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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, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- -------------
Commission file number 1-12527
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BAYCORP HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 02-0488443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 NEW HAMPSHIRE AVENUE, SUITE 125 03801
PORTSMOUTH, NEW HAMPSHIRE
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 766-4990
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes No X
----- -----
Class Outstanding at May 8, 2003
- --------------------------------------- --------------------------
Common Stock, $0.01 Par Value per Share 646,874
BAYCORP HOLDINGS, LTD.
INDEX
PART I - FINANCIAL INFORMATION:
Item 1 - Financial Statements:
Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 2003 and 2002 .................. 3
Consolidated Balance Sheets at March 31, 2003
and December 31, 2002 ....................................... 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002 .................. 5
Notes to Financial Statements .................................. 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 10
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk ................................................. 14
PART II - OTHER INFORMATION:
Item 5 - Other Information ..................................... 15
Item 6 - Exhibits and Reports on Form 8-K ...................... 15
Signatures .............................................................. 16
Certifications .......................................................... 17
Exhibit Index ........................................................... 20
2
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)
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Operating Revenues $ 991 $ 15,368
Operating Expenses
Production 0 6,586
Transmission 0 248
Purchased Power 1,195 192
Unrealized Loss on Firm Energy Contracts 1,083 0
Administrative & General 756 1,984
Depreciation & Amortization 0 941
Decommissioning Cost Accretion 0 1,231
Decommissioning Trust Fund Income 0 (357)
Taxes other than Income 128 871
----------- -----------
Total Operating Expenses 3,162 11,696
Operating Income (Loss) (2,171) 3,672
Other (Income) Deductions:
Interest and Dividend Income (402) (130)
Other (Income) Deductions (7) 158
----------- -----------
Total Other (Income) Deductions (409) 28
Income (Loss) Before Income Taxes (1,762) 3,644
Income Taxes 0 0
----------- -----------
Net Income (Loss) (1,762) 3,644
Other Comprehensive Income, Net of Tax
Unrealized Gain (Loss) on Securities 0 (496)
----------- -----------
Comprehensive Income (Loss) ($ 1,762) $ 3,148
=========== ===========
Weighted Average Shares Outstanding - Basic 7,844,102 8,423,241
Weighted Average Shares Outstanding - Diluted 7,844,102 8,573,790
Basic Net Income (Loss) Per Share ($ 0.22) $ 0.43
Diluted Net Income (Loss) Per Share ($ 0.22) $ 0.43
(The accompanying notes are an integral part of these consolidated statements.)
3
BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in Thousands)
March 31, December 31,
2003 2002
-------- --------
ASSETS
Current Assets:
Cash & Cash Equivalents $ 8,503 $134,164
Restricted Cash - Escrow 2,500 2,500
Accounts Receivable, net 339 316
Prepayments & Other Assets 3,184 3,427
-------- --------
Total Current Assets 14,526 140,407
Other Assets:
Energy Trading Contracts - at market 1,027 2,184
TOTAL ASSETS $ 15,553 $142,591
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable and Accrued Expenses $ 1,123 $ 414
Miscellaneous Current Liabilities 1,990 6,141
-------- --------
Total Current Liabilities 3,113 6,555
Deferred Gain on Long Term Power Contract 1,995 2,061
Commitments & Contingencies
Stockholders' Equity:
Common stock, $.01 par value,
Authorized - 20,000,000 shares,
Issued and Outstanding - 646,874 and 8,455,269, respectively 6 84
Additional Paid-in Capital 0 100,893
Accumulated Earnings 10,439 32,998
-------- --------
Total Stockholders' Equity 10,445 133,975
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,553 $142,591
======== ========
(The accompanying notes are an integral part of these consolidated statements.)
4
BAYCORP HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
Three Months Three Months
Ended Ended
March 31, 2003 March 31, 2002
-------------- --------------
Net cash flow from operating activities:
Net (loss) income ($ 1,762) $ 3,644
Adjustments to reconcile net earnings to net
cash (used in) provided by operating activities:
Depreciation and amortization 0 774
Amortization of nuclear fuel 0 1,035
Non-cash compensation expense 77 31
Decommissioning trust accretion 0 1,231
Decommissioning trust interest and other charges 0 (73)
(Increase) decrease in accounts receivable (23) 1,354
Increase in materials & supplies 0 (135)
(Increase) decrease in prepaids and other assets 1,400 (1,698)
Increase (decrease) in accounts payable and accrued expenses 710 (1,128)
Decrease in taxes accrued (2,241) 0
Increase (decrease) in misc. and other liabilities (1,975) 133
--------- ---------
Net cash (used in) provided by operating activities (3,814) 5,168
Net cash flows used in investing activities:
Capital additions 0 (164)
Nuclear fuel additions 0 (34)
Payments to decommissioning fund 0 (348)
(Increase) decrease in restricted cash 0 526
Purchased of short term Investments 0 (16,625)
Sales of short term investments 0 414
--------- ---------
Net cash used in investing activities 0 (16,231)
Net cash used in financing activities:
Stock option exercise 1,776 147
Reacquired capital stock and options (123,623) (376)
--------- ---------
Net cash used in financing activities (121,847) (229)
Net decrease in cash and cash equivalents (125,661) (11,292)
Cash and cash equivalents, beginning of period 134,164 15,278
--------- ---------
Cash and cash equivalents, end of period $ 8,503 $ 3,986
========= =========
Supplemental Disclosure of Non-cash Financing Activities:
Stock option exercise in exchange for promissory notes $ 0 $ 739
Cash paid during the period for taxes 2,427 0
(The accompanying notes are an integral part of these consolidated statements.)
