power at these prices or
higher prices in the future.
Risks in Connection with Joint Ownership of Seabrook Project. Great Bay
and Little Bay are required under the JOA to pay their 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 or Little Bay to make their monthly
payments under the JOA entitles certain other joint owners of the Seabrook
Project to purchase Great Bay or Little 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 and Little Bay may have a material
adverse effect on the Company. For example, Great Bay or Little Bay could opt to
pay a greater proportion of the Seabrook Project expenses in order to preserve
the value of their share of the Seabrook Project. In the past, certain of the
owners of the Seabrook Project other than Great Bay and Little 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 or
Little Bay filed for bankruptcy and that Participant was unable to pay its share
of Seabrook Project expenses, Great Bay or Little Bay might opt to pay a greater
portion of Seabrook Project expenses in order to preserve the value of their
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, Little Bay and the other owners
thereof as tenants in common, with the various owners holding varying ownership
shares. This means that Great Bay and Little Bay, which together own only a 15%
interest, do not have control of the management of the Seabrook Project. As a
result, decisions may be made affecting the Seabrook Project notwithstanding
Great Bay and/or Little 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 its subsidiaries. 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, Great Bay and Little 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 and Little Bay as part owners 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 and Little Bay are also subject to the jurisdiction of the FERC
21
<PAGE> 3
and, as a result, are 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 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.
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 the Company 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 the Joint Owners 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 -- Wholesale
Electricity Generation and Trading 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 fund, and the owners (including Great Bay and Little Bay) would remain
liable for the excess. Moreover, the
22
<PAGE> 4
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 (and Little Bay's 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.
Factors Related to HoustonStreet
Limited Operating History. HoustonStreet was incorporated in Delaware on
April 27, 1999. HoustonStreet.com was launched initially in the Northeast on
July 8, 1999 and nationwide on September 13, 1999. HoustonStreet has only a
limited operating history upon which to evaluate its performance.
Significant Future Losses Expected. HoustonStreet's business is subject to
the risks and uncertainties encountered by companies in early stages of
development, particularly enterprises in new and rapidly evolving markets, such
as electronic trading of energy products over the Internet. HoustonStreet's
substantial operating expenses and capital expenditures from formation to date
have greatly exceeded its revenues over the same period. HoustonStreet expects
to continue to incur substantial operating losses for the foreseeable future.
Moreover, there is no assurance that HoustonStreet will be able to achieve or
sustain profitability.
Internet-based Wholesale Energy Trading is a New and Evolving
Market. Wholesale trading of energy products over the Internet is a new and
rapidly evolving market. HoustonStreet cannot be certain that a viable market
will emerge or be sustainable. If the market for Internet-based wholesale energy
trading fails to develop, if it develops more slowly than expected, if it
becomes saturated with competitors or if it does not achieve widespread market
acceptance, HoustonStreet would be materially adversely affected.
Dependence on Internet-based Wholesale Energy Trading. Substantially all
of HoustonStreet's revenues depend on the continued and expanded use of
Internet-based wholesale energy trading platforms. HoustonStreet currently
depends on its wholesale electricity trading platform for all revenues.
HoustonStreet will likely depend on other energy trading platforms, including
platforms for oil and natural gas trading, if planned expansion is successful.
Businesses have only recently begun significant use of the Internet for
electronic commerce. Although Internet usage has grown dramatically,
HoustonStreet cannot assure you that usage will continue to increase for
commerce or trading wholesale energy products. A decrease in the use of the
Internet or a reduction in the currently anticipated growth in the use of the
Internet would have a material adverse effect on HoustonStreet. Businesses may
reject the Internet as a viable commercial medium for a number of reasons,
including potentially inadequate network infrastructure, slow development of
enabling technologies, insufficient commercial support or privacy concerns. The
Internet's infrastructure may be unable to support the demands placed on it by
increased usage. In addition, delays in developing or adopting new standards and
protocols required to handle increased levels of Internet activity, or increased
government regulation, could cause the Internet to lose its viability as a
commercial medium.
Dependence on Trading Liquidity. HoustonStreet will need to achieve
trading liquidity on its Internet-based wholesale energy trading exchange in
order to increase and sustain revenues. If the volume and level of trades on the
exchange do not increase, HoustonStreet will not achieve profitability.
