BAYCORP HOLDINGS LTD - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12527

BAYCORP HOLDINGS, LTD.
(Exact name of registrant as specified in its charter)

DELAWARE 02-0488443
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

ONE NEW HAMPSHIRE AVENUE, SUITE 125
PORTSMOUTH, NEW HAMPSHIRE 03801
(Address of principal executive (Zip Code)
offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(603) 766-4990

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)

AMERICAN STOCK EXCHANGE
(Name of each exchange on which registered)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

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 [X]

Indicate by check mark if disclosure of delinquent filers to
Item 405 of Regulations S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]

As of June 30, 2004, (the last business day of the registrant's
most recently completed second fiscal quarter) the aggregate
market value of the registrant's Common Stock held by non-
affiliates of the registrant was approximately $5,906,400 based
on the last reported sale price of the registrant's Common Stock
on the American Stock Exchange.

There were 557,945 shares of Common Stock outstanding as of
March 24, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Incorporated Document Location in Form 10-K
-------------------- --------------------
Portions of the Registrant's Proxy Part III
Statement furnished to Stockholders
in connection with the Annual
Meeting
to be held May 17, 2005.

-------------------------------------------------------

1

PART I

ITEM 1. BUSINESS.

INTRODUCTION

BayCorp Holdings, Ltd. ("BayCorp" or the "Company") is an
unregulated holding company incorporated in Delaware in 1996. As
of December 31, 2004, BayCorp had five wholly owned subsidiaries
including Great Bay Power Marketing, Inc., Great Bay Hydro
Corporation, Nacogdoches Power, LLC, Nacogdoches Gas, LLC, and
BayCorp Ventures, LLC. BayCorp also held a majority interest in
HoustonStreet Exchange, Inc. as of December 31, 2004.

Until January 1, 2003, BayCorp had two principal operating
subsidiaries that generated and traded 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. In December
2002, BayCorp dissolved Great Bay and Little Bay.

In October 2002, BayCorp formed two subsidiaries, Great Bay
Power Marketing, Inc. ("Great Bay Power Marketing") and BayCorp
Ventures, LLC ("BayCorp Ventures"). Great Bay Power Marketing,
incorporated in Maine as a wholly owned subsidiary, 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 "Pre-November 2002 and
Current Business - Purchased Power Agreements" below. Effective
January 1, 2003, Great Bay Power Marketing assumed the Unitil
contract and holds the letter of credit established to secure
Great Bay Power Marketing's obligations under the Unitil
contract. BayCorp formed BayCorp Ventures, a Delaware limited
liability company, as a wholly owned subsidiary, 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 that took place in 2003.

In September 2003, BayCorp formed Great Bay Hydro Corporation
("Great Bay Hydro"), a New Hampshire corporation, as a wholly
owned subsidiary. Great Bay Hydro 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. Great Bay Hydro completed the acquisition 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 and West Charleston, Vermont.

In October 2004, BayCorp formed Nacogdoches Power, LLC
("Nacogdoches Power"), a New Hampshire limited liability company,
as a wholly owned subsidiary. On October 19, 2004, Nacogdoches
Power acquired the development rights to an approximate 1000 MW
natural gas-fired power plant project in Nacogdoches County,
Texas, located in east Texas. The project received its air
quality permit and its wastewater discharge permit and has
options to acquire the land and a number of easements for the
plant. The proposed plant site is located near the Electric
Reliability Council of Texas ("ERCOT") and the Southwest Power
Pool high voltage transmission lines as well as a source of
cooling water and natural gas lines. Nacogdoches Power is
pursuing the development of this project with an initial focus on
securing gas supply and power offtake contracts.

In November 2004, BayCorp formed Nacogdoches Gas, LLC
("Nacogdoches Gas"), a New Hampshire limited liability company,
as a wholly owned subsidiary. In the fourth quarter of 2004,
Nacogdoches Gas entered into agreements with Sonerra Resources
Corporation ("Sonerra"), an independent oil and gas exploration,
development and operating company, under which Nacogdoches Gas
acquired an approximate 10% working interest (of a 77% net
revenue interest) in two natural gas and oil producing wells.
Nacogdoches Gas entered into an agreement, dated January 7, 2005
with Sonerra, under which Nacogdoches Gas will fund the
development of three natural gas and oil wells. This agreement
was amended as of March 14, 2005, increasing the number of wells
from three to four. In addition, Nacogdoches Gas has an option
to participate in Sonerra's continued development of up to 15
additional natural gas and oil wells over the next two years.
Under the agreement with Sonerra, Nacogdoches Gas will receive a
priority return until its aggregate investment is recovered.

In March 2005, BayCorp formed Great Bay Hydro Maine, LLC ("GBH
Maine"), a Maine limited liability company, as a wholly owned
subsidiary, and formed

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Great Bay Hydro Benton, LLC ("GBH Benton"), also a Maine limited
liability company, as a wholly owned subsidiary of GBH Maine. On
March 16, 2005, GBH Maine and GBH Benton acquired Benton Falls
Associates, L.P., a limited partnership that owns a 4.3 megawatt
hydroelectric generation plant in Benton, Maine ("Benton Falls"),
from The Arcadia Companies for approximately $2.2 million. The
Company assumed operating responsibility for Benton Falls, the
output of which is sold to Central Maine Power Corporation
("CMP") under a power purchase agreement ("CMP PPA") that expires
in December 2007. The rates under the CMP PPA are indexed to
CMP's standard rates for energy and capacity purchases
established annually by the Maine Public Utilities Commission.
The estimated average rate for April 2005 through December 2005
(based on projected monthly generation) is approximately $59.12
per megawatt hour ("MWh".)

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.
HoustonStreet developed and operates HoustonStreet.com, an
Internet-based independent crude oil and refined products trading
exchange in the United States. A recapitalization of
HoustonStreet was completed in the second quarter of 2004, and as
a result, BayCorp's ownership interest in HoustonStreet increased
above 50% and BayCorp began consolidating its financial
statements with 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.

RECENT DEVELOPMENTS

Great Bay Hydro Corporation

In October 2003, Great Bay Hydro entered into a purchase and
sale agreement with Citizens to acquire the generating facilities
in Vermont owned by the Vermont Electric Division of Citizens.
Great Bay Hydro completed the acquisition 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 and West Charleston, Vermont.
Great Bay Hydro uses the output of the Newport plant as a
physical hedge for a portion of BayCorp's contractual obligation
to supply 9.06 megawatts to Unitil through 2010. 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, and this amount is reflected in the
Company's financial statements. In addition, Citizens agreed to
indemnify Great Bay Hydro 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. On September 28, 2004, Great Bay Hydro agreed
to terminate Citizens' indemnification requirements in exchange
for Citizens' payment to Great Bay Hydro of approximately $4.4
million, since the receipt of which Great Bay Hydro paid
approximately $1.2 million for costs incurred through December
31, 2004 for FERC compliance. The remaining approximately $3.2
million is included in the Company's December 31, 2004 balance
sheet as cash. The balance sheet reflects corresponding short-
term and long-term liabilities of $719,000 and $2,479,000,
respectively, for the estimated remaining cost of FERC
compliance.

In June 2004, Great Bay Hydro received FERC approval of its
designation as an exempt wholesale generator ("EWG"). In order
to maintain EWG status, Great Bay Hydro must engage exclusively
in the business of owning or operating one or more "eligible
facilities" and selling electricity only at wholesale (i.e. not
to end users) and incidental activities. An "eligible facility"
is a facility used for the generation of electric energy
exclusively at wholesale or used for the generation of electric
energy and leased to one or more public utility companies. In
the case of Great Bay Hydro, its Vermont generating facility is
an "eligible facility."

HoustonStreet Exchange, Inc.

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 the 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

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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 owns shares
representing approximately 59.7% of the outstanding common shares
of HoustonStreet. 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 and accounted for
HoustonStreet under the equity method.

