<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 JUNE 30, 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)
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)
603-431-6600
(Registrant's telephone number, including area code)
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
--- ---
The number of shares outstanding of the Registrant's common stock as of July 30,
2000 was 8,273,500.
<PAGE> 2
BAYCORP HOLDINGS, LTD.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION:
<S> <C>
Item 1 - Financial Statements:
Consolidated Statements of Income and Comprehensive Income
- Three and Six Months Ended June 30, 2000 and 1999......................................... 3
Consolidated Balance Sheets at June 30, 2000
and December 31, 1999..................................................................... 4-5
Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2000 and 1999......................................................... 6
Notes to Financial Statements................................................................... 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations:.............................................................. 13-18
PART II - OTHER INFORMATION:
Item 4 - Submission of Matters to a Vote of Security Holders................................... 18
Item 6 - Exhibits and Reports on Form 8-K...................................................... 19
Signature...................................................................................... 20
Exhibit Index.................................................................................. 21
</TABLE>
2
<PAGE> 3
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 June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues $ 15,358 $ 7,450 $ 29,693 $ 17,554
Operating Expenses
Production 6,103 4,670 11,786 9,428
Transmission 323 223 556 436
Purchased Power 1,863 2,860 3,741 4,867
Administrative & General 15,884 1,717 20,172 2,894
Depreciation & Amortization 1,673 939 3,015 1,877
Unrealized Loss on Firm Forward Contracts 2,913 147 7,043 306
Taxes other than Income 1,173 1,054 2,324 2,088
----------- ----------- ----------- -----------
Total Operating Expenses 29,932 11,610 48,637 21,896
Operating Loss (14,574) (4,160) (18,944) (4,342)
Other (Income) Deductions:
Interest and Dividend Income (406) (130) (514) (299)
Decommissioning Cost Accretion 908 880 1,816 1,633
Decommissioning Trust Fund Income (338) (114) (633) (289)
Other Deductions 54 9 (181) 15
----------- ----------- ----------- -----------
Total Other Deductions 218 645 488 1,060
Loss Before Income Taxes (14,792) (4,805) (19,432) (5,402)
Income Taxes 0 0 0 0
----------- ----------- ----------- -----------
Net Loss Before Minority Interest (14,792) (4,805) (19,432) (5,402)
Less: Minority Interest in Loss of Subsidiary (4,971) 0 (5,801) 0
----------- ----------- ----------- -----------
Net Loss Before Cumulative Effect
of Change in Accounting Principle (9,821) (4,805) (13,631) (5,402)
Cumulative Effect of Change in
Accounting Principle 0 0 0 159
----------- ----------- ----------- -----------
Net Loss (9,821) (4,805) (13,631) (5,243)
Other Comprehensive Income, Net of Tax
Unrealized Loss on Securities 56 (155) (216) (370)
----------- ----------- ----------- -----------
Comprehensive Loss $ (9,765) $ (4,960) $ (13,847) (5,613)
=========== =========== =========== ===========
Weighted Average Shares Outstanding 8,273,448 8,191,948 8,271,690 8,191,948
Basic and Diluted Loss Per Share $ (1.19) $ (0.59) $ (1.65) $ (0.64)
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
3
<PAGE> 4
BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
Unaudited Audited
------------- -----------------
<S> <C> <C>
ASSETS:
Current Assets:
Cash & Cash Equivalents $ 17,865 $ 3,180
Restricted Cash - Escrow 2,676 2,503
Short-term Investments, at market 381 381
Accounts Receivable 4,728 4,564
Materials & Supplies, net 4,650 4,611
Prepayments & Other Assets 4,316 3,162
--------- ---------
Total Current Assets 34,616 18,401
Property, Plant, & Equipment:
Utility Plant Assets 121,833 121,043
Non-Utility Plant Assets 8,768 3,203
--------- ---------
Total Property, Plant and Equipment 130,601 124,246
Less: Accumulated Depreciation (19,103) (16,331)
--------- ---------
Net Utility Plant 111,498 107,915
Nuclear Fuel 25,178 20,243
Less: Accumulated Amortization (14,348) (11,863)
--------- ---------
Net Nuclear Fuel 10,830 8,380
Net Property, Plant & Equipment and Fuel 122,328 116,295
Other Assets:
Decommissioning Trust Fund 25,749 24,483
Deferred Debits & Other 14 5
--------- ---------
Total Other Assets 25,763 24,488
TOTAL ASSETS $ 182,707 $ 159,184
========= =========
</TABLE>
(The accompanying notes are an integral part of these consolidated statements.)