Dependence on Increased Business from Unaffiliated Customers. If
HoustonStreet fails to grow its customer base or generate repeat and expanded
business from customers that are not affiliated with BayCorp, HoustonStreet will
be unable to achieve or sustain profitability. For the period beginning July 8,
1999 through December 31, 1999, Great Bay, a subsidiary of BayCorp, was a party
to 77% of all trades on HoustonStreet. HoustonStreet earns standard commissions
from all trades on HoustonStreet, including trades by Great Bay
23
<PAGE> 5
and its counterparties. To date, a substantial majority of HoustonStreet's
revenue has been derived from commissions from trades involving Great Bay and
its counterparties.
HoustonStreet's management expects that commissions from trades involving
Great Bay and its counterparties will be a less significant portion of revenue
in the future as the number of registered traders and the volume of trades
increases. If trading volume does not increase as anticipated, HoustonStreet's
revenue will not increase and HoustonStreet's business and financial results
will be materially adversely affected.
Need for Expanded Sales and Marketing Operations. Expanded sales and
marketing operations will be necessary to attract traders to HoustonStreet's
trading exchange, to lengthen the time and frequency of service use, and to
build the HoustonStreet community of users. If HoustonStreet's sales and
marketing operations fail to register additional users and generate increased
traffic on its Web site, the number of trades completed on the exchange may not
increase. If the number, size and frequency of transactions do not increase,
HoustonStreet will be unable to increase its revenues and HoustonStreet's
business will not achieve profitability.
Need for Additional Financing. Based on current levels of operations and
planned growth, HoustonStreet's management anticipates that the net proceeds of
its stock sales in February and March 2000 and cash generated from operations
will be sufficient to meet HoustonStreet's needs through approximately October
2000. If HoustonStreet requires additional funding or determines that it is
appropriate to raise additional funding, HoustonStreet may be unable to raise
additional funds. Further, any such funding may result in significant dilution
to existing HoustonStreet stockholders, including BayCorp. The inability to
obtain sufficient funds from operations and external sources when needed would
have a material adverse effect on HoustonStreet's business, results of
operations and financial condition.
Ability to Implement Business Strategy. The growth and expansion of
HoustonStreet's business are expected to place significant demands on
HoustonStreet's management, operational and financial resources. Successful
implementation of HoustonStreet's business strategy will depend on a number of
factors, including its ability to:
- offer an efficient and effective wholesale energy trading platform
that meets industry needs,
- increase awareness of the HoustonStreet brand,
- continue to develop and upgrade the HoustonStreet Web site and related
technology, operating software and capacity,
- attract more wholesale energy traders to the HoustonStreet Web Site,
lengthen the time and frequency of service use, and build the
HoustonStreet community of registered users, and
- attract, hire, integrate, retain and motivate qualified personnel.
There can be no assurance that HoustonStreet will be successful in the
implementation of its business strategy.
Reliance on Strategic Relationships. HoustonStreet may be unable to
implement its strategic growth plans without successfully identifying, forming,
maintaining and enhancing strategic relationships, such as its strategic
relationship with Equiva. HoustonStreet's ability to achieve significant future
revenue growth will depend in part on adding new strategic partners. If
HoustonStreet is unable to form or successfully develop additional strategic
relationships, HoustonStreet may be unable to grow its revenues and
HoustonStreet could be materially adversely affected.
International Expansion. If HoustonStreet cannot expand internationally,
HoustonStreet may be unable to take advantage of the potential revenue
associated with energy trading on a global level. While HoustonStreet's
management believes that HoustonStreet can become profitable if its services are
widely adopted by power traders in the United States, the global energy market
represents a much larger source of revenue.
24
<PAGE> 6
To be successful, HoustonStreet's management believes that HoustonStreet
must expand its operations into international markets. International operations
will subject HoustonStreet to a number of risks that may increase
HoustonStreet's costs and require significant management attention. These risks
include:
- difficulties and increased expenses associated with staffing and
managing foreign operations,
- differing technology standards that may impede HoustonStreet's ability
to integrate its trading platforms across international borders,
- reluctance or inability of energy traders abroad to accept
Internet-based wholesale energy trading as a method of conducting
business,
- changes in regulatory requirements,
- currency exchange rate fluctuations, and
- potentially adverse tax consequences, including restrictions on the
repatriation of earnings.