Nacogdoches Gas, LLC

In the fourth quarter of 2004, Nacogdoches Gas entered into
agreements with Sonerra under which Nacogdoches Gas acquired an
approximate 10% working interest in two natural gas and oil
producing wells. Nacogdoches Gas entered into an agreement dated
January 7, 2005 with Sonerra, under which Nacogdoches Gas will
fund the development of three natural gas and oil wells. This
agreement was amended as of March 14, 2005, increasing the number
of wells from three to four. In addition, Nacogdoches Gas has an
option to participate in Sonerra's continued development of up to
15 additional natural gas and oil wells over the next two years.
Under the agreement with Sonerra, Nacogdoches Gas will fund the
total cost of the new wells (with the provision that up to 25% of
the working interest may be funded and acquired by other parties)
and will receive a priority return of 90% of the working
interest funded until its aggregate investment is recovered.
Once Nacogdoches Gas has recovered all of its investment in the
wells from the net proceeds of all wells and any other revenues
from the assets acquired under the development agreement, Sonerra
and Nacogdoches Gas will own equal amounts of the working
interests funded. The working interests include undivided
leasehold interests in the gas units and the production and
gathering equipment.

Sonerra directly or indirectly controls approximately 36,000
acres either through leases or as land held by production within
a project area in Nacogdoches County in east Texas. Sonerra also
has acquired 3D seismic data covering approximately 31,000 acres
within the project area, of which 24,000 acres are under lease or
held by production directly or indirectly by Sonerra.

Since entering the January 7, 2005 agreement with Sonerra,
Nacogdoches Gas has funded the development of three wells. The
net revenue interest in each of the wells being funded by
Nacogdoches Gas is 77%, which means that the working interests
bear 100% of the operating costs of the wells but receive 77% of
the net revenues from the wells with the remaining 23% of the net
revenues paid to the lessor and other royalty interests. The
first of those wells, Round Mountain, a James Lime horizontal
natural gas well, began production in January 2005 and through
the end of February 2005 has produced 95 million cubic feet of
natural gas. The second well, Wicked Wolf, a James Lime
horizontal natural gas well, began production in early March
2005. The third well, Painted Horse, a Rodessa vertical natural
gas well, is being developed.

Under the terms of the January 7, 2005 agreement as amended,
Sonerra will sequentially present five additional sets of three
well prospects to Nacogdoches Gas. Upon the presentation of a
set of three well prospects, Nacogdoches Gas at its option, may
proceed with the development of those three well prospects.
Should Nacogdoches Gas decide not to proceed with the development
of any given set of three well prospects, its right to
participate in future well sets terminates.

The total cost of an individual well typically ranges from $2.0
million to $3.5 million and includes the acquisition of leases
for the land, the drilling and completion of the wells and the
construction of extensions of the gas gathering system. The
total cost depends on the type of well (horizontal or vertical),
the amount of land required for the production unit, the length
of gas gathering pipeline and the completion technique.

Other exploration and production companies are operating in
Nacogdoches County and may seek to acquire land in or near the
project area being developed by Sonerra and Nacogdoches Gas.
Nacogdoches Gas has no employees.

Various federal, state and local laws relating to the discharge
of materials into the environment, or otherwise relating to the
protection of

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the environment, directly impact the development of oil and gas
wells and their costs. These laws and regulations govern, among
other things, emissions to the atmosphere, discharges of
pollutants into the waters of the United States, underground
injection of waste water, the generation, storage, transportation
and disposal of waste materials and the protection of public
health, natural resources and wildlife. The anticipated costs of
development of oil and natural gas wells by Nacogdoches Gas and
Sonerra includes funding for the measures necessary to meet
environmental compliance requirements and no additional
environmental compliance costs are anticipated.

Nacogdoches Power, LLC

On November 16, 2004, Nacogdoches Power acquired the
development rights to the Sterne Power project in the town of
Sacul in Nacogdoches County, Texas. The Sterne Power project was
initially designed and has been permitted as a nominal 1000 MW
plant. The project received its air quality permit in December
2002, and the air quality permit currently is effective through
December 7, 2005. An additional eighteen-month extension to the
permit may be requested by Nacogdoches Power. The wastewater
discharge permit is currently effective through August 1, 2006.
In addition, the project has an option to purchase the land for
the project and options to acquire easements for transmission
lines and/or gas pipelines. Those options have varying
expiration dates in 2005 and 2006 and are either being extended
or exercised. Nacogdoches Power is currently evaluating the
plant configuration. Further, Nacogdoches Power is seeking to
enter into power offtake contracts, although none have been
executed. A schedule for the development of the project has not
been established. The total cost of the Sterne project will
depend on the final plant design and will require substantial
additional financing. The amount and type of any such financing
has not been determined.

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 had an unliquidated claim against Enron for
damages resulting from the termination of the contracts. During
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 was
approved by the bankruptcy court on July 15, 2004. In December
2003, BayCorp sold a $1,041,600 portion of its power delivery
claim to an institutional investor for $343,700. In September
2004, BayCorp sold the remaining $175,400 of the power delivery
claim, as well as the claim for damages, to the same
institutional investor for $77,200. The Company recorded each of
these transactions as a recovery of bad debt, reducing total
administrative and general expenses.

Issuer 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").

At the extended Tender Offer 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.

Sale of Seabrook

In April 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 of Seabrook, for $836.6 million, which
included Great Bay's and Little Bay's approximate aggregate 15%
ownership share, 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

5

included in prepayments and the potential closing adjustments
were included in other 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 2004 in accordance
with the terms of the Escrow Agreements among the selling owners.
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
2004. Also in 2004, the Company negotiated a final settlement of
the remaining accrued liability related to the sale of Seabrook
and paid approximately $168,000 in settlement of this liability.
As a result of this liability being settled for less than the
Company had previously estimated and accrued for, the Company
recorded other income of approximately $634,000 in 2004.

Debt Financing

On March 15, 2005, the Company and all of its wholly owned
subsidiaries entered into a $10,250,000 Convertible Note (the
"Note") and a Pledge Agreement (the "Pledge Agreement") with
Sloan Group Ltd., a Bahamas corporation (the "Sloan Group"). The
debt, which accrues interest at 8% per annum and is due and
payable in full on December 15, 2005, is convertible by the Sloan
Group at any time between November 15, 2005 and December 15, 2005
(or any time after the occurrence and during the continuance of a
material event of default under the Note) into shares of
BayCorp's common stock, $.01 par value at a price of $14.04 per
share. The Note does not allow BayCorp to prepay the debt and
provides for a 2% premium on the interest rate in the event of a
default. Payment of the Note may be accelerated in the event of
a material event of default, which is customary for this type of
financing.

In addition to BayCorp, the borrowers under the Note include
the following subsidiaries of BayCorp: GBH Maine, GBH Benton,
Great Bay Power Marketing, Great Bay Hydro, BayCorp Ventures,
Nacogdoches Power and Nacogdoches Gas. As security for the Note,
the borrowers entered into the Pledge Agreement with the Sloan
Group. Under the Pledge Agreement, BayCorp pledged its equity
interests in GBH Maine and Nacogdoches Gas to the Sloan Group,
GBH Maine pledged its equity interests in GBH Benton and Benton
Falls to the Sloan Group, GBH Benton pledged its equity interests
in Benton Falls to the Sloan Group, and Nacogdoches Gas, GBH
Maine and GBH Benton pledged to the Sloan Group any equity
interest that they may obtain in other entities while the debt is
outstanding.

BayCorp used proceeds from the financing to finance the
acquisition of Benton Falls by GBH Maine and GBH Benton and
intends to use proceeds from the financing to continue the
development of natural gas and oil wells in East Texas under its
Project Development Agreement with Sonerra and for other
strategic and general corporate purposes.

PRE-NOVEMBER 2002 AND CURRENT BUSINESS

Until November 1, 2002, BayCorp's principal wholesale
electricity generation and trading assets were its 100% equity
interests in Great Bay and Little Bay. The business of Great Bay
and Little Bay consisted of managing their joint ownership
interests in the Seabrook Project and the sale in the wholesale
power market of their share of electricity produced by the
Seabrook Project. Neither Great Bay nor Little Bay had
operational responsibility for the Seabrook Project. Great Bay
was a party to one long-term power contract for approximately 10
MW of Great Bay's share of the Seabrook Project capacity. Great
Bay Power Marketing assumed Great Bay's obligations under that
contract which was amended, effective November 1, 2002, to
provide for 9.06 MW of firm (non-unit-specific) power. See
"Purchased Power Agreements" below.

After the Company's sale of Seabrook in November 2002,
BayCorp's principal operating assets have been its purchased
power contract with Unitil, its Vermont hydro generating
facilities and its equity interest in HoustonStreet.

