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 June 30, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
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Commission file number 1-12527
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BAYCORP HOLDINGS, LTD.
(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 July 30, 2004
- ----------------------------------------- ----------------------------
Common Stock, $0.01 Par Value per Share 560,096

INDEX

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements
- ----------------------------

3

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands except per share data)

(The accompanying notes are an integral part of these consolidated statements.)

4

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

(The accompanying notes are an integral part of these consolidated statements.)

5

NOTES TO FINANCIAL STATEMENTS

NOTE A - THE COMPANY

BayCorp Holdings, Ltd. ("BayCorp" or the "Company") is an unregulated holding
company incorporated in Delaware in 1996. BayCorp currently owns three
subsidiaries including Great Bay Power Marketing, Inc., BayCorp Ventures, LLC
and Great Bay Hydro Corporation. BayCorp also holds a majority interest in
HoustonStreet Exchange, Inc.

Until January 1, 2003, 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. 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 each wholly-owned by BayCorp. In December 2002,
BayCorp legally dissolved Great Bay and Little Bay.

In October 2002, BayCorp created two subsidiaries, Great Bay Power Marketing,
Inc. ("GBPM") and BayCorp Ventures, LLC. ("BCV"). GBPM was created to hold the
purchased power agreement that Great Bay had with Unitil Power Corporation
("Unitil") and to arrange for the power supply to satisfy the agreement. See
"Note C. Commitments and Contingencies. Purchased Power Agreements." Effective
January 1, 2003, GBPM assumed the Unitil contract, previously held by Great Bay,
and holds the letter of credit established to secure GBPM's obligations under
the Unitil contract. BayCorp created BCV 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.

In September 2003, BayCorp created a third subsidiary, Great Bay Hydro
Corporation ("GBH"). GBH entered into a purchase and sale agreement, dated as
of October 30, 2003, with Citizens Communications Company ("Citizens") to
acquire the generating facilities in Vermont owned by the Vermont Electric
Division of Citizens. GBH completed the acquisition of the Vermont generating
facilities and assumed operating responsibility of the generating facilities on
April 1, 2004. The generating facilities include an operating hydroelectric
facility of approximately 4 megawatts located in Newport, Vermont, diesel engine
generators totaling approximately 7 megawatts located in Newport, Vermont and
non-operating hydroelectric facilities in Troy, Vermont and West Charleston,
Vermont. GBH uses the output of the Newport plant as a physical hedge for
meeting a portion of BayCorp's supply obligations under the long-term contract
to supply 9.06 megawatts to Unitil. GBH paid a nominal purchase price to
Citizens for the generating facilities and 650 acres of real property associated
with the generating facilities and this amount is reflected in the Company's
financial statements. In addition, Citizens has agreed to indemnify GBH for the
reasonably anticipated costs of complying with the requirements of the new
operating license issued by the Federal Energy Regulatory Commission ("FERC") on
November 21, 2003. GBH and Citizens will share the savings if the costs of
compliance during the next three years are less than the anticipated amount.

BayCorp also owns shares representing approximately 59.7% of the outstanding
common shares of HoustonStreet Exchange, Inc. ("HoustonStreet"), which was
incorporated in Delaware in 1999. A recapitalization of HoustonStreet was
completed in the second quarter of 2004 and as a result, BayCorp's

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ownership interest in HoustonStreet increased above 50%. As a result of this
recapitalization, BayCorp began consolidating HoustonStreet as of May 1, 2004.
Prior to May 1, 2004, BayCorp held a minority interest in HoustonStreet and
accounted for HoustonStreet under the equity method. 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 ("FPL Energy Seabrook"), a subsidiary of FPL Group, Inc.,
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. FPL Energy Seabrook assumed
nearly all of the Company's Seabrook liabilities including the decommissioning
liability for the acquired portion of Seabrook. 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
were included in prepayments and the potential closing adjustments were included
in miscellaneous current liabilities. The amount escrowed was based on an
estimate of those expenses. The Company received a one-time payment following
the final reconciliation of and termination of all such escrow accounts in the
second quarter of 2004 in accordance with the terms of the Escrow Agreements
among the selling owners. No non-escrowed funds were required to pay for
closing adjustments. As a result of the post-closing adjustments being settled
for less than the Company had previously estimated and accrued for, the Company
recorded other income of approximately $572,000 in the second quarter of 2004.