Regulatory Risks and Privacy Concerns. As use of the Internet evolves,
federal, state and foreign agencies could adopt regulations covering issues such
as user privacy, content and taxation of products and services. If enacted,
government regulations could limit the market for HoustonStreet's services.
In order to use HoustonStreet's trading exchange, traders must first
register with HoustonStreet. The registration process requires that users
provide certain information about themselves and the companies for which they
trade. Although HoustonStreet collects this data only with the consent of a
visitor, privacy concerns may cause visitors to resist registering to use the
exchange. In addition, legislative or regulatory requirements may heighten
privacy concerns. Other countries and political entities, such as the European
Economic Community, have adopted legislation or regulatory requirements relating
to privacy. The United States may adopt similar legislation or regulatory
requirements. If privacy legislation is enacted or privacy concerns are not
adequately addressed, HoustonStreet's business could be materially adversely
affected.
Unpredictability of Future Revenues; Potential Fluctuation in Quarterly
Operating Results. As a result of HoustonStreet's limited operating history and
the emerging nature of the market for Internet-based trading of wholesale energy
products, HoustonStreet is unable to forecast its revenues accurately.
HoustonStreet expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside HoustonStreet's control. These factors include the demand for
HoustonStreet's trading services, the introduction and market acceptance of new
services in the industry, reductions in trading commissions or changes in how
services are priced, and the amount and timing of operating costs and capital
expenditures related to expanding HoustonStreet's business, operations and
infrastructure. Quarterly results also can be affected by changes in the use of
the Internet and electronic commerce, changes in governmental regulations, and
changes in general economic conditions and economic conditions specifically
related to the Internet and energy trading markets.
In addition, trading volumes can fluctuate due to the seasonal nature of
the wholesale electricity trading market. Typically, there are substantial
declines in the volume of wholesale electricity trading during the fourth
quarter of the calendar year. Based on statistics published by the FERC, the
amount of electricity traded in the United States in the fourth quarter of 1998
was approximately 50% less than amount traded in the third quarter of 1998.
HoustonStreet's management believes that fourth quarter trading can be adversely
affected by seasonal trading patterns, the inclination of some utilities,
independent power producers and power marketers to maintain existing trading
positions near year-end and other factors.
It is difficult to forecast the effect such factors, or the combination of
any of these factors, would have on HoustonStreet's results of operations for
any given fiscal quarter. HoustonStreet's management believes that
HoustonStreet's quarterly revenues, expenses and operating results could vary
significantly in the future and that period-to-period comparisons should not be
relied on as indications of future performance.
System Maintenance and Protection. Unanticipated problems at the
third-party facility that houses substantially all of HoustonStreet's computer
and communications hardware systems could cause interruptions or delays in
HoustonStreet's business, loss of data or render HoustonStreet unable to process
wholesale
25
<PAGE> 7
energy trades. Any such interruptions or delays at the facility would harm
HoustonStreet's revenue and results of operations. In addition, these
third-party systems and operations are vulnerable to damage or interruption from
intentional malicious acts, fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events. HoustonStreet does not have a formal
disaster recovery plan and does not carry business interruption insurance. In
addition, the failure by the third-party facility to provide the data
communications capacity required by HoustonStreet, as a result of human error,
natural disaster or other operational disruptions, could result in interruptions
in HoustonStreet's service. The occurrence of any or all of these events could
harm HoustonStreet's reputation and brand and business.
Traders on the HoustonStreet.com may also be harmed by any system or
equipment failures experienced by HoustonStreet. In that event, HoustonStreet's
relationship with these traders may be adversely affected, HoustonStreet may
lose traders, HoustonStreet's ability to attract new users may be adversely
affected and HoustonStreet could be exposed to liability.
If users of HoustonStreet's trading platform suffer similar interruptions
in their operations, for any of the reasons discussed above or for other
reasons, HoustonStreet's business could also be adversely affected. In addition,
if traders' computer systems suffer interruptions, the link to HoustonStreet's
Web site could be severed and the traders' wholesale energy trades could be
delayed or stopped.
Rapid Technological Change. To remain competitive, HoustonStreet must
continue to enhance and improve its services. The Internet is characterized by
rapid technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices.
HoustonStreet's success will depend, in part, on its ability to:
- develop leading Internet-based technologies useful for wholesale
energy trading,
- enhance its existing services,
- develop new services and technology that address the increasingly
sophisticated and varied needs of wholesale energy traders, and
- respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
HoustonStreet would be materially adversely affected if it is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner to
changing market conditions or customer requirements.