4
<PAGE> 5
BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
Unaudited Audited
------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ 6,102 $ 2,413
Unrealized Losses on Firm Forward Energy Contracts 7,690 647
Miscellaneous Current Liabilities 3,636 3,663
--------- ---------
Total Current Liabilities 17,428 6,723
Operating Reserves:
Decommissioning Liability 81,260 79,443
Miscellaneous Other 545 545
--------- ---------
Total Operating Reserves 81,805 79,988
Other Liabilities & Deferred Credits 6,415 6,227
Minority Interest in Subsidiary (2,796) 0
Preferred Stock of Subsidiary 27,100 0
Commitments & Contingencies 0 0
Stockholders' Equity:
Common stock, $.01 par value,
Authorized - 20,000,000 shares,
Issued and Outstanding - 8,499,300 and
8,457,800, respectively 85 84
Less: Treasury Stock - 225,800 shares at cost (1,629) (1,629)
Additional paid-in capital 92,434 92,295
Accumulated Other Comprehensive Income (218) (3)
Accumulated Deficit (37,917) (24,501)
--------- ---------
Total Stockholders' Equity 52,755 66,246
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 182,707 $ 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>
Six Months Ended June 30,
2000 1999
----- -----
<S> <C> <C>
Net cash flow from operating activities:
Net Loss $(13,631) $ (5,402)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority interest in loss of subsidiary (5,801) 0
APIC compensation expense 104 0
Depreciation and amortization 3,015 1,877
Amortization of nuclear fuel 2,485 1,916
Unrealized loss on firm forward energy contracts 7,043 159
Decommissioning trust accretion 1,816 1,633
Decommissioning trust interest (633) (289)
Increase in accounts receivable (164) (815)
Decrease in materials & supplies 51 178
Increase in prepaids and other assets (1,164) (1,232)
Increase in accounts payable 3,814 1,830
Increase(decrease) in taxes accrued (605) 1,304
Increase(decrease) in other accruals 380 (1,975)
-------- --------
Net cash used in operating activities (3,290) (816)
Net cash flows provided by (used in) investing activities:
Purchases of property and equipment (6,355) (2,147)
Nuclear fuel additions (4,935) (391)
Payments to decommissioning fund (882) (794)
Short term investments, net 0 9,473
-------- --------
Net cash provided by/(used in) investing activities (12,172) 6,141
Net cash provided by financing activities:
Stock options exercised 215 0
Proceeds from issuance of HoustonStreet stock 30,105 0
-------- --------
Net cash provided by financing activities 30,320 0
Net increase in cash and cash equivalents 14,858 5,325
Cash and cash equivalents, beginning of period 5,683 2,559
-------- --------
Cash and cash equivalents, end of period $ 20,541 $ 7,884
======== ========
</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
that was 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 also offers online trading exchanges for crude oil and
refined products. HoustonStreet plans to develop and launch trading platforms
for 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. In May 2000, HoustonStreet launched web-based exchanges for
crude oil, refined products and a new Speedway floor for electricity.
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 on 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.