Enron Claim
- -----------

In January 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 owed Great Bay $1,075,200 for power
delivered prior to Enron's Chapter 11 bankruptcy filing on December 2, 2001.
Great Bay also has an unliquidated claim against Enron for damages resulting
from the termination of the contracts. 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 the
approval of creditors and the bankruptcy court. In December 2003, BayCorp sold
a portion of its power delivery claim in the amount of $1,041,600 to an
institutional investor for $343,700. BayCorp recorded this transaction as a
recovery of bad debt. BayCorp retains the remaining portion of the power
delivery claim as well as the claim for damages. Any recovery by the Company on
account of this remaining 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

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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, 2003 as
filed in Form 10-K on March 26, 2004 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.

The Company currently utilizes forward and spot market purchases to maximize
the value of its long- term power sales contract with Unitil (the "Unitil PPA").
Forward contracts (including the Unitil PPA) meeting the definition of a
derivative and not designated and qualifying for the normal purchases and normal
sales exception under Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) are
recorded at fair value. In accordance with FASB's Emerging Issues Task Force
Issue No. 02-03, Issues Involved in Accounting for Derivative Contracts Held for
Trading Purposes and Contracts Involved in Energy Trading and Risk Management
Activities (EITF Issue No. 02-03), revenues related to derivative instruments
classified as trading are reported net of related cost of sales.

NOTE C - COMMITMENTS AND CONTINGENCIES

Purchased Power Agreements
- --------------------------

In anticipation of the Seabrook sale, the Unitil 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 as of January 1, 2003.

This contract meets the definition of a derivative under SFAS No. 133. All
sales, purchases and market value adjustments related to the Unitil PPA are
reflected gross in the Company's financial statements as the Company has
designated this forward contract as non-trading in accordance with EITF Issue
No. 02-03. Additionally, in accordance with EITF Issue No. 02-03, the inception
gain (initial value of $2.1 million) on the contract has been deferred and will
be amortized over the life of the contract. For the quarter ended June 30,
2004, the Company had an unrealized loss on the mark-to-market of the Unitil PPA
of $782,000 and had recognized a portion of the deferred gain on the Unitil PPA
of $66,000. The deferred inception gain and unrealized loss on the Unitil PPA
was $1,666,000 and $2,481,000, respectively, as of June 30, 2004. For the
quarter ended June 30, 2003, the Company had an unrealized gain on the mark-to-
market of the Unitil PPA of $432,000 and had amortized a portion of the deferred
gain on the Unitil PPA of $66,000. The deferred inception gain and unrealized
gain on the Unitil PPA was $1,929,000 and $1,459,000, respectively, as of June
30, 2003.

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The Company realized net gains on energy commodity contract trading activity
of approximately $8,000 and $46,000, respectively, for the three and six months
ended June 30, 2004. The gross retail sales volume of such activity was
approximately $467,000, recorded net of $459,000 of related cost of sales for
the three months ended June 30, 2004. The gross retail sales volume of such
activity was approximately $917,000, recorded net of $871,000 of related cost of
sales for the six months ended June 30, 2004. There was no such activity in the
three or six month periods ending June 30, 2003.

NOTE D - INVESTMENT IN HOUSTONSTREET

Prior to April 30, 2004, in addition to its equity interest in HoustonStreet,
the Company held an $8.4 million secured note in HoustonStreet. In March 2001,
HoustonStreet raised additional funding by selling senior secured notes to
BayCorp and other investors. Collectively, these notes were referred to as the
"HoustonStreet Series C Units." The outstanding principal and interest of this
note to BayCorp as of April 30, 2004 was approximately $11 million. The Company
had written this note down to zero as of December 31, 2000. The notes were
originally due and payable in December 2001, and the maturity date was
subsequently extended to January 15, 2004. The notes were not paid when due,
and in February 2004, HoustonStreet was formally notified of the payment
default. BayCorp and the other senior secured noteholders reserved their rights
and proposed a recapitalization of HoustonStreet that would potentially provide
effective control of HoustonStreet to the noteholders. The recapitalization was
approved by the Board of Directors of HoustonStreet in March 2004 and was
approved by HoustonStreet shareholders in April 2004.