Intense Competition. Wholesale energy trading markets are dynamic and
intensely competitive. Competition is likely to increase in the future as new
companies enter the market and current competitors expand their products and
services. See "Business -- Internet-based Energy Trading and Information
Business -- Competition." Many of these potential competitors are likely to
enjoy substantial competitive advantages, including:
- larger technical, production and marketing staffs,
- a more established presence in the wholesale energy trading community,
- greater brand recognition, and
- substantially greater financial, marketing, technical and other
resources.
If HoustonStreet does not compete effectively or if it experiences pricing
pressures, reduced margins or loss of market share resulting from increased
competition, HoustonStreet's business would be materially adversely affected.
Dependence on Management and Need for New Personnel. HoustonStreet is, and
for the foreseeable future will be, dependent upon the services of its
directors, executive officers and key management personnel. HoustonStreet's
future success depends on its ability to identify, attract, hire, train, retain
and motivate highly skilled technical, managerial, marketing, sales and customer
service personnel. The loss of the services of
26
<PAGE> 8
current key personnel and the failure to hire new personnel could have a
material adverse effect upon HoustonStreet's results of operations, product
development efforts and ability to grow.
In particular, HoustonStreet plans to recruit and hire a new Chief
Financial Officer and new Vice President of Technology in 2000. Competition for
such personnel is intense and there can be no assurance that HoustonStreet can
attract, assimilate or retain sufficiently qualified personnel. The failure to
hire and retain a new Chief Financial Officer, Vice President of Technology and
other necessary technical, managerial, marketing, sales and customer service
personnel, would materially adversely affect HoustonStreet.
HoustonStreet does not currently have employment agreements in place and
does not currently carry key man life insurance. Although HoustonStreet intends
to purchase key man term life insurance on the life of Frank W. Getman Jr., its
President and Chief Executive Officer, that insurance is not currently in place.
HoustonStreet does not plan to purchase life insurance on the lives of any of
its other key personnel.
Management of Growth. HoustonStreet expects to experience significant
growth in its business operations. This growth will place a substantial strain
on HoustonStreet's resources. HoustonStreet's need to manage its growth
successfully will require it to implement appropriate operational, financial,
accounting and management information systems and controls. HoustonStreet's
failure to manage its growth effectively would have a material adverse effect on
HoustonStreet.
Protection of Proprietary Rights. HoustonStreet's ability to compete
depends significantly on the proprietary nature of its Web site technology as
well as its patent applications. HoustonStreet has filed two patent applications
to date. HoustonStreet seeks to protect its proprietary rights through a
combination of patent, copyright and trade secret law and confidentiality
agreements. However, there can be no assurance that a third party will not
misappropriate or otherwise obtain access to HoustonStreet's proprietary
technology or develop similar technology independently. Competitors may also be
able to circumvent any patents that HoustonStreet obtains.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. HoustonStreet could
incur substantial costs to prosecute or defend any intellectual property
litigation. If HoustonStreet litigated to enforce its rights, it would be
expensive, would divert management resources and may not be adequate to prevent
the use of its intellectual property by third parties.
Potential Intellectual Property Infringement. While HoustonStreet
currently is not aware that it infringes any other patents, it is possible that
HoustonStreet's technology infringes patents held by third parties. If
HoustonStreet were to be found infringing, the owner of the patent could sue
HoustonStreet for damages, prevent HoustonStreet from making, selling or using
the owner's patented technology or could impose substantial royalty fees for
those privileges.
27
<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, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 14,767
<SECURITIES> 381
<RECEIVABLES> 5,060
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 29,630
<PP&E> 121,874
<DEPRECIATION> 17,532
<TOTAL-ASSETS> 176,468
<CURRENT-LIABILITIES> 11,081
<BONDS> 0
0
0
<COMMON> 85
<OTHER-SE> 62,294
<TOTAL-LIABILITY-AND-EQUITY> 176,468
<SALES> 14,334
<TOTAL-REVENUES> 14,334
<CGS> 18,705
<TOTAL-COSTS> 18,705
<OTHER-EXPENSES> 270
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108
<INCOME-PRETAX> (4,641)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,811)
<EPS-BASIC> (.46)
<EPS-DILUTED> (.46)
</TABLE>
