BAYCORP HOLDINGS LTD - 10-Q Quarterly Report

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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 September 30, 2003
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
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Commission file number 1-12527
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BAYCORP HOLDINGS, LTD.
(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 October 31, 2003
- --------------------------------------- -------------------------------
Common Stock, $0.01 Par Value per Share 646,937

INDEX

PART I - FINANCIAL INFORMATION:

Item 1 - Financial Statements:

Consolidated Statements of Income and Comprehensive Income -
Three and Nine Months Ended September 30, 2003 and 2002 3

Consolidated Balance Sheets at September 30, 2003
and December 31, 2002 4

Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2003 and 2002 5

Notes to Financial Statements 6

Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 12

Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 18

Item 4 - Controls and Procedures 18

PART II - OTHER INFORMATION:

Item 4 - Submission of Matters to a Vote of Security Holders 19

Item 5 - Other Information 20

Item 6 - Exhibits and Reports on Form 8-K 20

Signatures 21

Exhibit Index 22

2

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)

3

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)

4

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)

5

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 Great Bay and Little Bay sold their
interests in Seabrook. See "Sale of Seabrook Ownership" below.
Those ownership interests 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"). BayCorp formed GBPM to hold the purchased
power contract that Great Bay had with Unitil Power Corporation
("Unitil") and to purchase the power supply to satisfy the Unitil
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. The Company formed BayCorp Ventures to serve as a
vehicle through which the Company can make investments following
the Seabrook sale and the expiration of the Company's issuer
tender offer. See "Note A - 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, incorporated in Delaware in 1999, 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. Great Bay, Little
Bay and the other 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

6

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 Group, Inc. provided a parent company 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 in cash 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 remaining escrow amounts
are included in prepayments and the potential closing adjustments
are included in 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.

7

(1) Pro forma income statement amounts represent
sales under the Unitil contract along with related
purchased power. The pro forma Administrative &
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.

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
$90 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. On March 18, 2003, 9,207,508
shares had been properly tendered and not withdrawn
(including options surrendered for repurchase and
cancellation.) The Company exercised its discretion to
purchase up to an additional 2% of outstanding shares,
purchasing a total of 8,673,887 shares (and surrendered
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 of
September 30, 2003, the Company had 646,937 shares
outstanding and cash and cash equivalents and
restricted cash of approximately $9,715,000.

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 filed a plan of
reorganization on July 11, 2003, which is subject to
approval of creditors and the bankruptcy court.
BayCorp is currently negotiating to sell the undisputed
portion of its claim to an institutional investor.
BayCorp would retain the unscheduled portion of the
claim. Whether BayCorp will be able to complete the
sale of its claim or the amount the Company would
receive upon the sale 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

8

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 (as
amended by Form 10-K/A filed June 9, 2003), 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 (as amended by Form 10-K/A filed June 9,
2003). The results for the interim periods are not
necessarily indicative of the results to be expected
for the full fiscal year.

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 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 has one firm forward power
sales contract, its amended power sales agreement with
Unitil, as of September 30, 2003, which required mark-
to-market accounting treatment. As of September 30,
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 position on firm forward power sales
contracts included in the accompanying consolidated
statements of income for the quarter ended September
30, 2003 was a net loss of approximately $140,000. The
mark-to-market value of the contract at September 30,
2003 was approximately $1.3 million. The Company had
no firm forward power sales contracts as of September
30, 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 and 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 Great Bay 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.

This contract meets the definition of an energy
trading contract under EITF 98-10 and 00-17. In
accordance with 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 was
$2.1 million. The Company recorded $197,200 of this
deferred gain in the first nine months of 2003. These
amounts are reflected in the Company's financial
statements.

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

9

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.

NOTE D - INVESTMENT IN UNCONSOLIDATED AFFILIATES

In January 2003, the FASB issued Interpretation No.
46, Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51. The interpretation
requires that a company consolidate the financial
statements of an entity that cannot finance its
activities without outside financial support, and for
which that company provides the majority of support.
The Company has deemed that its subsidiary,
HoustonStreet Exchange, Inc., is a variable interest
entity. Although the Company has significant variable
interest in HoustonStreet, the Company has determined
that it is not the primary beneficiary as of September
30, 2003. Therefore, the Company has not consolidated
HoustonStreet. The Company's maximum exposure to loss
in HoustonStreet was approximately $7.7 million at
September 30, 2003. Losses totaling this amount were
recognized in the Company's financial statements in
prior periods.

As of September 30, 2003, the Company owned shares
representing approximately 46.4% of the voting power of
all outstanding common and preferred shares of
HoustonStreet. Summarized financial information for
the Company's investment in HoustonStreet, as accounted
for by the equity method, is as follows:

The Company also currently holds approximately $10.5
million in HoustonStreet senior secured promissory
notes, of the approximate $13.2 million in senior
secured promissory notes currently outstanding at
HoustonStreet. Unless extended, the maturity date for
the notes is January 15, 2004.