5
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. Until November 1, 2002, BayCorp had two
principal operating subsidiaries that generated and marketed wholesale
electricity, Great Bay Power Corporation ("Great Bay") and Little Bay Power
Corporation ("Little Bay"). Their principal asset was a combined 15% joint
ownership interest in the Seabrook Nuclear Power Project in Seabrook, New
Hampshire (the "Seabrook Project" or "Seabrook"), until November 1, 2002, when
BayCorp sold Great Bay's and Little Bay's interest in Seabrook. See "Sale of
Seabrook Ownership" below. That ownership interest entitled Great Bay and Little
Bay to approximately 174 megawatts ("MWs") of the Seabrook Project's power
output. Great Bay and Little Bay were exempt wholesale generators ("EWGs") under
the Public Utility Holding Company Act of 1935 ("PUHCA"). Unlike regulated
public utilities, Great Bay and Little Bay had no franchise area or captive
customers. The companies sold their power in the competitive wholesale power
markets. Great Bay and Little Bay were each wholly-owned by BayCorp. In December
2002, BayCorp formally dissolved Great Bay and Little Bay.
In October 2002, BayCorp created two new subsidiaries, Great Bay Power
Marketing, Inc. ("GBPM") and BayCorp Ventures, LLC ("BayCorp Ventures"). GBPM
was created to hold the purchased power contract that Great Bay had with Unitil
Power Corporation ("Unitil") and arrange for the power supply to satisfy the
contract. See "Note C - Commitments and Contingencies -Purchased Power
Agreements." Effective January 1, 2003, GBPM assumed the Unitil contract and
holds the Company's letter of credit established to secure GBPM's obligations
under the Unitil contract. BayCorp Ventures was created to serve as a vehicle
through which the Company can make investments following the Seabrook sale and
the expiration of the Company's tender offer.
BayCorp also owns shares representing approximately 46.4% of the voting
power of all outstanding common and preferred shares of HoustonStreet Exchange,
Inc. ("HoustonStreet"). HoustonStreet was incorporated in Delaware in 1999.
HoustonStreet is an equity investment of BayCorp. HoustonStreet developed and
operates HoustonStreet.com, an Internet-based independent crude oil and refined
products trading exchange in the United States.
Sale of Seabrook Ownership
In October 2000, the Company announced that it reached an agreement with
Northeast Utilities ("NU") under which the Company's generating subsidiaries,
Great Bay and Little Bay, would include their aggregate 15% ownership share of
the Seabrook Project in the auction of NU's subsidiaries' shares of the Seabrook
Project. As a result of the auction, which was conducted in 2001 and 2002, FPL
Energy Seabrook, LLC, a subsidiary of FPL Group, Inc., ("FPL Energy Seabrook")
agreed to purchase 88.2% of the 1,161 MW Unit 1 and 88.2% of the partially
constructed Unit 2, for $836.6 million subject to certain adjustments, with
payment deliverable fully in cash at closing. The purchase price included the
projected fuel and non-fuel inventories at closing and Unit 2 components. The
Sellers were responsible for making their then required decommissioning fund top
off payments on or before the date of sale closing and to transfer their
respective decommissioning trust funds to FPL Energy Seabrook. FPL Energy
Seabrook assumed nearly all of the Company's Seabrook liabilities including the
decommissioning liability for the acquired portion of Seabrook including the
requirement that it provide an appropriate future funding assurance subject to
the approval of the New Hampshire Nuclear Decommissioning Financing Committee.
FPL Energy Seabrook provided a parent company
6
BAYCORP HOLDINGS, LTD.
guaranty that it will fully fund its ownership share of the projected cost of
decommissioning in a manner consistent with New Hampshire statutory
requirements. FPL Energy Seabrook also agreed to comply with all employee
protections required by New Hampshire law and the Settlement Agreement. On
November 1, 2002, the Company closed the sale of its interests in Seabrook and
received approximately $113 million for its interests in the Seabrook Project
(the "Seabrook Closing"). The Company funded certain escrows for potential
closing adjustments and paid other costs of approximately $4.3 million. The
escrow amounts are included in prepayments and miscellaneous current
liabilities.