The effect of the recapitalization was to convert HoustonStreet's secured debt
into equity and convert outstanding preferred stock in HoustonStreet into either
the right to receive nominal cash consideration or a nominal amount of
HoustonStreet common stock. All outstanding shares of HoustonStreet common
stock prior to the restructuring were cancelled. As a result of the
restructuring, as of May 1, 2004, holders of senior secured promissory notes
held common stock of HoustonStreet representing approximately ninety-nine
percent of the outstanding capital stock of HoustonStreet. Holders of preferred
stock held approximately one percent of the outstanding capital stock as a
result of the restructuring.

This recapitalization at HoustonStreet was completed in the second quarter of
2004 and as a result, BayCorp owned shares representing approximately 59.7% of
the outstanding common shares of HoustonStreet, effective May 1, 2004. In
accordance with EITF Topic D-84, the Company followed step acquisition
accounting to consolidate HoustonStreet. The fair value of current assets
exceeded BayCorp's net investment in HoustonStreet by $278,000 resulting in
negative goodwill upon application of step acquisition accounting. As a result,
the Company recognized an extraordinary gain of $278,000 in the second quarter
of 2004 in accordance with SFAS No. 141 "Business Combinations."

Prior to the recapitalization, BayCorp held a minority ownership interest in
HoustonStreet, owning approximately 46.4% of the voting power of all outstanding
common and preferred shares of HoustonStreet and accordingly accounted for
HoustonStreet under the equity method.

9

Summarized financial information for HoustonStreet, prior to consolidation, is
as follows:

NOTE E - EQUITY

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 stockholders 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 NOL
carryforwards, the Board determined and announced that it would not exercise its
reserved right 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
stockholders 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 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. The
Company distributed approximately $123,622,000 to tendering stockholders and
option holders. As of December 31, 2003 the Company had 641,937 shares
outstanding and cash and cash equivalents and restricted cash of approximately
$9,969,000.

As of June 30, 2004 there were 560,096 shares outstanding and options to
purchase 221,656 shares, 179,156 of which were 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

10

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 2004 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.

In October 2001, the Company issued 240,000 non-qualified options pursuant to
the 2001 Non-Statutory Stock Option Plan. These options had 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 for the six months ended June 30, 2003.

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 $43,000 in the second quarter of 2004 for these options.

NOTE G - SEGMENT INFORMATION

BayCorp is a holding company for Great Bay Power Marketing, Great Bay Hydro,
BayCorp Ventures and HoustonStreet. The Company operates primarily in two
segments, each of which is managed separately because each segment sells
distinct products and services. Great Bay Power Marketing and Great Bay Hydro
constitute the electricity generation and trading business segment, whose
principal assets are the Unitil PPA and hydroelectric facilities of
approximately 4 megawatts located in Newport, Vermont, diesel engine generators
totaling approximately 7 megawatts located in Newport, Vermont and non-operating
hydroelectric facilities in Troy, Vermont and West Charleston, Vermont.
HoustonStreet developed and operates HoustonStreet.com, an Internet-based
independent crude oil and refined products trading exchange in the United
States.

Management utilizes more than one measurement and multiple views of data to
measure segment performance and to allocate resources to the segments. However,
the dominant measurements are consistent with the company's consolidated
financial statements and, accordingly, are reported on the same basis herein.
Management evaluates the performance of its segments and allocates resources to
them primarily based on cash flows and overall economic returns.

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NOTE H - 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 its revenues primarily through energy sales activities by GBPM
and GBH in the second quarter of 2004 and from GBPM in the second quarter of
2003. GBPM currently holds one purchased power contract with Unitil. On April
1, 2004 GBH completed an acquisition of generating facilities including an
operating hydroelectric facility of approximately 4 megawatts located in
Newport, Vermont, diesel engine generators totaling approximately 7 megawatts
located in Newport, Vermont and non-operating hydroelectric facilities in Troy,
Vermont and West Charleston, Vermont. GBH assumed operating responsibility of
the generating facilities on April 1, 2004. GBH uses the output of the Newport
plant as a physical hedge for meeting a portion of the Company's supply
obligations under the Unitil PPA. Expenses for the second quarter of 2004 and
2003 primarily consisted of the cost of purchased power and general and
administrative costs.