Purchased Power Agreements

Great Bay was party to a purchased power contract, dated as of
April 1, 1993, (the "Unitil PPA" or "PPA"), with Unitil that
provided for Great Bay to sell to Unitil 0.8696% of the energy
and capacity of Seabrook, or approximately 10 MWs. The Unitil
PPA commenced on May 1, 1993 and continues through October 31,
2010. On November first of each year the purchase price is
subject to increase at the rate of inflation less four percent.

In anticipation of the Seabrook sale, the Unitil PPA was
amended as of November 1, 2002. The amendment primarily modified
the existing Unitil PPA to reduce the amount of power delivered
to 9.06 MWs and the price that Unitil pays for power to $50.34
per MW hour, subject to an annual increase at the rate of
inflation less four percent, and provided that Great Bay would
supply the power regardless of whether Seabrook is providing the
power.

6

The amendment also provided alternative security for Unitil's
benefit, to replace and discharge the mortgage on Seabrook that
secured Great Bay's performance of the Unitil PPA. In connection
with the amended Unitil 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 Great Bay
Power Marketing as of January 1, 2003.

Unitil has an option, expiring November 1, 2005, to extend the
Unitil PPA for up to 12 years, until 2022. If Unitil exercises
its option to extend the PPA, the purchase price for power for
the first year of the extended term, beginning November 1, 2010,
will be $65.00 per MW hour (in 1992 dollars) multiplied by a
factor that equals the cumulative inflation from October 1992
through October 2010. For the remaining term of the extension,
the purchase price will be increased annually by the rate of
inflation over the previous year.

On March 17, 2003, Unitil announced the approval of a contract
with Mirant Americas Energy Marketing, LP ("Mirant"), which
provided for the sale of Unitil's existing power supply
entitlements, including the PPA with Great Bay Power Marketing,
effective on May 1, 2003. Great Bay Power Marketing's PPA with
Unitil has not been assigned to Mirant. Rather, Unitil has
appointed Mirant as their agent for purposes of administering the
PPA and Mirant is purchasing Unitil's entitlement under the PPA.

NEPOOL

Since December 1, 2002, Great Bay Power Marketing has been a
member of the New England Power Pool ("NEPOOL") and a party to
the Restated NEPOOL Agreement (the "NEPOOL Agreement"). Great
Bay had also been a member of NEPOOL until January 1, 2003.
NEPOOL is a voluntary association of companies engaged in the
electricity business in New England and its membership is open to
all investor-owned, municipal and cooperative electric utilities
in New England and other companies that transact business in the
region's bulk power market. Certain end users of electricity may
also become NEPOOL members. The NEPOOL Agreement imposes certain
obligations on its participants concerning generating capacity
reserves and the right to use major transmission lines.

Over the past several years, New Hampshire and a number of
other New England states have implemented deregulation of the
electric retail utility industry. In addition, NEPOOL
restructured to create and maintain open, non-discriminatory,
competitive, unbundled wholesale markets for energy, capacity,
and ancillary services. The NEPOOL wholesale market commenced
operation in May 1999. All of the deregulation initiatives open
retail and wholesale electricity markets to competition in the
affected states.

The New England Generation Information System (GIS), developed
for NEPOOL by APX Inc., enables efficient verification of retail
electric supplier compliance with various environmental
regulations. This system, which began operations in April 2002,
creates a certificate for each MWh of energy generated in or
imported into New England and allows the environmental attributes
of energy to be bought and sold separately from the energy
commodity. Generators supplying environmental information on
their units including fuel source and emissions data, may be able
to receive a premium for their certificates as retail suppliers
go to market to satisfy regulatory requirements including
renewable portfolio standards or create clean or low-emissions
products. For each MWh generated at the Newport facility, Great
Bay Hydro receives a corresponding credit in the NEPOOL GIS.

New England's independent system operator, ISO New England,
Inc. ("ISO-NE"), was established in July 1997 and is responsible
for maintaining the safety and reliability of the transmission
grid and bulk power market within the NEPOOL region. ISO-NE
performs these functions under a services contract with NEPOOL.
ISO-NE administers a bid-based wholesale market system in New
England that is designed to provide a competitive and efficient
generation market through an hourly clearing price mechanism. On
March 1, 2003, ISO-NE implemented a revised market system, known
as Standard Market Design, which incorporates location-base
pricing, congestion management, and day ahead and real time
energy markets.

Energy and Utility Regulation

Great Bay Power Marketing, Great Bay Hydro and Benton Falls
are subject to the jurisdiction of the FERC under Parts II and
III of the Federal Power Act and, as a result, are required to
file with FERC all contracts for the sale of electricity. FERC
has the authority to suspend the rates at which Great Bay Power
Marketing, Great Bay Hydro and Benton Falls propose to sell
power, to allow such rates to go into effect subject to refund
and to modify a proposed or existing rate if FERC determines that
such rate is not "just and reasonable." FERC's jurisdiction also
includes, among other things, the sale, lease, merger,
consolidation or other disposition of facilities, interconnection
of certain facilities, account and services and property records.

7

Because Great Bay Hydro and Benton Falls are EWG's, and Great
Bay and Little Bay were EWG's, these companies are and were not
subject to the jurisdiction of the Securities and Exchange
Commission ("SEC") under PUHCA. In order to maintain EWG status,
Great Bay Hydro and Benton Falls have to, and Great Bay and
Little Bay had to, engage exclusively in the business of owning
and/or operating all or part of one or more "eligible facilities"
and to sell electricity only at wholesale (i.e. not to end users)
and activities incidental thereto. An "eligible facility" is a
facility used for the generation of electric energy exclusively
at wholesale or used for the generation of electric energy and
leased to one or more public utility companies. The term
"facility" may include a portion of a facility. The Great Bay
Hydro and Benton Falls generating facilities are "eligible
facilities." In the case of Great Bay and Little Bay, their
combined 15% joint ownership interest in the Seabrook Project
constituted an "eligible facility."

Great Bay Hydro is the licensee for the Clyde River
Hydroelectric Project and is subject to the terms and conditions
of a FERC operating license, issued November 21, 2003
("License"). The License incorporates the conditions of a Water
Quality Certificate ("WQC") issued by the Vermont Agency of
Natural Resources on August 1, 2002, as amended. The License and
WQC direct Great Bay Hydro to comply with various requirements,
which include operating the project within certain stream flow
and water level parameters and installing and operating
downstream and upstream fish passage facilities.

Benton Falls is the licensee for the Benton Falls Hydroelectric
Project and is subject to the terms and conditions of a FERC
operating license, issued in 1984 ("BF License") and which is
effective thru February 2034. The FERC license incorporates the
conditions of the Water Quality Certification issued by the Maine
Department of Environmental Conservation.

Nuclear Waste Disposal

In 2002, costs associated with nuclear plant operations
included amounts for nuclear waste disposal, including spent
fuel, as well as for the ultimate decommissioning of the plants.
The liability for the disposal of any low level waste that
remained at Seabrook after November 1, 2002 was transferred to
FPL Energy Seabrook upon closing.

Decommissioning

NRC licensing requirements and restrictions are also applicable
to the decommissioning of nuclear generating units at the end of
their service lives, and the NRC has adopted comprehensive
regulations concerning decommissioning planning, timing, funding
and environmental review. Changes in NRC requirements or
technology can increase estimated decommissioning costs.

Until November 1, 2002, Great Bay and Little Bay were
responsible for their pro rata share of the decommissioning and
cancellation costs for Seabrook. FPL Energy Seabrook assumed
this decommissioning liability as of the Seabrook Closing.

Investment in HoustonStreet

BayCorp owns shares representing approximately 59.7% of the
voting power of all outstanding common shares of HoustonStreet.
HoustonStreet developed and operates HoustonStreet.com, an
Internet-based, independent crude oil and refined products
trading exchange in the United States.

HoustonStreet operates in a very competitive market. Its main
competitors are numerous over-the-counter ("OTC") telephone
brokers. HoustonStreet believes, however, that it is currently
the only online exchange for the OTC physical crude oil and
refined products markets. Other online exchanges focus primarily
on natural gas, power, and financial crude oil markets such as
swaps and options. HoustonStreet is focused primarily on the
physical crude oil and refined products markets.