As of September 30, 2003, the Company had no
investments in or receivables from HoustonStreet
recognized on the accompanying balance sheet.

Holders of 5% or more of the shares of Series A and B
Convertible Preferred Stock of HoustonStreet may
request that HoustonStreet redeem such shares in three
equal annual installments on each of the fourth, fifth
and sixth anniversaries of their initial issuance. The
redemption price is $3.75 per share of Series A stock
and $12.00 per share of Series B. The first of such
redemption dates is March 31, 2004. The management of
HoustonStreet believes that the redemption prices are
far in excess of the market value of the Series A and B
Preferred Stock, and HoustonStreet does not currently
have either the resources or the legal ability to be
able to pay such redemption, if requested. Given the
large amount of senior secured indebtedness that
HoustonStreet would have to repay before it could
redeem such shares, HoustonStreet is considering
several options, including the repurchase of shares of
Series A and B Preferred Stock at a nominal price.
Either the redemption or repurchase of preferred shares
could result in BayCorp regaining majority ownership
and control of HoustonStreet. In that event, BayCorp
would be required to consolidate HoustonStreet in the
BayCorp financial statements.
10

NOTE E - EQUITY

On January 31, 2003 the Company announced an issuer
tender offer to purchase up to 8,500,000 shares of its
common stock. Under the terms of the offer, BayCorp
shareholders could tender to BayCorp all or a portion
of the shares that they owned for a cash purchase price
of $14.85 per share. The offer was expected to close
on March 3, 2003. Due to the overwhelming response to
the tender offer and the significant proration that
would have been required to preserve the Company's NOL
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. BayCorp announced
the final result of the tender offer 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
surrendered 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
$123,622,000. As of September 30, 2003 there were
646,937 shares outstanding and options to purchase
221,713 shares, 120,047 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
related interpretations, 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 begin to account for all employee awards
granted, modified, or settled after January 1, 2003 in
accordance with SFAS No. 123, "Accounting for Stock
Based Compensation" and SFAS 148, "Accounting for Stock
Based Compensation - Transition and Disclosure" on a
prospective basis. Awards under the company's plans
vest over periods ranging from one to three years.
Therefore, the cost related to stock-based employee
compensation included in the determination of net
income for 2002 and 2003 differs from that which would
have been recognized if the fair value based method had
been applied to all awards since the original effective
date of Statement 123. The following table illustrates
the effect on net income and earnings per share if the
fair value based method had been applied to all
outstanding and unvested awards in each period.

11

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 upon the closing of the sale
of the Seabrook Project. The Company recorded
compensation expense related to contingent and repriced
options of $77,000 and $1,125,000, respectively, for
the nine months ended September 30, 2003 and 2002.

In April 2003 and July 2003, the Company issued
132,000 and 10,000 options, respectively, pursuant to
the 1996 Stock Option Plan and the 2001 Non-Statutory
Stock Option Plan. These options have an exercise
price of $14.45. The Company accounts for these
options using the fair value method and recorded
compensation expense of $71,000 in the third quarter of
2003 and $290,000 for the nine months ended September
30, 2003 for these options.

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

BayCorp derived substantially all of its revenue
through its energy sales activities by GBPM in the
first nine months of 2003 and Great Bay and Little Bay
in the first nine months of 2002. BayCorp formed GBPM
to hold the purchased power contract that Great Bay had
with Unitil and to purchase the power supply to satisfy
the Unitil 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 in
December 2002.

The following discussion focuses solely on operating
revenues and operating expenses and are presented in a
substantially consistent manner for all of the periods
presented. In the first nine months of 2003, all
operating revenues were derived from the sale of power
pursuant to the purchased power contract with Unitil.
Expenses for the first nine months of 2003 primarily
consisted of the cost of purchased power to satisfy
this contract and general and administrative costs. In
the first nine months 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 in that period included Seabrook
operating costs, purchased power costs and Seabrook
general and administrative costs.

Results of Operations: Third Quarter of 2003 Compared
to the Third Quarter of 2002

Operating Revenues

BayCorp's operating revenues decreased by
approximately $14,552,000 to $1,007,000 in the third
quarter of 2003 as compared to $15,559,000 in the third
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

12

Company's sale of its ownership interests in Seabrook.
During the three months ended September 30, 2003,
GBPM's average selling price increased 24.4%, to 5.04
cents per kWh as compared to an average selling price
of 4.05 cents per kWh for Great Bay in the same period
in 2002.