The following unaudited pro forma income statement assumes the disposition
of the Seabrook investment occurred on January 1, 2002. The unaudited pro forma
financial information is presented for comparative purposes only and is not
intended to be indicative of actual results of continuing operations that would
have been achieved had the sale been consummated as of January 1, 2002, nor do
they purport to indicate results which may be attained in the future.
QUARTER ENDED MARCH 31, 2002
Seabrook
Investment(1)
BayCorp Proforma
Historical Adjustments Pro-Forma
----------- ----------- -----------
(dollars in thousands)
OPERATING REVENUES
Sales $ 15,368 ($ 14,197) $ 1,171
OPERATING EXPENSES
Production 6,586 (6,586) 0
Transmission 248 (248) 0
Purchased Power 192 439 631
Administrative & General 1,984 (1,035) 949
Decommissioning Cost Accretion 1,231 (1,231) 0
Decommissioning Trust Fund Income (357) 357 0
Depreciation and Amortization 941 (941) 0
Taxes other than Income 871 (844) 27
----------- ----------- -----------
Total Operating Expenses 11,696 (10,089) 1,607
OPERATING INCOME (LOSS) 3,672 (4,108) (436)
OTHER (INC) DEC
Interest and Investment Income (130) 0 (130)
Other Expense 158 0 158
----------- ----------- -----------
Total Other Deductions 28 0 28
INCOME (LOSS) BEFORE INCOME TAXES 3,644 (4,108) (464)
Income Tax Expense 0 0 0
----------- ----------- -----------
NET INCOME (LOSS) $ 3,644 ($ 4,108) ($ 464)
Weighted Average Shares Outstanding - Basic 8,423,241 8,423,241
Weighted Average Shares Outstanding - Diluted 8,573,790 8,423,241
Basic Net Income (Loss) per share $ .43 ($ 0.06)
Diluted Net Income (Loss) per share $ .43 ($ 0.06)
- ------------
(1) Pro forma income statement amounts represent sales under the Unitil
contract along with related purchased power. The Admin & General expenses
include the costs incurred by BayCorp to manage its investment in
Seabrook. Pro forma results do not consider the cost reductions which
would be required if the Company no longer held its Seabrook investment.
Pro forma results also do not include assumed earnings on the proceeds
from the sale of Seabrook.
7
BAYCORP HOLDINGS, LTD.
Tender Offer
On January 31, 2003, BayCorp commenced an issuer tender offer to purchase
up to 8,500,000 shares of its Common Stock at a price of $14.85 per share (the
"Tender Offer" or "Offer"). The Company disclosed in the Offer to Purchase
mailed to shareholders that the Board may decide to reduce the number of shares
purchased in the Offer to preserve the Company's ability to use its
approximately $90 million in net operating loss ("NOL") carryforwards. The Offer
was scheduled to expire on March 3, 2003.
On March 4, 2003, in view of the response to the Offer and the significant
proration that would have been necessary to preserve the Company's approximately
$97 million in NOL carryforwards, the Board determined and announced that it
would not exercise its discretion to prorate the shares tendered in the Offer to
preserve the Company's ability to use the NOL carryforwards without limitation.
The Company extended the expiration date of the Tender Offer to March 18, 2003
to provide shareholders additional time to tender shares that had not been
tendered or to withdraw shares that had been tendered. At the extended
expiration date of March 18, 2003, 9,207,508 shares had been properly tendered
and not withdrawn (including options tendered for repurchase and cancellation)
and the Company exercised its discretion to purchase up to an additional 2% of
outstanding shares, purchasing a total of 8,673,887 shares (and options) at a
purchase price of $14.85, representing approximately 94.3% of the shares (and
options) tendered, excluding odd lots, which were purchased without proration.
Payment for all such shares and options was completed by March 24, 2003. As a
result, as of March 31, 2003, the Company had 646,874 shares outstanding and
cash and cash equivalents and restricted cash of approximately $11,003,000.
Enron Claim
On January 4, 2002, BayCorp reported that Great Bay received notice on
December 21, 2001 from Enron Power Marketing, Inc. ("Enron") that Enron was
terminating its contracts with Great Bay. Enron owes Great Bay $1,075,200 for
power delivered prior to Enron's Chapter 11 bankruptcy filing on December 2,
2001. During the fourth quarter of 2001, BayCorp recorded an expense of
$1,100,000 to establish a reserve for doubtful accounts due to the uncertainty
of collecting remaining amounts owed by Enron to Great Bay for power delivered
prior to Enron's Chapter 11 bankruptcy filing. Enron has not yet filed a plan of
reorganization and the amount of any recovery by the Company on account of its
claim against Enron is uncertain.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements included herein have been prepared on
behalf of the Company 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, 2002 as filed in Form 10-K,
are adequate to make the information presented not misleading. The Company's
significant accounting policies are described in Note 1 of Notes to Consolidated
Financial Statements included in the Company's 10-K. The results for the interim
periods are not necessarily indicative of the results to be expected for the
full fiscal year.