HoustonStreet's crude oil platform includes several trading
floors, organized by grade and location. The platform allows for
user-customization where the user specifies which markets should
appear together on a floor regardless of grade or location.
HoustonStreet's refined products platform includes several
trading floors, organized by commodity, pipeline and geographic
location. Bids and offers are segmented by trading period (month
and cycle) and by grade. In 2004, HoustonStreet had trading
volumes of over 128 million barrels of crude oil and refined
products with total revenues of approximately $852,500. This
represents an increase of approximately 19.6% in barrels traded
and a decrease of approximately 3.2% in revenues as compared to
2003. As of December 31, 2004, HoustonStreet had five employees.

8

EMPLOYEES AND MANAGEMENT

As of March 24, 2005, BayCorp had seven employees, Great Bay
Hydro had one employee, Benton Falls had two employees and
HoustonStreet had five employees. Great Bay Power Marketing,
BayCorp Ventures, Nacogdoches Power and Nacogdoches Gas had no
employees.

Executive Officers of the Registrant

The executive officers of BayCorp are:

Frank W. Getman Jr. has served as Chief Executive Officer and
President of the Company since May 1998. Mr. Getman has served
as Chairman of the Board since May 2000 and has served as Chief
Operating Officer of the Company from September 1996 to March
2000 and Vice President, Secretary and General Counsel of Great
Bay from August 1995 to September 1996. Mr. Getman also has
served as President and Chief Executive Officer of HoustonStreet
since April 1999. From September 1991 to August 1995, Mr. Getman
was an attorney with the law firm of Hale and Dorr LLP, Boston,
Massachusetts. Mr. Getman holds J.D. and M.B.A. degrees from
Boston College and a B.A. in Political Science from Tufts
University.

Anthony M. Callendrello has served as the Company's Chief
Operating Officer since April 2000 and as the Secretary of the
Company since May 2000. Mr. Callendrello has over 20 years
experience in the nuclear industry. With over 16 years at the
Seabrook Project, Mr. Callendrello most recently served as the
plant's Manager of Environmental, Government and Owner Relations.
From 1980 to 1983, Mr. Callendrello was employed with Stone &
Webster Engineering Corporation, which provided engineer and
architect services to utility and other industries. Mr.
Callendrello holds a Master of Engineering - Mechanical degree
and a Bachelor of Engineering degree from Stevens Institute of
Technology.

Patrycia T. Barnard has served as Vice President of Finance and
Treasurer of the Company since January 2001. Ms. Barnard served
as Director of Accounting since May 1996 and has served as
Treasurer since 1998. Ms. Barnard has over 20 years experience
in multi-national, corporate accounting and finance. From 1978
until 1993, Ms. Barnard was employed by BTR, Plc., a conglomerate
of highly diversified manufacturing companies, most recently as
Assistant Controller for Clarostat Mfg. Co. Inc. Ms. Barnard
holds an M.B.A and a Masters in Accounting from New Hampshire
College. She also holds a B.S. in Business Administration from
the University of New Hampshire.

BayCorp entered into Management and Administrative Services
Agreements (the "Services Agreements") with Great Bay Power
Marketing, BayCorp Ventures, Great Bay Hydro, Nacogdoches Gas and
HoustonStreet in 2004. Under the Services Agreements with Great
Bay Power Marketing, BayCorp Ventures, Great Bay Hydro and
Nacogdoches Gas, BayCorp provides a full range of management and
administrative services, including general management and
administration, accounting and bookkeeping, budgeting, human
resource services and regulatory compliance. Great Bay Power
Marketing was billed $180,000, BayCorp Ventures was billed
$27,600, Great Bay Hydro was billed $90,000, and Nacogdoches Gas
was billed $20,000 for these services in 2004. Under the
Services Agreement with HoustonStreet, BayCorp provides
HoustonStreet with administrative, accounting and bookkeeping,
budgeting and human resource services. HoustonStreet was billed
$30,000 in 2004 for these services. Each Services Agreement has
a one-year term and provides for automatic one-year renewals.
HoustonStreet entered into a Computer Technology Services
Agreement with BayCorp in 2004 to provide BayCorp with computer
technology services including software and hardware repairs and
updates and server and networking connection issues, as may be
required by BayCorp on an as needed basis. BayCorp was billed
$30,000 for these services in 2004.

AVAILABLE INFORMATION

BayCorp does not maintain an Internet address and, therefore,
BayCorp's Annual Report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports
are not available on a Company Internet website. BayCorp will
provide paper copies of the Company's filings free of charge upon
request.

9

ITEM 2. PROPERTIES.

Until November 1, 2002, BayCorp's principal assets included its
100% equity interests in Great Bay and Little Bay. In turn,
Great Bay's and Little Bay's principal asset was a combined 15%
joint ownership interest in the Seabrook Project. On November 1,
2002, BayCorp sold Great Bay's and Little Bay's interest in
Seabrook. In December 2002, BayCorp dissolved Great Bay and
Little Bay.

BayCorp currently wholly owns five, and is the majority owner
of one, operating subsidiaries. Great Bay Power Marketing
purchases and markets power on the open market. Great Bay Hydro,
as of April 1, 2004, owns generating facilities that 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 and West Charleston,
Vermont. On March 16, 2005, GBH Maine and GBH Benton acquired
Benton Falls Associates, a limited partnership that owns a 4.3
megawatt hydroelectric generation plant in Benton, Maine for
approximately $2.2 million. The Company assumed operating
responsibility for Benton Falls, the output of which is sold to
CMP under a power purchase agreement that expires in December
2007.

Nacogdoches Power owns the development rights to an approximate
1000 MW natural gas-fired power plant project in Nacogdoches
County, Texas, located in east Texas and is pursuing the
development of this project with an initial focus on securing gas
supply and power offtake contracts.

Nacogdoches Gas, under agreements with Sonerra Resources
Corporation, an independent oil and gas exploration, development
and operating company, acquired an approximate 10% working
interest (of a 77% net revenue interest) in two producing wells
developed by Sonerra in the fourth quarter of 2004. In January
2005, under a separate agreement, Nacogdoches Gas agreed to fund
the development of three natural gas and oil wells. This
agreement was amended as of March 14, 2005, increasing the number
of wells from three to four. In addition, Nacogdoches Gas has an
option to participate in Sonerra's continued development of up to
15 additional natural gas and oil wells over the next two years.
Sonerra directly or indirectly controls approximately 36,000
acres either through leases or as land held by production within
a project area in Nacogdoches County in east Texas. Sonerra also
has acquired 3D seismic data covering approximately 31,000 acres
within the project area, of which 24,000 acres are under lease or
held by production directly or indirectly by Sonerra.

Since entering the January 7, 2005 agreement with Sonerra,
Nacogdoches Gas has funded the development of three wells. The
net revenue interest in each of the wells being funded by
Nacogdoches Gas is 77%, which means that the working interests
bear 100% of the operating costs of the wells but receive 77% of
the net revenues from the wells with the remaining 23% of the net
revenues paid to the lessor and other royalty interests. The
first of those wells, Round Mountain, a James Lime horizontal
natural gas well, began production in January 2005 and through
the end of February 2005 has produced 95 million cubic feet of
natural gas. The second well, Wicked Wolf, a James Lime
horizontal natural gas well, began production in early March
2005. The third well, Painted Horse, a Rodessa vertical natural
gas well, is being developed.

HoustonStreet, a majority owned subsidiary of BayCorp,
operates HoustonStreet.com, an independent internet-based crude
oil and refined products trading exchange.

As of March 18, 2005, BayCorp's corporate headquarters was
located in Portsmouth, New Hampshire, where it occupies
approximately 1,000 square feet of leased office space.
HoustonStreet's corporate headquarters, also located in
Portsmouth, New Hampshire, consists of approximately 1,100 square
feet of leased office space. BayCorp's management believes that
the corporate headquarters in Portsmouth, New Hampshire meets the
current requirements of BayCorp and HoustonStreet and that
additional space can be obtained to meet requirements for the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS.

Not Applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not Applicable.

10

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Following are the reported high and low sales prices of BayCorp
common stock ("MWH") on the American Stock Exchange as reported
in the Wall Street Journal daily as traded, for each quarter of
2003 and 2004:

As of March 24, 2005, the Company had 15 holders of record of
its common stock. The Company believes that as of March 24,
2005, the Company had approximately 447 beneficial holders of its
common stock. The number of beneficial owners substantially
exceeds the number of record holders because many of the
Company's stockholders hold their shares in street name. BayCorp
has never paid cash dividends on its common stock. Any future
dividends depend on future earnings, BayCorp's financial
condition and other factors.