Expenses

There were no Seabrook related operating expenses in
the third quarter of 2003. Seabrook production and
transmission expenses were $5,336,000 in the third
quarter of 2002. Purchased power costs increased
approximately $890,000 from $13,000 in the third
quarter of 2002 to $903,000 in the third 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
$891,000 in the third quarter of 2003 as compared to
approximately $2,884,000 in the third quarter of 2002.
Administrative and general expenses for the third
quarter of 2002 included approximately $1,100,000 of
Seabrook expenses. There were no Seabrook
administrative and general expenses in the third
quarter of 2003. There were no Seabrook-related costs
for depreciation, decommissioning cost accretion or
decommissioning trust fund income in the third quarter
of 2003. Charges of $941,000 and $1,231,000 and income
of $342,000, respectively, were recorded for these
items in the third quarter of 2002. Taxes other than
income for the third quarter of 2003 were approximately
$4,000 and were primarily payroll-related taxes. Taxes
other than income for the third quarter of 2002 were
$840,000 and consisted primarily of local and state
taxes associated with the Company's ownership in
Seabrook.

In the third quarter of 2003, GBPM recorded a net
unrealized loss on its firm forward energy trading
contract of $140,000. Sales for the third 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 third quarter of
2002.

Interest income decreased approximately $140,000 from
$164,000 in the third quarter of 2002 to $24,000 in
the third quarter of 2003 primarily due to lower
average cash balances in the respective periods.

Net Income

As a result of the above factors, during the third
quarter of 2003, the Company recorded a net loss of
$936,000, or approximately $1.45 per share, as compared
to net income of approximately $4,831,000, or
approximately $0.58 per share, during the third quarter
of 2002.

Results of Operations: First Nine Months of 2003
Compared to the First Nine Months of 2002

Operating Revenues

BayCorp's operating revenues decreased by
approximately $38,059,000 to $2,994,000 in the first
nine months of 2003 as compared to $41,053,000 in the
first nine months 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. During the
nine months ended September 30, 2003, GBPM's average
selling price increased 24.8%, to 5.04 cents per kWh as
compared to an average selling price of 4.04 cents per
kWh for Great Bay in the same period in 2002.

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Expenses

There were no Seabrook-related operating expenses in
the first nine months of 2003. Seabrook production and
transmission expenses were $19,293,000 in the first
nine months of 2002. Purchased power costs increased
approximately $2,724,000, from $276,000 in the first
nine months of 2002 to $3,000,000 in the first nine
months of 2003 because, 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 $2,552,000 in the first nine
months of 2003 as compared to approximately $7,137,000
in the first nine months of 2002. Administrative and
general expenses for the first nine months of 2002
included approximately $2,938,000 of Seabrook expenses.
There were no Seabrook administrative and general
expenses in the first nine months of 2003. There were
no Seabrook-related costs for depreciation,
decommissioning cost accretion or decommissioning trust
fund income in the first nine months of 2003. Charges
of $2,821,000 and $3,694,000 and income of $1,147,000,
respectively, were recorded for these items in the
first nine months of 2002. Taxes other than income for
the first nine months of 2003 were approximately
$136,000 and were primarily payroll-related taxes.
Taxes other than income for the first nine months of
2002 were $2,650,000 and primarily reflected local and
state taxes associated with the Company's ownership in
Seabrook.

In the first nine months of 2003, GBPM recorded a net
unrealized loss on its firm forward energy trading
contract of $725,000. Sales for the first nine months
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 $19,000 from
$439,000 in the first nine months of 2002 to $458,000
in the first nine months of 2003 primarily due to
significantly higher cash balances in the first three
months and higher average cash balances in the
respective periods. The Company recorded other income
of approximately $298,000 in the first nine months of
2003 as compared to other deductions of approximately
$16,000 in the first nine months of 2002. This
increase in other income was primarily attributable to
the 2003 annual distribution made to NEIL members
representing BayCorp's share of distributions under
mutual insurance policies associated with the Seabrook
plant.

Net Income

As a result of the above factors, during the first
nine months of 2003, the Company recorded a net loss of
$2,663,000, or approximately $0.88 per share, as
compared to net income of approximately $6,752,000, or
approximately $0.81 per share, during the first nine
months of 2002.

Liquidity and Capital Resources

As of September 30, 2003, BayCorp had approximately
$9,715,000 in cash and cash equivalents and restricted
cash. BayCorp's cash generation for the nine months
ended September 30, 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 the currently anticipated cash
requirements of its current operations. 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