8
BAYCORP HOLDINGS, LTD.
Previously, Great Bay utilized unit contingent and firm forward power sales
contracts to maximize the value of its 174 MW power supply from the Seabrook
Project. The Company follows the provisions of SFAS 133 Accounting for
Derivative Activities and Hedging Activities. The Company recorded the related
firm forward power sale contracts at fair value based on the estimated contract
replacement value at each balance sheet date. The Company had one firm forward
power sales contract, its amended power sales agreement with Unitil, as of March
31, 2003, which required mark-to-market accounting treatment. As a result, as of
March 31, 2003, the Company has an unrealized gain on the mark-to-market of this
firm forward power sales contract recorded in its financial statements. The net
change in unrealized gain/(loss) on firm forward power sales contracts included
in the accompanying consolidated statements of income for the quarter ended
March 31, 2003 was a net loss of approximately $1,083,000. The mark to market
value of the contract at March 31, 2003 was approximately $1.0 million. The
Company had no firm forward power sales contracts as of March 31, 2002 that
required mark-to-market accounting treatment.
NOTE C - COMMITMENTS AND CONTINGENCIES
Purchased Power Agreements
In anticipation of the Seabrook sale, the Unitil Purchased Power Agreement
("PPA")was amended as of November 1, 2002. The amendment primarily modified the
existing PPA to reduce the amount of power delivered to 9.06 megawatts, reduce
the price that Unitil pays for power to $50.34 per megawatt hour, and provide
that Great Bay would supply the power regardless of whether Seabrook is
providing the power. The amendment also provided alternative security for
Unitil's benefit, to replace and discharge the Third Mortgage that secured Great
Bay's performance of the PPA. In connection with the amended PPA, the Company
was required to deposit $2.5 million into a restricted account for the benefit
of Unitil should the Company default. The amount is reflected as restricted cash
in the accompanying balance sheet. The amendment received FERC approval. Great
Bay assigned the Unitil PPA to GBPM.
On March 17, 2003, Unitil announced the approval of a contract with Mirant
Americas Energy Marketing, LP ("Mirant"), which provides for the sale of
Unitil's existing power supply entitlements, including the PPA with GBPM,
effective on May 1, 2003. GBPM's PPA with Unitil is not being assigned to
Mirant. Rather, Unitil has appointed Mirant as their agent for purposes of
administering the PPA with GBPM and Mirant is purchasing Unitil's entitlement
under the PPA.
This contract meets the definition of an energy trading contract under EITF
98-10 and 00-17. In accordance with the FASB's Emerging Issues Task Force
interpretation 02-03 the inception gain (initial value of $2.1 million) on the
contract has been deferred and will be recognized over the life of the contract.
As of December 31, 2002 the fair value of the contract was $2.2 million. The
deferred gain on the contract is $2.1 million. The Company recorded $65,800 of
this deferred gain in the first quarter of 2003. These amounts are reflected in
the Company's balance sheet.
NOTE D - INVESTMENT IN UNCONSOLIDATED AFFILIATES
As of March 31, 2003, the Company owned shares representing approximately
46.4% of the voting power of all outstanding common and preferred shares of
HoustonStreet. The Company also currently holds approximately $9.9 million in
HoustonStreet senior secured promissory notes, of the approximate $12.6 million
in senior secured promissory notes currently outstanding at HoustonStreet.
Summarized financial information for the Company's investment in HoustonStreet,
as accounted for by the equity method, is as follows:
9
BAYCORP HOLDINGS, LTD.
Three Months ended Year ended Year ended
HoustonStreet: March 31, 2003 December 31, 2002 December 31, 2001
-------------- ----------------- -----------------
Total Assets $ 570,184 $ 585,238 $ 1,256,400
Total Liabilities 12,824,369 12,558,312 14,784,100
Commission Revenues 237,166 1,689,906 523,393
Net Gain (Loss) (281,106) 1,383,376 (40,046,837)
Company's Proportional Equity in Net
Gain (Loss) $ (130,433) $ 641,886 $(22,258,967)
Gain (Loss) Reflected in BayCorp
Financials $ 0 $ 0 $ 0
As of March 31, 2003, the Company had no investments or receivables
from HoustonStreet recognized on the accompanying balance sheet.
NOTE E - EQUITY
On January 31, 2003 the Company announced an issuer tender offer to
purchase up to 8,500,000 of its common stock shares. Under the terms of the
offer, BayCorp shareholders could offer to sell to BayCorp all or a portion of
the shares that they owned at a price of $14.85 per share in cash. The offer was
expected to close on March 3, 2003. Due to the overwhelming response to the
tender and the significant proration that would have been required to preserve
the Company's net operating loss carryforwards, the Board of Directors decided
that it would not exercise its discretion to effect a proration for that purpose
and on March 4, 2003, extended the offer. The extension allowed shareholders
additional time to either tender shares that had not been tendered or withdraw
shares already tendered. The final result of the tender offer was announced on
March 24, 2003. BayCorp exercised its right to purchase up to an additional 2%
of its outstanding shares, and accepted 8,673,887 shares of common stock,
including options tendered by directors, officers and employees for repurchase,
in the tender. Funds were distributed to tendering shareholders and shares not
accepted in the tender were returned to shareholders beginning on March 24,
2003. The Company distributed approximately $123,602,000. As of March 31, 2003
there were 646,874 shares outstanding and options to purchase 79,775 shares,
36,442 of which were then exercisable.