Equity Compensation Plan Information. The following table
provides information about the Company's common stock that may be
issued upon the exercise of options and rights under all of the
Company's existing equity compensation plans as of December 31,
2004.

(1) Includes the Company's 1996 Stock Option Plan and the 2001 Nonstatutory
Stock Option Plan.

Unregistered Sales of Equity Securities and Use of Proceeds - Share
Repurchase Plan. The following table summarizes repurchases of BayCorp stock
during the fiscal quarter ended December 31, 2004:

(1) On September 29, 2003, the Company announced that its Board of Directors
had authorized the repurchase of up to ten percent of its fully diluted common
stock on the open market or in negotiated transactions. On

11

September 15, 2004, the Company announced that its Board of Directors had
authorized the repurchase of up to an additional 100,000 shares of its common
stock on the open market or in negotiated transactions. The Board of Directors
did not establish expiration dates for either of these plans.

ITEM 6. SELECTED FINANCIAL DATA.

The following table presents selected financial data of the
Company as of and for the years ended December 31, 2004, 2003,
2002, 2001 and 2000. The information below should be read in
conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's
financial statements, including the notes thereto, contained
elsewhere in this Report.

SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

In April 2002, 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 of Seabrook, for $836.6
million, which included Great Bay's and Little Bay's approximate
aggregate 15% ownership share, 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. See "Item 1.
Recent Developments - Sale of Seabrook."

Until November 1, 2002, BayCorp's principal wholesale
electricity generation and trading assets were its 100% equity
interests in Great Bay and Little Bay. The business of Great Bay
and Little Bay consisted of managing their joint ownership
interests in the Seabrook Project and the sale in the wholesale
power market of their share of electricity produced by the
Seabrook Project. Neither Great Bay nor Little Bay had
operational responsibility for the Seabrook Project. Great Bay
was a party to one long-term power contract for approximately 10
MWs of Great Bay's share of the Seabrook Project capacity.
During the period that it owned interests in Seabrook, Great
Bay's business strategy was to utilize unit contingent and firm
forward sales contracts to maximize the value of its 174 MW power
supply.

In October 2002, BayCorp formed two subsidiaries, Great Bay
Power Marketing and BayCorp Ventures. Great Bay Power Marketing
was created to hold the purchased power agreement that Great Bay
had with Unitil and arrange for the power supply to satisfy the
agreement. Effective January 1, 2003, Great Bay Power Marketing
assumed Great Bay's obligations under that contract which was
amended, effective November 1, 2002 to provide for 9.06 MWs of
firm (non-unit-specific) power and holds the letter of credit
established to secure Great Bay Power Marketing's obligations
under the Unitil contract. See "Item 1. Purchased Power
Agreements." In December 2002, BayCorp dissolved Great Bay and
Little Bay. BayCorp created BayCorp Ventures to serve as a
vehicle

12

through which the Company can make investments following the
Seabrook sale and the expiration of the Company's Tender Offer.

In September 2003, BayCorp formed Great Bay Hydro, which
entered into a purchase and sale agreement, dated as of October
30, 2003, with Citizens to acquire the generating facilities in
Vermont owned by the Vermont Electric Division of Citizens.
Great Bay Hydro completed the acquisition 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 and West Charleston, Vermont.
Great Bay Hydro uses the output of the Newport plant as a
physical hedge for a portion of BayCorp's contractual obligation
to supply 9.06 megawatts to Unitil through 2010. 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 and this amount is reflected in the
Company's financial statements. In addition, Citizens 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. On September 28, 2004,
Great Bay Hydro agreed to terminate Citizens' indemnification
requirements in exchange for Citizens' payment to Great Bay Hydro
of approximately $4.4 million, since the receipt of which Great
Bay Hydro paid approximately $1.2 million for costs incurred for
FERC compliance. The remaining approximately $3.2 million is
included in the Company's December 31, 2004 balance sheet as
cash. The balance sheet reflects corresponding short-term and
long-term liabilities of $719,000 and $2,479,000, respectively,
for the estimated remaining cost of FERC compliance.

In October 2004, BayCorp formed Nacogdoches Power, which
acquired the development rights to an approximate 1000 MW natural
gas-fired power plant project in Nacogdoches County, Texas,
located in east Texas. The project received its air quality
permit and its wastewater discharge permit and has options to
acquire the land and a number of easements for the plant. The
proposed plant site is located near the ERCOT and the Southwest
Power Pool high voltage transmission lines as well as a source of
cooling water and natural gas lines. Nacogdoches Power is
pursuing the development of this project with an initial focus on
securing gas supply and power offtake contracts.

In November 2004, BayCorp formed Nacogdoches Gas, which
entered into agreements in the fourth quarter of 2004 with
Sonerra Resources Corporation, an independent oil and gas
exploration, development and operating company, acquiring an
approximate 10% working interest in two producing wells developed
by Sonerra. In January 2005, Nacogdoches Gas entered into an
agreement with Sonnera under which Nacogdoches Gas will fund the
development of three additional natural gas and oil wells. This
agreement was amended as of March 14, 2005, increasing the number
of wells from three to four. In addition, Nacogdoches Gas has an
option to participate in Sonerra's continued development of up to
15 additional natural gas and oil wells over the next two years.
Under the agreement with Sonerra, Nacogdoches Gas will fund the
total cost of the new wells (with the provision that up to 25% of
the working interest may be funded and acquired by other parties)
and will receive a priority return of 90% of the working interest
funded until its aggregate investment is recovered. Once
Nacogdoches Gas has recovered all of its investment in the wells
from the net proceeds of all wells and any other revenues from
the assets acquired under the development agreement, Sonerra and
Nacogdoches Gas will own equal amounts of the working interests
funded. The working interests include undivided leasehold
interests in the gas units and the production and gathering
equipment.

In March 2005, BayCorp formed Great Bay Hydro Maine and Great
Bay Hydro Benton. On March 16, 2005, GBH Maine and GBH Benton
acquired Benton Falls Associates, a limited partnership which
owns a 4.3 megawatt hydroelectric generation plant in Benton,
Maine, from The Arcadia Companies for approximately $2.2 million.
The Company assumed operating responsibility for Benton Falls,
the output of which is sold to CMP under a power purchase
agreement that expires in December 2007. The rates under the CMP
PPA are indexed to CMP's standard rates for energy and capacity
purchases established annually by the Maine Public Utilities
Commission.

BayCorp owns shares representing approximately 59.7% of the
outstanding common shares of HoustonStreet Exchange, Inc., which
developed and operates HoustonStreet.com, an Internet-based
independent crude oil and refined products trading exchange in
the United States. A recapitalization of HoustonStreet was
completed in the second quarter of 2004, and as a result,
BayCorp's ownership interest in HoustonStreet increased above 50%
and BayCorp began consolidating its financial statements with
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. In January 2003, the FASB
issued Interpretation No. ("FIN") 46, Consolidation of Variable
Interest Entities - An Interpretation of ARB No. 51, as amended
by FIN 46R. 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
deemed that its investment, HoustonStreet, was not a variable
interest entity prior to May 1, 2004 and therefore, the Company
did not consolidate HoustonStreet prior to May 1, 2004.

13

BayCorp's net losses in 2004 and 2003 were primarily
attributable to the cost of purchased power and the non-cash
charge to earnings for unrealized losses on its firm forward
energy contract exceeding the revenue from that contract. The
net income in 2002 was primarily attributable to the gain on sale
of the Seabrook assets to FPL Energy Seabrook.

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

Operating Revenues

BayCorp's total operating revenues in 2004 were approximately
$5,538,000. Total revenues included approximately $4,006,000
generated from Great Bay Power Marketing's long-term power sales
contract with Unitil and approximately $82,000 in net revenues
from Great Bay Power Marketing's energy commodity trading
activity. The gross retail sales volume of such activity was
approximately $1,999,600, net of approximately $1,917,600 of
related costs of sales. Great Bay Hydro generated 2004 revenues
of approximately $628,000 from the sale of electricity and
generated revenues of approximately $131,000 from NEPOOL GIS
certificates. For each MWh generated at Great Bay Hydro's
Newport facility, Great Bay Hydro receives a corresponding credit
in the NEPOOL GIS. These credits are available for sale. Great
Bay Hydro's Newport certificates qualify for Connecticut Class I
renewable status during certain operating periods and in 2004
were sold in the Connecticut energy market. See "Part I. Item I.
Business - NEPOOL." Nacogdoches Gas reported 2004 revenues of
approximately $62,000 from sales of natural gas and HoustonStreet
generated 2004 revenues of approximately $629,000. Consolidated
operating revenues in 2003 were approximately $4,001,000 and were
derived solely from Great Bay Power Marketing's long-term power
sales contract with Unitil.