Page 7
<PAGE> 8
The Company adopted SFAS No. 130, Reporting Comprehensive Income, effective
January 1, 1998. Accumulated Other Comprehensive Income and the current period
charge are as follows:
<TABLE>
<CAPTION>
Three Month Six Month
Unrealized Unrealized
Income (Loss) Income (Loss)
on Securities on Securities
<S> <C> <C>
Beginning Balance $(275,100) $ (2,700)
Current Period Charge 56,800 (215,600)
--------- ---------
Ending Balance $(218,300) $(218,300)
========= =========
</TABLE>
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 firm forward 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
June 30, 2000, the Company had a net unrealized loss of approximately
$7,690,000. The net change in unrealized loss on firm forward contracts for the
second quarter ended June 30, 2000 was $2,913,200 and for the six months ended
June 30, 2000 was $7,043,100 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 HoustonStreet 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 Great Bay and Little Bay propose to sell power, to allow such rates to go
into effect subject to refund and
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BAYCORP HOLDINGS, LTD.
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 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
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BAYCORP HOLDINGS, LTD.
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 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 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
Page 10
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BAYCORP HOLDINGS, LTD.
assets at market value and any unrealized gains and losses are reflected in
equity. There was an unrealized holding gain of $175,500 as of June 30, 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 - HOUSTONSTREET 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 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. HoustonStreet does not take title to any
products traded on HoustonStreet.com nor compete with any users of the system.
Page 11
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BAYCORP HOLDINGS, LTD.
OTHER SERIES A AND SERIES B FINANCING ACTIVITY
In addition to sales of its capital stock to Equiva, HoustonStreet sold
$24.1 million of its common stock and Series A and Series B convertible
preferred stock to other investors including Williams Energy Marketing and
Trading Company, Omega Advisors, Inc., Elliot Associates, L.P., Thomas H. Lee
Company, Sapient Corporation, kRoad Ventures L.P., Vivendi S.A. and Conoco, Inc.
Collectively with the Equiva investments, HoustonStreet raised $30.1 million in
gross proceeds through these stock sales. As a result, BayCorp owns
approximately 50.04% of HoustonStreet stock (on an as converted to common stock
basis) as of June 30, 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 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, crude oil
and refined products and charges commissions for these energy products 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.
<TABLE>
<CAPTION>
As of and for the Great Bay
six months ended and Little
June 30 ($000's) Bay HoustonStreet Corporate Eliminations Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
----
Revenues 32,864 55 956 4,182 29,693
Depreciation &
amortization 1,987 1,028 0 0 3,015
Operating Expenses 33,645 18,125 1,049 4,182 48,637
Interest expense 9 0 0 0 9
Segment net income
(loss) (1,478) (12,076) (12,153) 12,076 (13,631)
Total Assets 181,598 13,977 57,939 70,807 182,707
Capital expenditures 790 5,565 0 0 6,355
</TABLE>
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BAYCORP HOLDINGS, LTD.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
--------
Revenues 17,554 0 1,011 1,011 17,554
Depreciation &
amortization 1,863 0 14 0 1,877
Operating Expenses 21,912 0 995 1,011 21,896
Interest expense 3 0 0 0 3
Segment net income
(loss) (5,270) 0 27 0 (5,243)
Total Assets 134,198 0 66,851 63,530 137,519
Capital expenditures 2,147 0 0 0 2,147
</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 and 138, 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.)
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 Project in
Seabrook, New Hampshire. The Company anticipates that it will derive additional
revenues from HoustonStreet.
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.
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BAYCORP HOLDINGS, LTD.
RESULTS OF OPERATIONS: SECOND QUARTER OF FISCAL 2000 COMPARED TO THE SECOND
QUARTER OF FISCAL 1999
Operating Revenues
BayCorp's operating revenues increased by approximately $7,908,000, or
106.1%, to $15,358,000 in the second quarter of 2000 as compared to $7,450,000
in the second 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 second quarter of 2000 as compared to the second quarter of 1999. During
the second 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
second 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 second quarter of 2000 was 96.5% of the rated capacity as
compared to a capacity factor of 47.9% for the second quarter of 1999. Operating
revenues and capacity factor were adversely impacted in the second quarter of
1999 by the scheduled refueling outage at the Seabrook Project that began on
March 27, 1999; the Seabrook Project resumed full power on May 21, 1999.
Substantially all of the Company's operating revenues were earned by its
wholesale electricity generation and trading business.