BayCorp has never paid cash dividends on its common stock. Any future
dividends depend on future earnings, BayCorp's financial condition and other
factors.
NOTE F - STOCK OPTIONS
The Company accounted for its stock option plans under Accounting
Principles Board Opinion No. 25, and as such no compensation cost was recognized
on options that were granted prior to 2003 at fair market value and that had not
been modified. On August 14, 2002 the Company announced that it would expense
the fair value of all stock options granted beginning January 1, 2003 in
accordance with SFAS No. 123, "Accounting for Stock Based Compensation." There
were no stock options granted in the first quarter of 2003.
On December 3, 1998, the Board of Directors of the Company voted to reprice
all of the outstanding options of the Company, at that date, as the then
outstanding options were "out of the money." The Board of Directors determined
that the then outstanding options no longer had the desired motivational effect
or compensatory benefit for the employees. The repricing of the options was
based on the current market value of the stock as of December 18, 1998.
Simultaneously with the repricing, 139,583 existing options were forfeited.
During 2000, the Board of Directors of the Company accelerated the vesting
period of the options held by certain employees of the Company.
In October 2001, the Company issued 240,000 non qualified options pursuant
to the 2001 Non Statutory Stock Option Plan. These options have an exercise
price of $9.05 and vested only upon the completion of the sale of the Seabrook
Project. In accordance with APB 25 and FIN 44 compensation expense has been
recorded with respect to these options.
In March 2002, the Company issued loans of $756,029 to its President, Frank
Getman, and a director, John Tillinghast, in order for them to exercise 150,384
options for common stock. These loans had limited recourse and were repaid in
November 2002. The options that were exercised were part of the above repricing.
FASB Interpretation No. 44, Accounting for Certain Transactions involving
Stock Compensation ("FIN 44"), effective July 1, 2000 and applied prospectively,
(except for direct or indirect option repricings and the definition of an
employee in which case the effective date is December 15, 1998), addresses
compensation issues regarding the definition of an employee, modifications to
plan awards, changes in grantee status, business combinations and share
repurchase features. For transactions subject to the December 15, 1998 effective
date, no compensation expense is recognized for the period between December 15,
1998 and July 1, 2000. FIN 44 requires variable accounting when direct or
indirect reductions of the exercise price occur. In accordance with APB 25 and
FIN 44, the Company recorded compensation expense related to the repriced and
contingent options and the accelerated options of $77,000 and $31,000,
respectively, for the quarters ended March 31, 2003 and 2002.
Had compensation cost for these Plans been determined consistent with SFAS
No. 123, Accounting for Stock Based Compensation, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts.
2003 2002
-------- -------
Net Income (Loss): As Reported $(1,762) $3,644
Pro Forma............................. .......... (1,925) 3,072
Earnings (Loss) Per Share (Basic): As Reported $ 0.22 $ 0.43
Pro Forma............................ ........... 0.25 0.37
Earnings (Loss) Per Share (Diluted): As Reported $ 0.22 $ 0.43
Pro Forma............................ ........... 0.25 0.36
NOTE G - NEW ACCOUNTING PRONOUNCEMENTS
None applicable to the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
10
BAYCORP HOLDINGS, LTD.
BayCorp derived substantially all of its revenue through its energy sales
activities and its 100% equity interest in Great Bay Power Marketing in the
first quarter of 2003 and its 100% equity interests in Great Bay and Little Bay
in the first quarter of 2002. GBPM was created to hold the purchased power
contract that Great Bay had with Unitil Power Corporation and arrange for the
power supply to satisfy the contract. Great Bay and Little Bay were electric
generating companies whose principal asset was a combined 15% joint ownership
interest in the Seabrook Project. Great Bay and Little Bay were dissolved on
December 31, 2002.
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. In the first quarter of 2003, all revenues were
derived from the sale of power pursuant to the purchased power contract with
Unitil. Expenses for the first quarter of 2003 primarily included the cost of
purchased power to satisfy this contract and general and administrative costs.
In the first quarter of 2002, the Company's revenues were primarily derived from
the sale of power generated from its 15% joint ownership interest in the
Seabrook Project. Expenses included Seabrook operating costs, purchased power
costs and Seabrook general and administrative costs.