The Company realized an average selling price for electricity
sold under the Unitil sales contract and from the sale of Great
Bay Hydro generation of 5.03 cents per kilowatt hour ("kWh") in
2004 as compared to an average selling price of 5.04 cents per
kWh for the twelve months ended December 31, 2003. The Company's
cost of power (determined by dividing total operating expenses by
kWhs sold during the applicable period) decreased approximately
22.5% to 8.73 cents per kWh in 2004 as compared to 11.26 cents
per kWh in 2003. The decrease was primarily the result of
increased kWhs sold in 2004 due to additional generation from
Great Bay Hydro.

BayCorp's operating revenues in 2003 were approximately
$4,001,000 and were derived solely from the Company's long-term
power sales contract with Unitil. Operating revenues in 2002
were approximately $48,788,000 and were primarily from the sale
of the Company's share of Seabrook generation. 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. See "Part 1. Item 1. Recent
Developments - Sale of Seabrook."

The Company realized a higher average selling price for
electricity in 2003 as compared to 2002. During the twelve
months ended December 31, 2003, the average selling price
increased 31.9% to 5.04 cents per kilowatt hour ("kWh") as
compared to an average selling price of 3.82 cents per kWh for
the twelve months ended December 31, 2002. The Company's cost of
power (determined by dividing total operating expenses by kWhs
sold during the applicable period) increased 204% to 11.26 cents
per kWh in 2003 as compared to 3.70 cents per kWh in 2002. The
increase was primarily the result of decreased kWhs sold in 2003
as 2003 Company sales were solely to Unitil under the Unitil PPA.

Expenses

BayCorp's total operating expenses increased approximately
$724,000, or 8.1%, to $9,672,000 in 2004 as compared to
$8,948,000 in 2003. The increase was primarily attributable to
an increase in unrealized losses on the Unitil PPA, the Company's
long-term energy contract. The Unitil PPA meets the definition
of a derivative under Statement of Financial Accounting Standards
("SFAS") No. 133. Accordingly, the Company marks this energy
contract to market and recognized an unrealized loss of
$3,428,000 in 2004 and an unrealized loss of $2,189,000 in 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 more significantly in
the twelve months ended December 31, 2004 as compared to the same
period in 2003 primarily due to increases in the forward prices
of natural gas during those periods. 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

14

therefore set the price of power in NEPOOL. Accordingly, the
price of power in NEPOOL is highly influenced by the price of
natural gas.

In accordance with the Emerging Issues Task Force ("EITF")
Issue No. 02-03, the inception gain (initial value of $2.1
million) on the energy contract has been deferred and is being
recognized over the life of the contract. The Company recognized
approximately $263,000 of deferred gain on the Unitil contract in
2004 and in 2003. Operating expenses included approximately
$4,058,000 and $3,901,000 for purchased power in 2004 and 2003,
respectively. The Company purchased power to satisfy its
obligation under its long-term energy contract with Unitil at an
average purchase price of 5.10 cents per Kwh in 2004 and 4.93
cents per Kwh in 2003. Administrative and general expenses
decreased approximately $534,000, or 19.7%, to $2,171,000 in 2004
as compared to $2,705,000 in 2003. The Company has undertaken
numerous cost savings measures that reduced administrative and
general expenses in 2004, including relocating its corporate
offices to smaller space and reducing headcount in 2003 and
reducing the salaries of its President and COO late in the second
quarter of 2003 that have reduced administrative and general
expenses in 2004. In 2003, the Company incurred administrative
and general expenses related to the Tender Offer, the Seabrook
sale and other business planning activities, including legal, tax
and other professional services. Taxes other than income
decreased approximately $283,000, or 68%, to $133,000 in 2004,
primarily for Great Bay Hydro property taxes, as compared to
$416,000 in 2003, primarily for taxes associated with Seabrook
closing costs.

Interest and dividend income decreased approximately $288,000,
or 57.3%, to approximately $215,000 in 2003 as compared to
approximately $503,000 in 2002, primarily due to higher average
cash balances in 2003.

Other income increased approximately $877,000, to $1,153,000 in
2004 as compared to $276,000 in 2003. This increase was
primarily due to receipt by the Company in 2004 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. See "Part I. Item 1.
Recent Developments." The Company also received insurance
refunds related to its previous ownership in Seabrook of
approximately $190,000 in 2004. In 2004, the Company negotiated
a final settlement of the remaining accrued liability related to
the sale of Seabrook and paid approximately $168,000 in
settlement of this liability. As a result of this liability
being settled for less than the Company had previously estimated
and accrued for, the Company recorded other income of
approximately $634,000 in 2004. Offsetting these income items,
the Company recorded a deduction of $255,000 for a directors and
officers liability insurance policy covering claims, including
nuclear related claims, for events that may have occurred prior
to July 2004. The Company is currently in non-nuclear related
energy businesses, and as such, directors and officers liability
insurance coverage is available at significantly lower premiums
for current operations. Other Income in 2003 was primarily from
a distribution representing the Company's share of distributions
under mutual insurance company policies associated with Seabrook.

The Company recognized an extraordinary gain of $278,000 in
2004 upon the consolidation of HoustonStreet. As of May 1, 2004,
BayCorp's ownership in HoustonStreet was 59.7%, and in accordance
with ARB 51 the Company reconsolidated HoustonStreet. The
Company accounted for the reconsolidation of HoustonStreet in
accordance with EITF Topic D-84, and accordingly, followed step
acquisition accounting. 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 "Part I. Item 1. Recent
Developments."

BayCorp's total operating expenses were approximately
$8,948,000 in 2003 and approximately $47,327,000 in 2002.
Included in 2003 operating expenses was approximately $3,901,000
for purchased power. The Company purchased power to satisfy its
obligation under its long-term power sales contract with Unitil
at an average purchase price of 4.91 cents per Kwh. The Company
recognized an unrealized loss of $2,189,400 in 2003. The Company
recognized approximately $263,000 of deferred gain on the Unitil
contract in 2003. Also included in 2003 operating expenses were
approximately $2,705,000 in administrative and general expenses,
which included approximately $785,800 in Company salaries and
related benefits, $409,600 in non-cash charges for the variable
accounting for stock options, and approximately $179,000 for an
accrual 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. Corporate
insurance expense was approximately $226,400 in 2003. Legal and
other outside services were approximately $1,379,200, primarily
for services associated with the Company's Tender Offer, SEC
filing requirements and costs associated with new business
development efforts. Administrative and general expenses were
reduced by approximately $343,700 after receiving these funds in
recovery of a previously recorded bad debt. See "Part I.Item 1.
Recent Developments - Enron Claim." Taxes other than income were
approximately $416,000, primarily for taxes associated with
Seabrook closing costs. Operating expenses in 2002 included ten
months of Seabrook operating costs in addition to BayCorp
corporate expenses.

15

Interest and dividend income decreased approximately $380,000,
or 43%, to approximately $503,000 in 2003 as compared to
approximately $883,000 in 2002, primarily due to higher average
cash balances in 2002 and higher earnings on investments
available to the Company. Other Income in 2003 was approximately
$276,000, primarily from a distribution representing the
Company's share of distributions under mutual insurance company
policies associated with Seabrook. Other income in 2002 included
approximately $59,774,000 from the sale by BayCorp of its
ownership interest in Seabrook.