As of May 1, 2004, BayCorp began consolidating HoustonStreet for financial
reporting purposes and HoustonStreet revenues and expenses are reflected in the
Company's financials as of that date. The Company recognized an extraordinary
gain of $278,000 in the second quarter of 2004 upon consolidation of
HoustonStreet. See "Note D."

The following discussion focuses solely on operating revenues and operating
expenses and is presented in a substantially consistent manner for all of the
periods presented.

Results of Operations: Second Quarter of 2004 Compared to the
Second Quarter of 2003
- --------------------------------------------------------------

Operating Revenues
- ------------------

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BayCorp's operating revenues increased by approximately $447,000, or 44.9%, to
$1,443,000 in the second quarter of 2004 as compared to $996,000 in the second
quarter of 2003. The increase in revenues was primarily attributable to
revenues of approximately $283,000 from the sale of electricity generated by
Great Bay Hydro and the inclusion of HoustonStreet revenues of approximately
$156,000.

Expenses
- --------

The Company purchases power to satisfy its power supply obligations.
Purchased power expenses increased by approximately $96,000, or 10.6%, to
$998,000 in the second quarter of 2004 as compared to $902,000 in the second
quarter of 2003.

The Company recorded a non-cash charge for an unrealized loss on the mark-to-
market of its long term energy sales contract and recorded the amortization of
the deferred inception gain on this contract for a total net unrealized loss of
approximately $716,000 in the second quarter of 2004 as compared to a net
unrealized gain of approximately $498,000 in the second quarter of 2003. The
mark-to-market value of this long-term contract is based on current projections
of power prices over the life of the contract. Forward power prices increased
during 2003 and have continued to rise into the second quarter of 2004 primarily
due to increases in the forward price of natural gas. In the New England Power
Pool ("NEPOOL") power generating plants are usually dispatched in the order of
increasing variable costs. The plants that are called upon to supply the last
amount of demand are considered to be on the margin and set the price of power
for all plants selling into the market. Since the completion of a significant
amount of new gas-fired generation in NEPOOL, plants that use natural gas as a
fuel source are frequently on the margin and therefore set the price of power in
NEPOOL. Accordingly, the price of power in NEPOOL is highly influenced by the
price of natural gas.

Administrative and general expenses decreased approximately $284,000, or
31.2%, to $625,000 in the second quarter of 2004 as compared to $909,000 in the
second quarter of 2003. The Company incurred costs related to the Tender Offer
in the second quarter of 2003; there were no such costs incurred in the second
quarter of 2004. In addition, the Company undertook numerous cost savings
measures, including relocating its corporate offices to smaller space, reducing
headcount and reducing the salaries of its President and its COO late in the
second quarter of 2003 that have reduced administrative and general expenses in
the second quarter of 2004 as compared to the second quarter of 2003.

Other income increased approximately $347,000, to $667,000 in the second
quarter of 2004 as compared to $320,000 in the second quarter of 2003. This
increase was primarily due to receipts by the Company of one-time payments
totaling approximately $572,000 following the final reconciliation and
termination of certain escrow accounts that had been funded for potential
closing adjustments and other costs specific to the Company's sale of its
interests in the Seabrook Nuclear Power Plant in November 2002.

The Company recognized an extraordinary gain of $278,000 in the second quarter
of 2004 upon the consolidation of HoustonStreet. As of May 1, 2004, BayCorp's
ownership in HoustonStreet was 59.7%, and in accordance with EITF Topic D-84,
the Company followed step acquisition accounting to consolidate HoustonStreet.
The fair value of current assets exceeded BayCorp's net investment in
HoustonStreet by $278,000 resulting in negative goodwill upon application of
step acquisition accounting. See "Note D."

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Net Income
- ----------

As a result of the above factors, for the second quarter of 2004, the Company
recorded net income of approximately $95,000, or $0.16 per share, as compared to
net income of approximately $35,000, or $0.05 per share, for the second quarter
of 2003.

Results of Operations: First Six Months of 2004 Compared
to the First Six Months of 2003
- --------------------------------------------------------

Operating Revenues
- ------------------

BayCorp's operating revenues increased by approximately $490,000, or 24.7%, to
$2,477,000 in the first six months of 2004 as compared to $1,987,000 in the
first six months of 2003. The increase in revenues in 2004 was primarily
attributable to revenues of approximately $283,000 from the sale of electricity
generated by Great Bay Hydro and the inclusion of HoustonStreet revenues of
approximately $156,000.