Results of Operations: First Quarter of 2003 Compared to the First Quarter of
2002
Operating Revenues
BayCorp's operating revenues decreased by approximately $14,377,000 to
$991,000 in the first quarter of 2003 as compared to $15,368,000 in the first
quarter of 2002. The decrease in operating revenues was primarily attributable
to the decrease in the amount of power sold as a result of the Company's sale of
its ownership interest in Seabrook. Sales of electricity decreased to
approximately 19,674,900 kilowatt hour ("kWh") during the first quarter of 2003
as compared to approximately 378,038,000 kWhs in the first quarter of 2002.
During the three months ended March 31, 2003, GBPM's average selling price
increased 23.8%, to 5.04 cents per kWh as compared to an average selling price
of 4.07 cents per kWh for the same period in 2002.
Expenses
There were no Seabrook related operating expenses in the first quarter of
2003. Seabrook production and transmission expenses were $6,834,000 in the first
quarter of 2002. Purchased power costs increased approximately $1,003,000, from
$192,000 in the first quarter of 2002 to $1,195,000 in the first quarter of
2003. Since the sale of Seabrook, the Company has had to purchase power to
satisfy its firm power agreement with Unitil. Administrative and general
expenses were $756,000 in the first quarter of 2003 as compared to approximately
$1,984,000 in the first quarter of 2002. Administrative and general expenses for
the first quarter of 2002 included approximately $1,006,000 of Seabrook
expenses. There were no Seabrook administrative and general expenses in the
first quarter of 2003. There was no Seabrook related costs for depreciation,
decommissioning cost accretion or decommissioning trust fund income in the first
quarter of 2003. Charges of $941,000 and $1,231,000 and income of $357,000,
respectively, were recorded in the first quarter of 2002. Taxes other than
income for the first quarter of 2003 was approximately $128,000 and was
primarily for payroll related taxes. Taxes other than income for the first
quarter of 2002 was $871,000 and primarily reflected property and state utility
taxes associated with the Company's ownership in Seabrook.
11
BAYCORP HOLDINGS, LTD.
In the first quarter of 2003, GBPM recorded a net unrealized loss on its
firm forward energy trading contract of $1,083,000. Sales for the first quarter
of 2002 were made on a unit contingent basis as opposed to firm sales and, as
such, there was no mark to market accounting for firm contracts in the first
quarter of 2002.
Interest income increased approximately $272,000 from $130,000 in the
first quarter of 2002 to $402,000 in the first quarter of 2003 primarily due to
higher average cash balances in the first quarter of 2003 as compared to the
first quarter of 2002. Cash in the first quarter of 2003 included the proceeds
from the sale of Seabrook and the disbursement of cash on March 24, 2003 upon
completion of the Company's tender offer. The Company recorded other income of
approximately $7,000 in the first quarter of 2003 as compared to recording other
deductions of approximately $158,000 in the first quarter of 2002. During the
first quarter of 2002, other deductions primarily reflected costs associated
with the relocation of BayCorp headquarters.
Net Income
As a result of the above factors, during the first quarter of 2003, the
Company recorded a net loss of $1,762,000, or approximately $0.22 per share, as
compared to net income of approximately $3,644,000, or approximately $0.43 per
share, during the first quarter of 2002.
Liquidity and Capital Resources
As of March 31, 2003, BayCorp had approximately $11,003,000 in cash and
cash equivalents and restricted cash. BayCorp's cash generation for the three
months ended March 31, 2003 was not sufficient to cover the cash requirements of
the Company during this period. The Company believes that its current cash,
together with the anticipated proceeds from the sale of electricity by GBPM,
will be sufficient to enable the Company to meet its anticipated cash
requirements. However if the prices at which GBPM must purchase its power supply
increases significantly from current levels, BayCorp or GBPM could be required
to raise additional capital, either through a debt financing or an equity
financing, to meet ongoing cash requirements. There can be no assurance that
BayCorp or GBPM will be able to raise additional capital on acceptable terms or
at all.
BayCorp's cash and cash equivalents decreased approximately $125,661,000
during the first three months of 2003 primarily due the Company's issuer tender
offer. The final result of the Tender Offer was announced on March 24, 2003.
BayCorp exercised its right to purchase up to an additional 2% of its
outstanding shares, and accepted 8,673,887 shares of common stock, including
options tendered by directors, officers and employees for repurchase, in the
tender. The Company distributed approximately $123,602,000 to tendering
shareholders and option holders. In addition, in the first quarter of 2003, the
Company received cash of approximately $1,776,000 from stock option exercise
transactions.
The Company had a net loss of approximately $1,762,000 during the first
quarter of 2003. During the first quarter of 2003 there were cash expenditures
of approximately $2,241,000 for federal and state tax payments. A decrease of
approximately $1,400,000 in prepaids and other assets was primarily attributable
to the settlement of post Seabrook closing adjustments, and were offset by
corresponding decreases in miscellaneous current liabilities. The increase in
accounts payable and accrued expenses of approximately $710,000 in the first
quarter of 2003 was primarily attributable to purchased power costs.