Sales of electricity increased by approximately 61.6% to 396,491,000
kilowatt-hours ("kWhs") in the second quarter of 2000 as compared to 245,408,400
kWhs in the second quarter of 1999. During the three months ended June 30, 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 29.1% to 3.86
cents per kWh as compared with 2.99 cents per kWh for the three months ended
June 30, 1999.
Expenses
Production and Transmission expenses increased approximately $1,533,000, or
31.3%, to $6,426,000 in the second quarter of 2000 as compared to $4,893,000 in
the second quarter of 1999. Taxes other than income increased approximately
$119,000, or 11.3%, during the second 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 second quarter
of 1999 to 15.03% in the second quarter of 2000. Administrative and general
expenses increased approximately $14,167,000, or 825.1%, to $15,884,000 in the
second quarter of 2000 as compared to $1,717,000 in the second quarter of 1999.
This increase was primarily attributable to expenses associated with the
development, operation and expansion of HoustonStreet. Also contributing to this
increase were administrative and general expenses associated with BayCorp's
increased ownership percentage in the Seabrook Project as discussed above.
Depreciation and amortization increased approximately $734,000, or 78.2%, to
$1,673,000 in the second quarter of 2000 as compared to $939,000 in the second
quarter of 1999. The increase in depreciation expense was primarily due to
depreciating the assets of HoustonStreet and Little Bay.
In the second quarter of 2000, Great Bay recorded unrealized losses on
forward firm energy contracts of $2,913,000 as compared to $147,000 in the
second quarter of 1999. 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 second quarter of 2000. This enabled
Great Bay to realize significantly higher selling prices for its uncommitted
capacity in the second quarter of 2000 as compared to the second quarter of
1999, but resulted in a non-cash charge to earnings for unrealized losses on
forward firm energy contracts.
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BAYCORP HOLDINGS, LTD.
Decommissioning cost accretion increased $28,000, or 3.2%, and
decommissioning trust fund income increased $224,000, or 196.5%, in the second
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 second quarter
of 2000 as compared to the second quarter of 1999. The 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.
Interest income increased approximately $276,000, or 212.3%, in the second
quarter of 2000 as compared to the second quarter of 1999, reflecting earnings
on higher cash balances in the second quarter of 2000 as compared to cash
balances in the second quarter of 1999.
Minority Interest
Minority interest in loss of subsidiary for the second quarter of 2000 was
$4,971,000 and is based on minority interest in HoustonStreet of approximately
34% as of June 30, 2000.
Net Loss
As a result of the above factors, during the second quarter of 2000, the
Company recorded a net loss of $9,821,000, or approximately $1.19 per basic and
diluted share, as compared to a net loss of approximately $4,805,000, or $0.59
per basic and diluted share, during the second 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 $2,771,000 in the
second quarter of 2000.
RESULTS OF OPERATIONS: FIRST SIX MONTHS OF FISCAL 2000 COMPARED TO THE FIRST SIX
MONTHS OF FISCAL 1999
Operating Revenues
BayCorp's operating revenues increased by approximately $12,139,000, or
69.2%, to $29,693,000 in the first six months of 2000 as compared to $17,554,000
in the first six months 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 six months of 2000 as compared to the first six
months of 1999. During the first six months 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 six months 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 six months of 2000 was 96.2% of the rated
capacity as compared to a capacity factor of 70.8% for the first six months of
1999. Operating revenues and capacity factor were adversely impacted in the
first six months of 1999 by the scheduled refueling outage at the Seabrook
Project that began on March 27, 1999; the Seabrook Project resumed full power on
May 21, 1999. Substantially all of the Company's operating revenues were earned
by its wholesale electricity generation and trading business.
Sales of electricity increased by approximately 35.8% to 813,827,000
kilowatt-hours ("kWhs") in the first six months of 2000 as compared to
599,078,600 kWhs in the first six months of 1999. During the six months ended
June 30, 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 25.5% to 3.64 cents per kWh as compared with 2.90 cents per kWh for
the six months ended June 30, 1999.
Page 15
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BAYCORP HOLDINGS, LTD.