Expenses
- --------

The Company recorded a non-cash charge for an unrealized loss on the mark-to-
market of its long term energy sales contract and recorded the amortization of
the deferred inception gain on this contract for a total net unrealized loss of
approximately $2,353,000 in the first six months of 2004 as compared to a net
unrealized loss of approximately $585,000 in the first six months of 2003. The
mark-to-market value of this long-term contract is based on current projections
of power prices over the life of the contract. Forward power prices increased
during 2003 and have continued to rise in the first six months of 2004 primarily
due to increases in the forward price of natural gas. In NEPOOL, power
generating plants are usually dispatched in the order of increasing variable
costs. The plants that are called upon to supply the last amount of demand are
considered to be on the margin and set the price of power for all plants selling
into the market. Since the completion of a significant amount of new gas-fired
generation in NEPOOL, plants that use natural gas as a fuel source are
frequently on the margin and therefore set the price of power in NEPOOL.
Accordingly, the price of power in NEPOOL is highly influenced by the price of
natural gas.

Administrative and general expenses decreased approximately $741,000, or
41.3%, to $1,052,000 in the first six months of 2004 as compared to $1,793,000
in the first six months of 2003. The Company incurred costs related to the
Tender Offer in the first six months of 2003; there were no such costs incurred
in the second quarter of 2004. In addition, the Company undertook numerous cost
savings measures, including relocating its corporate offices to smaller space,
reducing headcount and reducing the salaries of its President and its COO late
in the second quarter of 2003 that have reduced administrative and general
expenses in the first six months of 2004 as compared to the first six months of
2003.

Interest income decreased approximately $335,000, to $99,000 in the first six
months of 2004 as compared to $434,000 in the first six months of 2003. Cash
balances in the first six months of 2003 were significantly higher than in the
first six months of 2004. 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 Company exercised its discretion to purchase up to an
additional 2% of outstanding shares, purchasing a total of 8,673,887 shares and
options, representing approximately 94.3% of the shares and options tendered.
The Company distributed approximately $123,603,000 in cash to tendering
shareholders and options holders by March 24, 2003. See "Note E - Equity."

14

Other income increased approximately $349,000, to $676,000 in the first six
months of 2004 as compared to $327,000 in the first six months of 2003. This
increase was primarily due to receipt by the Company of one-time payments
totaling approximately $572,000 following the final reconciliation and
termination of certain escrow accounts that had been funded for potential
closing adjustments and other costs specific to the Company's sale of its
interests in the Seabrook Nuclear Power Plant in November 2002.

The Company recognized an extraordinary gain of $278,000 in the first six
months of 2004 upon the consolidation of HoustonStreet. As of May 1, 2004,
BayCorp's ownership in HoustonStreet was 59.7%, and in accordance with EITF
Topic D-84, the Company followed step acquisition accounting to consolidate
HoustonStreet. The fair value of current assets exceeded BayCorp's net
investment in HoustonStreet by $278,000 resulting in negative goodwill upon
application of step acquisition accounting. See Note D.

Net Income
- ----------

As a result of the above factors, for the first six months of 2004, the
Company recorded a net loss of approximately $2,002,000, or $3.28 per share, as
compared to a net loss of approximately $1,727,000, or $0.41 per share, for the
first six months of 2003.

Liquidity and Capital Resources
- -------------------------------

As of June 30, 2004, BayCorp had approximately $6,943,000 in cash and cash
equivalents and approximately $2,500,000 in restricted cash. The Company also
had approximately $1,264,000 in a cash deposit at ISO NE. The Company purchases
a portion of its power needed for resale from ISO NE and ISO NE requires
financial assurance to protect NEPOOL against a payment default of one of its
participants. The amount of collateral needed is calculated based upon formulas
developed by ISO NE and NEPOOL. This deposit is reflected as an Other Long Term
Asset in the Company's financial statements.