12
BAYCORP HOLDINGS, LTD.
The Company is presently evaluating options regarding the future
direction of the business following the sale of Seabrook and the completion of
the Company's issuer tender offer. Among the Company's available alternatives
following the completion of its issuer tender offer are to acquire energy
related assets, make other energy-related investments, including the development
of its HoustonStreet subsidiary, or to liquidate. If the Company sought to
invest in energy-related assets or other investments, the Company's cash
remaining following the tender offer might be insufficient. In such case, the
Company could seek to raise additional funds through debt or equity financing.
There can be no assurance that the Company will be successful in obtaining
additional financing. If the Company is not successful in obtaining additional
financing, the Company would not be able to pursue its desired investments. In
such case, the Company would consider all of the options then available,
including liquidation. If the Company decides to liquidate, cash will be
reserved to pay for the expected expenses of a liquidation and other
liabilities of the Company.
The Company reduced the number of employees from eleven as of December 31,
2001 to nine as of December 31, 2002 and to seven as of March 31, 2003. The
Company relocated in March 2003 to a smaller office space in Portsmouth, New
Hampshire.
Critical Accounting Policies
Preparation of the Company's financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities and revenues and expenses. Note
1 to the Consolidated Financial Statements in the Company's Form 10-K is a
summary of the significant accounting policies used in the preparation of the
Company's financial statements. The following is a discussion of the most
critical accounting policies used by the Company.
Stock Options
The Company accounted for its stock option plans under APB No. 25 prior to
2003 and as such no compensation cost had been recognized for options granted at
fair market value that had not been modified. The Company repriced certain
options, accelerated the vesting of others, made limited recourse loans for
certain individuals to exercise options and issued contingent options. In
accordance with APB 25 and FIN 44, the Company recorded compensation expense
related to these options. Compensation expense was $77,000 and $31,000 for the
quarters ended March 31, 2003 and 2002, respectively. On August 14, 2002 the
Company announced that it would expense the fair value of all stock options
granted beginning January 1, 2003 in accordance with SFAS No. 123, "Accounting
for Stock Based Compensation." There were no stock options granted in the first
quarter of 2003.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and all its subsidiaries. The Company had a 15% joint ownership interest in
Seabrook, a 1,150 megawatt nuclear generating unit. The Company recorded in its
financial statements its proportional share of Seabrook's assets, liabilities
and expenses. The Company consolidates all majority-owned and controlled
subsidiaries and applies the equity method of accounting for investments between
20% and 50%. All significant intercompany transactions have been eliminated. All
sales of subsidiary stock are accounted for as capital transactions in the
consolidated financial statements. The Company accounts for its HoustonStreet
investment on the equity method.
Energy Marketing
The Company utilized unit contingent and firm forward sales contracts to
maximize the value of its 174 MW power supply from the Seabrook Project. The
Company currently utilizes forward and spot market purchases to maximize the
value of its Unitil agreement. The Company had not entered into any forward firm
energy contracts as of March 31, 2002. The forward purchase contracts and Unitil
agreement are recorded at fair value. The initial fair value gain of the Unitil
agreement has been deferred and is being amortized over the life of the
agreement.
Forward Looking Statements and Certain Factors That May Affect Future Results
This Quarterly Report contains forward-looking statements. For this
purpose, any statements contained in this report 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 report.
History of Losses. BayCorp reported operating income for 2001 and 2002.
Prior to 2001, BayCorp had never reported an operating profit for any year since
its incorporation.
Liquidity Need. As of March 31, 2003, BayCorp had approximately $11
million in cash and cash equivalents and restricted cash. The Company believes
that such cash, together with the anticipated proceeds from the sale of
electricity by Great Bay Power Marketing, will be sufficient to enable the
Company and its wholly owned subsidiaries to meet their cash requirements in
2003. The direction of the Company's business and circumstances, foreseen or
unforeseen, may cause cash requirements to be materially higher than anticipated
and the Company or its wholly-owned subsidiaries may be required to raise
additional capital, either through a debt financing or an equity financing, to
meet ongoing cash requirements. In that event, the Company and its wholly owned
subsidiaries would 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.
Primary Reliance on a Single Contract. BayCorp's principal source of
revenue is its wholesale electricity trading business, which depends in large
part on Great Bay Power Marketing's contract to sell power to Unitil Power
Corporation. Accordingly, BayCorp's results of operations significantly depend
on the successful and continued performance under the Unitil contract.
13
BAYCORP HOLDINGS, LTD.