Expenses
Production and Transmission expenses increased approximately $2,478,000, or
25.1%, to $12,342,000 in the first six months of 2000 as compared to $9,864,000
in the first six months of 1999. Taxes other than Income increased approximately
$236,000, or 11.3%, during the first six months 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 six months
of 1999 to 15.03% in the first six months of 2000. Administrative and general
expenses increased approximately $17,278,000, or 597%, to $20,172,000 in the
first six months of 2000 compared to $2,894,000 in the first six months of 1999.
This increase was primarily attributable to expenses associated with the
development, operation and expansion of HoustonStreet. Also contributing to this
increase were administrative and general expenses associated with BayCorp's
increased ownership percentage in the Seabrook Project discussed above.
Depreciation and amortization increased approximately $1,138,000, or 60.6%, to
$3,015,000 in the first six months of 2000 as compared to $1,877,000 in the
first six months of 1999. The increase in depreciation expense was primarily due
to depreciating the assets of HoustonStreet and Little Bay.
In the first six months of 2000, Great Bay recorded unrealized losses on
forward firm energy contracts of $7,043,000 compared to unrealized losses for
forward firm energy contracts of $306,000 in the first six months of 1999. 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 six months of 2000. This enabled Great Bay to realize
significantly higher selling prices for its uncommitted capacity in the first
six months of 2000 as compared to the first six months of 1999, but resulted in
a non-cash charge to earnings for unrealized losses on forward firm energy
contracts.
Decommissioning cost accretion increased $183,000, or 11.2%, and
decommissioning trust fund income increased $344,000, or 119%, in the first six
months 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 six
months of 2000 as compared to the same period in 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.
Interest income increased approximately $215,000, or 71.9%, in the first six
months of 2000 as compared to the same period in 1999, reflecting earnings on
higher cash balances in the first six months of 2000 as compared to cash
balances in the first six months of 1999. The increase in cash balances during
the first six months of 2000 was primarily attributable to the receipt by
HoustonStreet of approximately $30,100,000.
Minority Interest
Minority interest in loss of subsidiary for the first six months of 2000
was $5,801,000 and was based on minority interest in HoustonStreet of
approximately 34% as of June 30, 2000.
Net Loss
As a result of the above factors, for the first six months of 2000, the
Company recorded a net loss of $13,631,000, or approximately $1.65 per basic and
diluted share, as compared to a net loss of approximately $5,243,000, or $0.64
per basic and diluted share, during the first six months of 1999.
Page 16
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BAYCORP HOLDINGS, LTD.
Excluding HoustonStreet expenses and the non-cash charge related to losses on
forward firm energy contracts, BayCorp would have reported net income of
approximately $5,487,000 for the first six months of 2000.
Liquidity and Capital Resources
As of June 30, 2000, BayCorp's consolidated cash position was approximately
$20,922,000 in cash and equivalents, restricted cash and short-term investments.
A significant factor affecting BayCorp's consolidated cash position during the
first six months of 2000 was the receipt of approximately $30,100,000 in cash by
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 $14,386,000 at June 30, 2000.
BayCorp's wholesale electricity generation and trading business, Great Bay
and Little Bay, generated approximately $8,455,000 in cash during the first six
months of 2000, which included receipt of approximately $4,074,000 from
HoustonStreet for settlement of an intercompany loan.
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.
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.
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, operation and expansion and
that HoustonStreet will incur additional cash deficits. The Company intends to
cover such deficits during the early stages of development, operation and
expansion at HoustonStreet with invested capital. As of June 30, 2000,
HoustonStreet had received approximately $30,100,000 in cash from investors in
HoustonStreet. The Company anticipates that HoustonStreet will raise additional
funds through the sale of equity which will cause the Company's ownership
interest to decline.