Net Operating Losses

At December 31, 2003 and 2004, the Company had net operating
loss carryforwards ("NOLs") for federal income tax purposes of
approximately $167 million and $188 million, respectively, before
limitations. The Company's NOL before limitations at December
31, 2004 includes $167 million attributable to BayCorp and $21
million attributable to HoustonStreet. The Company's federal
NOLs will expire during the years ending December 31, 2005
through 2023 if not used to offset future taxable income. An
ownership change occurs within the meaning of Internal Revenue
Code ("IRC") Section 382 when the ownership percentage of 5% or
greater shareholders in a company increases by more than 50% over
a three-year period. The Company believes that the Tender Offer
in March 2003 and related transactions resulted in a change in
ownership of BayCorp within the meaning of IRC Section 382. As
such, BayCorp may be precluded from utilizing its federal and
state NOLs originating prior to the ownership change. BayCorp
estimates that approximately $165 million of its NOL is subject
to an annual limitation for purposes of IRC Section 382 of
approximately $390,000 per year. As a result of this limitation,
all or a portion of BayCorp's federal and state NOLs may expire
unused. Additional NOLs and other tax attributes generated
subsequent to the Tender Offer may be limited in the event of
certain future changes of ownership by significant shareholders.
The Company also believes that all or a portion of
HoustonStreet's NOLs may be subject to an IRC Section 382
limitation. Accordingly, all or a portion of HoustonStreet's
federal and state NOLs may expire unused.

The following selected quarterly financial information is
unaudited and includes all adjustments consisting of normal
recurring accruals which are, in the opinion of management,
necessary for a fair statement of results of operations for such
periods (dollars are in thousands, except per share data):

On November 1, 2002, the Company closed the sale of its
interests in Seabrook and received cash consideration of
approximately $113 million for its interests in the Seabrook
Project. The Company realized a gain on the sale of its Seabrook
assets of approximately $60 million, or $7.12 and $6.81 per basic
and diluted share, respectively.

LIQUIDITY AND CAPITAL RESOURCES

BayCorp's long-term energy sales contract with Unitil and the
sale of electricity generated at Great Bay Hydro were the primary
sources of operating revenues in 2004. The cash generated from
these activities was not sufficient to meet the Company's ongoing
cash requirements in 2004. The Company sold power under the
Unitil PPA in 2004 at 5.04 cents per kWh and incurred purchased
power costs at an average purchase price of 5.10 cents per

16

kWh. The average selling price for electricity generated by
Great Bay Hydro was 5.01 cents per kWh. As of December 31, 2004,
the Company had approximately $9,627,000 in cash and cash
equivalents and $2,500,000 in restricted cash.

The Company had a net loss in 2004 of approximately $2,538,000.
There was a non-cash charge for an unrealized loss on the mark-to-
market of the Unitil PPA of approximately $3,428,000 and a non-
cash recognition of deferred gain on the Unitil PPA of
approximately $263,000. The value of this contract is based on
current projections of power prices over the life of the
contract. Forward power prices increased during 2004 primarily
due to increases in the forward price of natural gas. Power
generating plants that use natural gas as a fuel source are
increasingly on the margin and therefore are setting the forward
price of power in NEPOOL. Accordingly, the price of power in
NEPOOL is highly dependent on the price of natural gas. Other
non-cash charges included compensation expense of approximately
$172,000 for the variable accounting of certain employee stock
options. The Company also recognized a non-cash extraordinary
gain of $278,000 in 2004 upon the consolidation of HoustonStreet
as of May 1, 2004.

An increase in accounts receivable in 2004 of approximately
$207,000 was primarily attributable to accounts receivable at
Great Bay Hydro and Nacogdoches Gas, both of which were new
companies created in 2004, and HoustonStreet accounts receiveable
of approximately $122,000 which are reflected in the Company's
statements as a result of the consolidation of HoustonStreet in
2004. See "Part I. Item I. Recent Deveopments - HoustonStreet."

A decrease of approximately $2,027,000 in prepaids and other
assets 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 Seabrook in November 2002.
The Company received approximately $572,000 in 2004 relative to
the termination of these accounts and, as a result of the total
liability being settled for less than the Company had previously
estimated and accrued for, these accounts were reduced by
approximately $939,000. In addition, there was a reduction in
the deposit required by NEPOOL in 2004 of approximately $990,000.
The decrease in prepaids and other assets was also attributable
to a reduction of approximately $91,000 in prepaid insurance
costs. The Company was able to reduce its annual premium for
directors and officers liability insurance by approximately 74%
in 2004 because the the Company is currently in non-nuclear
related energy businesses, and as such, directors and officers
liability insurance coverage is available at significantly lower
premiums for current operations.

A decrease in accounts payable and accrued expenses of
approximately $221,000 was primarily attributable to the timing
of purchased power payments by Great Bay Power Marketing. As a
result of a change in NEPOOL policy, purchased power payments
from Great Bay Power Marketing to NEPOOL were due weekly as of
July 15, 2004, whereas prior to that date they had been due and
payable on a monthly basis.

The Company recorded a net increase in miscellaneous and other
liabilities of 1,448,000 in 2004. This increase was due in part
to the cash settlement the Company received in 2004 from
Citizens. On September 28, 2004, Great Bay Hydro agreed to
terminate Citizens' indemnification requirements in exchange for
Citizens' payment to Great Bay Hydro of approximately $4.4
million. After receipt of these funds, Great Bay Hydro paid
approximately $1.2 milllion for costs incurred in 2004. The
remaining approximately $3.2 million is included in the Company's
balance sheet as cash along with corresponding short-term and
long-term liabilities of $718,000 and $2,479,000, respectively,
for the estimated remaining cost of FERC compliance. See "Part
I. Item 1. Recent Developments - Great Bay Hydro." Other
liabilites were also reduced by approximately $1,741,000 as a
result of 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 Seabrook in November 2002 being settled for less
than the Company had previously estimated and accrued.

Cash flows from investing activities included cash of
approximately $393,000 recorded upon the consolidation of
HoustonStreet. See "Part I. Item 1. Recent Developments -
HoustonStreet." Investing activities in 2004 also included
$45,000 paid by the Company's subsidiary, Nacogdoches Power, to
acquire development rights to an approximate 1000 MW natural gas-
fired power plant project in Nacogdoches County, Texas. In the
fourth quarter of 2004, Nacogdoches Gas entered into agreements
with Sonerra under which Nacogdoches Gas acquired an approximate
10% working interest in two natural gas and oil producing wells
for approximately $690,000.

During 2004, the Company repurchased 88,551 shares of its
common stock for approximately $1,157,000, at an average per
share price of approximately $13.06. The Company received
approximately $41,000 from the exercise of employee stock options
in 2004.

17

The Company's contractual obligations as of December 31, 2004
were as follows:

Following the sale of Seabrook in the fourth quarter of 2002
and the completion of the Company's Tender Offer in the first
quarter of 2003, the Company evaluated and pursued energy-related
investment opportunities. The Company continues to focus on the
acquisition of energy-related assets.

BayCorp has continued to seek to acquire either complete or
partial ownership interests in electric generating facilities.
This is an area where BayCorp has a solid understanding of the
market and the value of and risks related to those assets. There
are also a large number of generating assets that have been
offered or are currently being 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, however, substantial competition for
the acquisition of these assets, with a number of new
participants entering the market, including private equity funds,
hedge funds, insurance companies, Canadian income funds and
investment banks. The Company remains 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, (2)
international assets that have stable, long-term off-take
contracts, and (3) merchant or contracted renewable assets.
BayCorp is also pursuing other energy-related investments
including development of new power generation facilities and
hydrocarbon (natural gas and oil) reserves and the further
development of HoustonStreet, its online trading platform.

BayCorp's first acquisition following its sale of Seabrook
was the acquisition through Great Bay Hydro of the Vermont
generating plants 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 and West Charleston, Vermont. 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 a portion of BayCorp's contractual obligation to supply
9.06 megawatts to Unitil through 2010.

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, and this amount is
reflected in the Company's financial statements. In addition,
Citizens 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. On
September 28, 2004, Great Bay Hydro agreed to terminate Citizens'
indemnification requirements in exchange for Citizens' payment to
Great Bay Hydro of approximately $4.4 million, since the receipt
of which Great Bay Hydro paid approximately $1.2 million for
costs incurred as of December 31, 2004 for FERC compliance. The
remaining approximately $3.2 million is included in the Company's
December 31, 2004 balance sheet as cash. The balance sheet
reflects corresponding short-term and long-term liabilities of
$719,000 and $2,479,000, respectively, for the estimated
remaining cost of FERC compliance. The Company expects to
complete the requirements of FERC license within those amounts.