Risks Associated with Post-Closing Obligations from the Seabrook Sale. On
November 1, 2002, Great Bay and Little Bay sold their interests in the Seabrook
Project. In the Purchase and Sale Agreement for the Seabrook Project, FPL Energy
Seabrook agreed to indemnify Great Bay and Little Bay against certain claims
specified in the agreement. Great Bay and Little Bay also agreed to indemnify
FPL Energy Seabrook against certain claims specified in the Purchase and Sale
Agreement. If a claim is brought against Great Bay and Little Bay for which FPL
Energy Seabrook is required to indemnify Great Bay and Little Bay but FPL Energy
Seabrook fails to provide such indemnity, or if Great Bay is required to
indemnify FPL Energy Seabrook pursuant to the agreement, then the Company's
results of operations could be materially different. In addition, Great Bay and
Little Bay have deposited funds into an escrow account for the payment of
Seabrook expenses incurred subsequent to Closing. The amount escrowed was based
on an estimate of those expenses. Should actual expenses be greater than the
amount escrowed, additional funds will be required.
Extensive Government Regulation. The electric energy industry is subject
to extensive regulation by federal and state agencies. Great Bay Power Marketing
is subject to the jurisdiction of the FERC and, as a result, is required to file
with FERC all contracts for the sale of electricity. FERC's jurisdiction also
includes, among other things, the sale, lease, merger, consolidation or other
disposition of facilities, interconnection of certain facilities, accounts,
service and property records.
Risks Related to HoustonStreet. HoustonStreet's revenues depend on
continued and expanded use of Internet-based wholesale energy trading platforms.
Electronic trading of wholesale energy is new and evolving, and thus may not
achieve widespread market acceptance or emerge as a sustainable business. In
addition, HoustonStreet will need to enhance trading liquidity in order to
increase and sustain revenues. As a technology dependent business,
HoustonStreet's business could suffer due to computer or communications systems
interruptions or failures, technological change or adverse competitive
developments. Further, as electronic commerce 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 materially adversely affect HoustonStreet's business. Although
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. If any of the foregoing risks materialize, or other
risks develop that adversely affect HoustonStreet, or if HoustonStreet fails to
grow its revenues and net income, BayCorp could lose all of the value of its
investment in HoustonStreet.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
The prices of electricity are subject to fluctuations resulting from
changes in supply and demand. Great Bay sold a portion of its electricity
through forward, fixed-price energy trading contracts in prior years, including
in 2002. GBPM tracks market exposure for any forward firm energy trading
contracts in a mark-to-market model that is updated daily with current market
prices and is reflected in the Company's balance sheet. The positive, or
negative, value of the portfolio of forward firm power commitments represents an
estimation of the gain, or loss, that Great Bay and GBPM would have experienced
if open firm commitments were covered at then-current market prices. As of March
31, 2003, GBPM had a net unrealized gain on forward firm fixed energy trading
contracts of approximately $1,027,000.
14
BAYCORP HOLDINGS, LTD.
PART II - OTHER INFORMATION
Item 5. Other Information
On May 9, 2003, the Company issued its first quarter 2003 earnings
release. The earnings release is Exhibit 99.3 to this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index.
(b) The following reports on Form 8-K were filed during the three months
ended March 31, 2003:
Form 8-K filed on January 16, 2003 announcing its change in certifying
accountants.
Form 8-K/A filed on January 17, 2003 to correct typographical errors in
the January 16, 2003 Form 8-K.
Form 8-K/A filed on January 21, 2003 to amend the current report on Form
8-K filed on November 15, 2002, to include a pro forma balance sheet as of
September 30, 2002 and to provide additional information regarding the
previously announced disposition of certain assets made on November 1,
2002 by certain of BayCorp Holdings, Ltd.'s subsidiaries.
15
BAYCORP HOLDINGS, LTD.
SIGNATURES
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, 2003 /s/ Frank W. Getman Jr.
----------------------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
16
BAYCORP HOLDINGS, LTD.
CERTIFICATIONS
I, Frank W. Getman Jr., President and Chief Executive Officer of BayCorp
Holdings, Ltd., certify that:
1. I have reviewed this quarterly report on Form 10-Q of BayCorp Holdings, Ltd.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared.
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and at the audit committee
of registrant's board of directors (or person performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weakness.
Date: May 15, 2003 By: /s/ Frank W. Getman Jr.
------------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
(principal executive officer)
17
BAYCORP HOLDINGS, LTD.
I, Frank W. Getman Jr., President and Chief Executive Officer of BayCorp
Holdings, Ltd., certify that:
1. I have reviewed this quarterly report on Form 10-Q of BayCorp Holdings, Ltd;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state material fact necessary to make
the statements made, in a light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or person's performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weakness.
Date: May 15, 2003 By: /s/ Frank W. Getman Jr.
------------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
(principal financial officer)
18
I, Patrycia T. Barnard, Vice President and Treasurer of BayCorp Holdings, Ltd.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of BayCorp Holdings, Ltd;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state material fact necessary to make
the statements made, in a light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or person's performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weakness.
Date: May 15, 2003 By: /s/ Patrycia T. Barnard
------------------------------
Patrycia T. Barnard
Vice President and Treasurer
(chief accounting officer)
19
BAYCORP HOLDINGS, LTD.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.3 BayCorp Earning Release for the quarter ended March 31, 2003.
20