BayCorp's cash generation for the six months ended June 30, 2004 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 and GBH, will be sufficient to
enable the Company to meet the anticipated cash requirements of its current
operations in 2004. However if the prices at which GBPM must purchase its power
supply increase 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 $526,000 during the
first six months of
2004. The Company had a net loss of approximately $2,002,000 in the first six
months of 2004. Included in this net loss was a non-cash charge to earnings of
approximately $86,000 for compensation expense related to the accounting for
stock options. Also included was a non-cash charge for the loss on the mark-to-
market of the Unitil PPA of approximately $2,485,000 and a non-cash recognition
of deferred gain on the Unitil PPA of

15

approximately $132,000. The Company also recognized a non-cash extraordinary
gain of $278,000 upon the consolidation of HoustonStreet as of May 1, 2004. An
increase in accounts receivable of approximately $366,000 was primarily
attributable to GBH receivables of approximately $312,000.

The decrease of approximately $1,220,000 in prepaids and other assets and the
decrease of approximately $953,000 in miscellaneous and other current
liabilities was primarily attributable to the final reconciliation and
termination of certain escrow accounts that had been funded for potential
closing adjustments and other costs specific to the Company's sale of its
interests in the Seabrook Nuclear Power Plant in November 2002. The Company
received approximately $572,000 in the first six months of 2004 relative to the
termination of these accounts. An additional $367,000 was reversed from these
accounts for the over accrual for these potential closing costs. An increase in
accounts payable and accrued expenses of approximately $110,000 was primarily
attributable to GBH payables of approximately $188,000.

During the first six months of 2004, the Company repurchased 81,841 shares of
its common stock for approximately $1,074,000, at an average per share price of
approximately $13.13.

The Company's contractual obligations as of June 30, 2004 were as follows:

Following the sale of Seabrook and the completion of the Company's Tender
Offer, the Company has evaluated and pursued a number of energy-related
investment opportunities. The Company continues to focus on the acquisition of
electric generating assets, an area where it feels that it has a solid
understanding of the market and the value of and risks related to those assets.
BayCorp is interested in acquiring either complete or partial ownership of
generating facilities. There are a large number of generating assets currently
offered for sale. These plants consist of both merchant and contracted
facilities using a variety of fuels and located both domestically and
internationally. There is also growing competition for the acquisition of these
assets, with a number of new participants entering the market, including private
equity funds, hedge funds, insurance companies and investment banks. The
Company is focused on pursuing opportunities and assets that it believes will
provide a return to stockholders commensurate with the risks.

Generally, BayCorp has targeted the following operating assets: (1) merchant
plants in regions with developed wholesale power markets such as New England,
New York, PJM and Texas that are fueled by means other than natural gas (e.g.
hydro, coal, nuclear), (2) international assets that have stable, long-term off-
take contracts, and (3) either merchant or contracted renewable assets. BayCorp
is also pursuing other energy-related investments including development of new
power generation facilities and the further development of HoustonStreet, its
online trading platform.

BayCorp's first acquisition in the post-Seabrook period was the acquisition of
the generating plants owned by Citizens through BayCorp's wholly-owned
subsidiary, Great Bay Hydro. Great Bay Hydro entered into a purchase and sale
agreement in October 2003 with Citizens to acquire all of the generating
facilities in Vermont owned by the Vermont Electric Division of Citizens. The
generating facilities include an operating hydroelectric facility of
approximately 4 MWs located in Newport, Vermont, diesel engine generators
totaling approximately 7 MWs located in Newport, Vermont and non-operating
hydroelectric facilities in Troy, Vermont and West Charleston, Vermont. On
April 1, 2004, BayCorp announced that Great Bay Hydro completed this

16

acquisition. Great Bay Hydro assumed operating responsibility for these
facilities on April 1, 2004 and is using the output of the Newport plant as a
physical hedge for meeting a portion of BayCorp's supply obligations under the
long-term contract to supply 9.06 megawatts to Unitil.

Great Bay Hydro paid a nominal purchase price to Citizens for the generating
facilities and 650 acres of real property associated with the generating
facilities. In addition, Citizens has agreed to indemnify Great Bay Hydro for
the reasonably anticipated costs of complying with the requirements of the new
operating license issued by the FERC on November 21, 2003. Great Bay Hydro and
Citizens will share the savings if the costs of compliance during the next three
years are less than the anticipated amount.