14

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 $126,950,000 during the first nine
months of 2003 primarily due to 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 surrendered by
directors, officers and employees for repurchase, in
the tender. The Company distributed approximately
$123,622,000 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
$2,663,000 in the first nine months of 2003. In the
first nine months of 2003 there was a non-cash charge
to earnings of approximately $367,000 for compensation
expense related to the accounting for stock options.
There was a non-cash charge for loss on the mark-to-
market of the Unitil PPA of approximately $922,000 and
a non-cash recognition of deferred gain on the Unitil
PPA of approximately $197,000. A decrease of
approximately $563,000 in prepaids and other assets was
primarily attributable to a partial settlement of post
Seabrook closing adjustments, and were offset by
corresponding decreases in miscellaneous and other
liabilities. Taxes accrued decreased approximately
$2,341,000 when installment payments were made for
federal and state income taxes. The increase in
accounts payable and accrued expenses of approximately
$460,000 in the first nine months of 2003 was primarily
attributable to purchased power costs of $289,000 and
an additional accrual of approximately $179,000 for
estimated payments to Mr. Getman and Mr. Callendrello
for achieving certain goals and financial incentives
for specific objectives established by the Board under
the Company's Key Employee Retention and Incentive
Plan. The Company has accrued approximately $411,000
for such incentive payments. It is uncertain when
payment for achieving these goals and financial
incentives will be made.

The Company is presently evaluating its alternatives
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 are to acquire energy-related
assets (see Item 5. Other Information), make other
energy-related investments, including the further
development of HoustonStreet, or liquidate. If the
Company sought to invest in significant energy-related
assets or other investments, the Company's cash is
likely to 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 would be successful in obtaining additional
financing. If the Company is not successful in
obtaining additional financing, the Company may not be
able to pursue its desired investment alternatives. In
such case, the Company would consider all of the
options then available, including liquidation. If the
Company decides to liquidate, cash would be reserved to
pay for the expected expenses of liquidation and other
liabilities of the Company, including potential runoff
insurance policies and severance obligations that would
be triggered.

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 September 30, 2003. As a
cost savings measure, the Company relocated in March
2003 to smaller office space in Portsmouth, New
Hampshire and reduced the salaries of Mr. Getman and
Mr. Callendrello.

15

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 (as amended by Form 10-K/A filed June 9,
2003) is a summary of the significant accounting
policies used in the preparation of the Company's
financial statements. The following is a discussion of
certain of the Company's critical accounting policies.

Stock Options

The Company accounted for its stock option plans
under APB No. 25 and related interpretations prior to
2003 and as such no compensation cost had been
recognized for options granted at fair market value
that had not been modified. In prior years, the
Company repriced certain options, accelerated the
vesting of others, made limited recourse loans for
certain individuals to exercise options and issued
contingent options. The Company recorded compensation
expense related to these options. Compensation expense
for these options was $77,000 and $1,125,000 for the
nine months ended September 30, 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." The Company granted 142,000 stock
options to directors, officers and employees in the
first nine months of 2003. The Company recorded
compensation expense of $290,000 for these options.

Principles of Consolidation

BayCorp's 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.

In January 2003, FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51. The interpretation
requires that a company consolidate the financial
statements of an entity that cannot finance its
activities without outside financial support and for
which that company provides the majority of support.
The Company has deemed that HoustonStreet is a variable
interest entity. Although the Company has a
significant variable interest in HoustonStreet, the
Company has determined that it is not the primary
beneficiary of HoustonStreet's expected losses as of
September 30, 2003. Therefore, the Company has not
consolidated HoustonStreet.

Energy Marketing

The Company utilized unit contingent and firm forward
sales contracts in the first nine months of 2002 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

16

had not entered into any forward firm energy contracts
as of September 30, 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 recognized
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, statements about the Company's future business
direction, 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 September 30, 2003, BayCorp had approximately
$9.7 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 GBPM, will be sufficient to enable the
Company and its wholly owned subsidiaries to meet the
currently anticipated cash requirements of the current
operation 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 GBPM's contract to sell power to
Unitil. Accordingly, BayCorp's results of operations
significantly depend on continued and successful
performance under the Unitil PPA.

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 pre-closing
expenses received

17

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. GBPM 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 September 30,
2003, GBPM had an unrealized gain on the mark-to-market
of forward firm fixed energy trading contracts of
approximately $1,253,000.

Item 4. Controls and Procedures

BayCorp management, including the Chief Executive
Officer and the principal accounting officer, have
conducted an evaluation of the effectiveness of
disclosure controls and procedures, pursuant to
Exchange Act Rule 13a-15(b), as of September 30, 2003.
Based on that evaluation, the Chief

18

Executive Officer and the principal accounting officer
concluded that the Company's disclosure controls and
procedures are effective in ensuring that all material
information required to be filed in this quarterly
report has been made known to them in a timely fashion
and no changes are required at this time.

In connection with the evaluation by BayCorp
management, including the Chief Executive Officer and
the principal accounting officer, of BayCorp's internal
control over financial reporting, pursuant to Exchange
Act Rule 13a-15(d), no changes during the quarter ended
September 30, 2003 were identified that have materially
affected, or are reasonably likely to materially
affect, BayCorp's internal control over financial
reporting.

Part II - OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security
Holders

The Company held its Annual Meeting of Stockholders
on July 10, 2003. 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. Seven 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.