BayCorp's consolidated cash and equivalents, restricted cash and short-term
investments increased approximately $14,858,000 during the first six months of
2000. The Company had a consolidated net loss of approximately $13,631,000 and a
minority interest in loss of subsidiary of $5,801,000. The Company used cash of
approximately $6,355,000 for capital expenditures, $4,934,000 for nuclear fuel
additions and $882,000 for decommissioning fund payments. In addition, during
the first six months of 2000, there was an increase in prepaids and other assets
of approximately $1,164,000 primarily due to the timing of payments for Seabrook
Project operating expenses. Offsetting these cash expenditures were non-cash
charges to income of approximately $3,014,000 for depreciation, $2,484,000
Page 17
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BAYCORP HOLDINGS, LTD.
for nuclear fuel amortization, $7,043,000 for unrealized losses on firm energy
trading contracts and $1,816,000 for decommissioning trust fund accretion.
Accounts payable also increased approximately $3,814,000 primarily due to
HoustonStreet operations.
The Company anticipates that capital expenditures for HoustonStreet for the
fiscal year 2000 will total approximately $10,000,000 primarily for software
construction. HoustonStreet plans to raise funds for these expenditures through
a private placement of preferred stock. Great Bay and Little Bay anticipate that
their share of the Seabrook Project's capital expenditures for the 2000 fiscal
year will total approximately $8,400,000 for nuclear fuel and various capital
projects.
The statements in this report relating to the Company's future plans for
marketing, new products and alliances and future growth and operating results,
including but not limited to statements regarding HoustonStreet's natural gas
and other energy related commodities trading platforms, are forward-looking
statements. There are a number of important factors that could cause actual
results to differ materially from those suggested or indicated by such
forward-looking statements, including without limitation, that (i) HoustonStreet
may be unable to launch its natural gas and other energy related commodities
trading platforms, or to launch them in a timely manner, (ii) the Seabrook
Project may operate at lower capacity than historical levels, (iii)
decommissioning or other expenses associated with ownership of 15% of the
Seabrook Project may be materially higher than anticipated, (iv) the price of
electricity in the New England wholesale power market cannot be predicted, (v)
energy traders may be unwilling or unable to use Internet-based energy trading
systems, including HoustonStreet.com, (vi) HoustonStreet.com may not be able to
operate profitably, (vii) technological or systems outages could occur on the
HoustonStreet.com site, (viii) competitors to HoustonStreet.com with greater
financial, marketing or other resources could emerge, (ix) performance is
contingent upon successful completion of design, implementation and improvement
to HoustonStreet's electricity, crude, refined products and natural gas sites,
and (x) general economic and/or industry-specific conditions and the other
factors described in BayCorp's Annual Report on Form 10-K for the year ended
December 31, 1999.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 25, 2000.
Proxies for the meeting were solicited pursuant to Regulation 14A, and there
were no solicitations in opposition to management's nominees for Directors. All
such nominees were elected. At the Annual Meeting, the following matters were
voted on:
1. Six members were elected to the Board of Directors to serve until the next
Annual Meeting of Stockholders of the Company and until their successors
are duly elected and qualified. The following table sets forth the number
of votes cast for and withheld for each nominee for Director.
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
Alexander Ellis 5,896,676 403,302
Stanley I. Garnett 5,896,676 403,302
Frank W. Getman Jr. 5,896,676 403,302
Michael R. Latina 5,896,676 403,302
Lawrence M. Robbins 5,896,676 403,302
John A. Tillinghast 5,896,676 403,302
</TABLE>
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BAYCORP HOLDINGS, LTD.
2. The stockholders of the Company authorized an amendment to the 1996 Stock
Option Plan of the Company (by a vote of 5,936,592 in favor of the
amendment and 363,386 votes against the amendment.)
3. The stockholders of the company ratified the selection by the Board of
Directors of Arthur Andersen LLP as the Company's independent public
accountants for the current fiscal year. (6,288,463 votes in favor of the
proposal, 11,514 votes against the proposal and 1 vote abstained.)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits furnished as Exhibits hereto:
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.
(b) There were no reports on Form 8-K submitted for the three months ended
June 30, 2000.
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<PAGE> 20
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.
August 14, 2000 By: /s/ Frank W. Getman Jr.
-------------------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
(Principal executive officer,
principal financial officer and
principal accounting officer)
Page 20
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- ------------
<S> <C>
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.
</TABLE>