The Company may pursue investments that would require additional equity or
debt financing. The Company believes that such financing is available, but
there can be no assurance that the Company would be successful in obtaining such
financing. If the Company is not successful in obtaining additional financing,
the Company may not be able to pursue certain investment alternatives. In such
a case, the Company may be limited to opportunities that it can pursue given its
current resources. The income from the Company's current and near-term expected
operating businesses (the Unitil PPA and Great Bay Hydro acquisition) is
insufficient to pay current operating expenses. The Company believes however,
that its current cash, together with the anticipated proceeds from the sale of
electricity by GBPM and GBH, will be sufficient to enable the Company to meet
the anticipated cash requirements of its current operations in 2004. If the
Company is unsuccessful in identifying and making additional investments, the
Company may seek alternative strategies, including liquidation. If the Company
decides to liquidate, cash may 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.

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,
filed March 26, 2004, 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 historically by the
Company.

Stock Options

The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25 and related interpretations for options issued 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.
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." 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 2004 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.

17

Principles of Consolidation

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 began consolidating its subsidiary, HoustonStreet, as a result of
the recapitalization that occurred on April 30, 2004. As a result of the
recapitalization, the Company's ownership in HoustonStreet increased from 46.4%
to 59.7%.

Energy Marketing

Forward contracts (including the Unitil PPA) meeting the definition of a
derivative and not designated and qualifying for the normal purchases and normal
sales exception under Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133) are
recorded at fair value. In accordance with FASB's Emerging Issues Task Force
Issue No. 02-03, Issues Involved in Accounting for Derivative Contracts Held for
Trading Purposes and Contracts Involved in Energy Trading and Risk Management
Activities (EITF Issue No. 02-03), revenues related to derivative instruments
classified as trading are reported net of related cost of sales.

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.

Business Opportunities and Development. As described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources," the Company has evaluated and pursued energy-
related investment opportunities, has focused on the acquisition of electric
generating assets and is considering other energy-related investments and the
further development of HoustonStreet. There can be no assurance that the
Company will be able to identify business opportunities that it believes to be
attractive, or that it will be successful in pursuing any such opportunities, in
view of factors that include competition for the acquisition of assets, the fact
that many energy-related activities are subject

to government regulatory requirements, the Company's limited resources and the
probable need to obtain debt or equity financing in order to pursue certain
opportunities.

History of Losses. BayCorp reported an operating loss for the first six
months of 2004 and for the year 2003 and reported operating income for the years
2002 and 2001. Prior to 2001, BayCorp had never reported an operating profit
for any year since its incorporation.

18

Liquidity Need. As of June 30, 2004, BayCorp had approximately $10.7 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 and GBH will be sufficient to enable the Company and its wholly owned
subsidiaries to meet their cash requirements in 2004. 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. 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. Moreover, the Company's need to raise
additional capital in order to pursue certain opportunities may affect the
Company's competitive position with respect to such opportunities. If
additional funds are raised by issuing equity securities, dilution to then
existing stockholders will result.

Primary Reliance on a Single Asset. BayCorp's principal source of revenue in
the first six months of 2004 was GBPM's contract to sell power to Unitil.
Accordingly, BayCorp's results of operations significantly depended on the
successful and continued performance under the Unitil contract. On April 1,
2004, BayCorp announced that Great Bay Hydro completed the acquisition of all of
the generating facilities in Vermont owned by the Vermont Electric Division of
Citizens. Great Bay Hydro assumed operating responsibility for these facilities
on April 1, 2004 and is currently using the output of the Newport plant as a
physical hedge for meeting a portion of BayCorp's supply obligations under the
Unitil contract.

Extensive Government Regulation. The electric energy industry is subject to
extensive regulation by federal and state agencies. GBPM and Great Bay Hydro
are subject to the jurisdiction of the FERC. GBPM is required to file with FERC
all contracts for the sale of electricity. Great Bay Hydro operates the Clyde
River hydroelectric project under the terms of a license issued by FERC. 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

19

The prices of electricity are subject to fluctuations resulting from changes
in supply and demand. The Company tracks market exposure for any forward firm
energy contracts in a mark-to-market model that is updated daily with current
market prices and is reflected in the company's balance sheet. See "Note B -
Summary of Significant Accounting Policies." The positive, or negative, value
of the portfolio of forward firm energy commitments represents an estimation of
the gain, or loss, that GBPM would have experienced if open firm commitments
were covered at then-current market prices. GBPM had a net unrealized loss of
$2,353,000 on its forward firm fixed energy contract as of June 30, 2004 and an
unrealized loss of approximately $585,000 as of June 30, 2003.

Item 4. Controls and Procedures
- -------------------------------

Evaluation of Disclosure Controls and Procedures

The Chairman, CEO, and President and the Vice President of Finance of the
Company have reviewed and evaluated the effectiveness of disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 (the "Exchange
Act") Rules 240.13a and 15(e)) as of the end of the fiscal quarter covered by
this Quarterly Report. Based on that evaluation, the Chairman, CEO, and
President and the Vice President of Finance have concluded that their current
disclosure controls and procedures are, in all material respects, effective and
timely, providing them with material information relating to that required to be
disclosed in the reports the Company files or submits under the Exchange Act.

The Company's management, including the Chairman, CEO and President and the
Vice President of Finance, does not expect that the Company's disclosure
controls and procedures or its internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, provides
reasonable, not absolute, assurance that the objectives of the control system
are met. The design of a control system reflects resource constraints; the
benefits of controls must be considered relative to their costs. Because there
are inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been or will be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns occur because of simple error or mistake. Controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all future conditions; over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with the policies or procedures. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.

Changes in Internal Controls

There have not been any significant changes in the Company's internal controls
or, to its knowledge, in other factors that have materially affected, or are
reasonably likely to materially affect, these controls subsequent to the date of
their evaluation. The Company is not aware of any significant deficiencies or
material weaknesses and, therefore, no corrective actions were taken.

Part II - OTHER INFORMATION

20

Item 2 - Changes in Securities and Use of Proceeds
- --------------------------------------------------

Share Repurchase Plan.

In September 2003, the Company's Board of Directors authorized the repurchase
of up to ten percent of its fully diluted common stock on the open market or in
negotiated transactions.

The following table summarizes repurchases of BayCorp stock in the six months
ended June 30, 2004:

(1) All shares were repurchased pursuant to the Company's repurchase plan
announced September 29, 2003.

Item 3. Defaults upon Senior Securities
- ---------------------------------------

Prior to the April 30, 2004 recapitalization of HoustonStreet resulting in
BayCorp's ownership interest increasing above 50% and HoustonStreet becoming a
majority-owned subsidiary, HoustonStreet had defaulted in the payment of its
senior secured promissory notes. Such notes were cancelled in the
recapitalization of HoustonStreet. See Notes to Financial Statements, Note D.

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

The Company held its Annual Meeting of Stockholders on May 17, 2004. Proxies
for the meeting were solicited pursuant to Regulation 14A, and there were no
solicitations in opposition to management's nominees for Directors. All such
nominees were elected. At the Annual Meeting, the following matters were voted
on:

1. Six members were elected to the Board of Directors to serve until the next
Annual Meeting of Stockholders of the Company and until their successors
are duly elected and qualified. The following table sets forth the number
of votes cast for and withheld for each nominee for Director.

21

2. The stockholders of the Company ratified the selection by the Audit
Committee of Vitale, Caturano & Company, PC as the Company's independent
auditors by a vote of 580,130 shares in favor of the proposal, 21,404
shares voted against the selection, and 503 shares abstained.

Item 5. Other Information
- --------------------------

On August 2, 2004, the Company issued its second quarter 2004 earnings
release. The earnings release is attached as Exhibit 99 to this Form 10-Q.

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

(a) See Exhibit Index.

(b) There were no reports on 8-K filed during the three months ended June 30,
2004.

22

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.

August 6, 2004 /s/ Frank W. Getman Jr.
------------------------
Frank W. Getman Jr.
President and Chief Executive Officer
and Principal Financial Officer

23

EXHIBIT INDEX

Exhibit Description
No.
---------- -----------

2 Agreement and Plan of Merger of HSEMergerCo, Inc. with
and into HoustonStreet Exchange, Inc.

31.1 Certification of President and Chief Executive Officer
(principal executive officer) pursuant to Exchange Act
Rules 13a-14 and 15d-14.

31.2 Certification of President and Chief Executive Officer
(principal financial officer) pursuant to Exchange Act
Rules 13a-14 and 15d-14.

31.3 Certification of Vice President of Finance and Treasurer
(chief accounting officer) pursuant to Exchange Act
Rules 13a-14 and 15d-14.

32.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

32.2 Certification of Vice President of Finance and Treasurer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

99 BayCorp Holdings, Ltd. Earnings Release for the quarter
ended June 30, 2004.