The Company formed Nacogdoches Power in 2004, and thru this
subsidiary, acquired the development rights to the Sterne Power
project in the town of Sacul in Nacogdoches County, Texas. The
Sterne project was inititally designed and has been permitted as
a nominal 1000 MW plant. The project received its air quality
permit in December 2002, and the air quality permit currently is
effective through December 7, 2005. An additional eighteen-month
extension to the permit may be requested by Nacogdoches Power.
The wastewater discharge permit is currently effective through
August 1, 2006. The project has an option to purchase the land
for the project and options to acquire easements for transmission
lines and/or gas pipelines. Those options have varying
expiration dates in 2005 and 2006 and are either being extended
or exercised. Nacogdoches Power is currently evaluating the
plant configuration. Further, Nacogdoches Power is seeking to
enter into power offtake contracts, although none have been
executed. A schedule for the development of the project has not
been established. The total cost of the Sterne project will
depend on the final plant design and will require substantial
additional financing. The amount and type of any such financing
has not been determined.

18

As part of its efforts to secure a natural gas supply for the
Sterne Power project, the Company determined that significant
natural gas and oil exploration and production activities were
being carried out in Nacogdoches County, Texas near the location
of the Sterne Power project. It was through this process that
the Company identified the oil and gas development opportunity
with Sonerra.

The Company formed Nacogdoches Gas in 2004, and in the fourth
quarter of 2004, Nacogdoches Gas entered into agreements with
Sonerra under which Nacogdoches Gas acquired an approximate 10%
working interest (of a 77% net revenue interest) in two natural
gas and oil producing wells. Nacogdoches Gas entered into an
agreement dated January 7, 2005 with Sonerra, under which
Nacogdoches Gas will fund the development of three natural gas
and oil wells. This agreement was amended as of March 14, 2005,
increasing the number of wells from three to four. In addition,
Nacogdoches Gas has an option to participate in Sonerra's
continued development of up to 15 additional natural gas and oil
wells over the next two years. Under the agreement with Sonerra,
Nacogdoches Gas will fund the total cost of the new wells (with
the provision that up to 25% of the working interest may be
funded and acquired by other parties) and will receive a priority
return of 90% of the working interest funded until its aggregate
investment is recovered. Once Nacogdoches Gas has recovered all
of its investment in the wells from the net proceeds of all wells
and any other revenues from the assets acquired under the
development agreement, Sonerra and Nacogdoches Gas will own equal
amounts of the working interests funded. The working interests
include undivided leasehold interests in the gas units and the
production and gathering equipment.

Sonerra directly or indirectly controls approximately 36,000
acres either through leases or as land held by production within
a project area in Nacogdoches County in east Texas. Sonerra also
has acquired 3D seismic data covering approximately 31,000 acres
within the project area, of which 24,000 acres are under lease or
held by production directly or indirectly by Sonerra.

Since entering the January 7, 2005 agreement with Sonerra,
Nacogdoches Gas has funded the development of three wells. The
net revenue interest in each of the wells being funded by
Nacogdoches Gas is 77%, which means that the working interests
bear 100% of the operating costs of the wells but receive 77% of
the net revenues from the wells with the remaining 23% of the net
revenues paid to the lessor and other royalty interests. The
first of those wells, Round Mountain, a James Lime horizontal
natural gas well, began production in January 2005 and through
the end of February 2005 has produced 95 million cubic feet of
natural gas. The second well, Wicked Wolf, a James Lime
horizontal natural gas well, began production in early March
2005. The third well, Painted Horse, a Rodessa vertical natural
gas well, is being developed.

Under the terms of the January 7, 2005 agreement as amended,
Sonerra will sequentially present five additional sets of three
well prospects to Nacogdoches Gas. Upon the presentation of a
set of three well prospects, Nacogdoches Gas, at its option, may
proceed with the development of those three well prospects.
Should Nacogdoches Gas decide not to proceed with the development
of any given set of three well prospects, its right to
participate in future well sets terminates.

The total cost of an individual well typically ranges from $2.0
million to $3.5 million and includes the acquisition of leases
for the land, the drilling and completion of the wells and the
construction of extensions of the gas gathering system. The
total cost depends on the type of well, the amount of land
required for the production unit, the length of gas gathering
pipeline and the completion technique.

Other exploration and production companies are operating in
Nacogdoches County and may seek to acquire land in or near the
project area being developed by Sonerra and Nacogdoches Gas.
Nacogdoches Gas has no employees.

Various federal, state and local laws relating to the discharge
of materials into the environment, or otherwise relating to the
protection of the environment, directly impact the development of
oil and gas wells and their costs. These laws and regulations
govern, among other things, emissions to the atmosphere,
discharges of pollutants into the waters of the United States,
underground injection of waste water, the generation, storage,
transportation and disposal of waste materials and the protection
of public health, natural resources and wildlife. The
anticipated costs of development of oil and natural gas wells by
Nacogdoches Gas and Sonerra includes funding for the measures
necessary to meet environmental compliance requirements and no
additional environmental compliance costs are anticipated.

On March 15, 2005, the Company and all of its wholly owned
subsidiaries entered into a $10,250,000 Convertible Note and a
Pledge Agreement with Sloan Group Ltd., a Bahamas corporation.
The debt, which accrues interest at 8% per annum and is due and
payable in full on December 15, 2005, is convertible by the Sloan
Group at any time between November 15, 2005 and December 15, 2005
(or any time after the occurrence and during the continuance of a
material event of default under the Note) into shares of
BayCorp's common stock, $.01 par value at a price of $14.04 per
share. The Note does not allow BayCorp to prepay the debt and
provides for a 2% premium on the

19

interest rate in the event of a default. Payment of the Note
may be accelerated in the event of a material event of default,
which is customary for this type of financing.

In addition to BayCorp, the borrowers under the Note include
the following subsidiaries of BayCorp: GBH Maine, GBH Benton,
Great Bay Power Marketing, Great Bay Hydro, BayCorp Ventures,
Nacogdoches Power and Nacogdoches Gas. As security for the Note,
the borrowers entered into the Pledge Agreement with the Sloan
Group. Under the Pledge Agreement, BayCorp pledged its equity
interests in GBH Maine and Nacogdoches Gas to the Sloan Group,
GBH Maine pledged its equity interests in GBH Benton and Benton
Falls to the Sloan Group, GBH Benton pledged its equity interests
in Benton Falls to the Sloan Group, and Nacogdoches Gas, GBH
Maine and GBH Benton pledged to the Sloan Group any equity
interest that they may obtain in other entities while the debt is
outstanding.

BayCorp used proceeds from the financing to finance the
acquisition of Benton Falls by GBH Maine and GBH Benton and
intends to use proceeds from the financing to continue the
development of natural gas and oil wells in East Texas under its
Project Development Agreement with Sonerra and for other
strategic and general corporate purposes.

In March 2005, BayCorp formed GBH Maine and GBH Benton. On
March 16, 2005, GBH Maine and GBH Benton acquired Benton Falls
Associates, a limited partnership that owns a 4.3 megawatt
hydroelectric generation plant in Benton, Maine from The Arcadia
Companies for approximately $2.2 million. The Company assumed
operating responsibility for Benton Falls, the output of which is
sold to CMP under a power purchase agreement that expires in
December 2007. The rates under the CMP PPA are indexed to CMP's
standard rates for energy and capacity purchases established
annually by the Maine Public Utilities Commission.

The Company intends to pursue investments that will 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 Company believes that its current cash, together with the
anticipated proceeds from the sale of electricity by Great Bay
Power Marketing, Great Bay Hydro and Benton Falls, and the
proceeds from the sale of natural gas by Nacogdoches Gas, will be
sufficient to enable the Company to meet the anticipated cash
requirements of its current operations in 2005. If the Company
is unsuccessful in identifying and making additional investments,
the Company may pursue alternative strategies, including sale of
the Company or its assets, or deregistration.

The Company filed its 2002 tax return in September 2003 and
requested a refund of approximately $941,000 from the State of
New Hampshire for overpayment of 2002 state income taxes. The
State of New Hampshire Department of Revenue Administration
("NHDRA") began an examination of the Company's 2000, 2001 and
2002 tax returns in December 2003. Given the uncertainty as to
the outcome of the audit, the Company did not record the
requested refund as of December 31, 2003. The audit was
concluded in January 2005. A settlement was reached between the
Company and the NHDRA in February 2005 and the Company received a
refund of $225,000 in Feburary 2005 which it will record as
income during 2005.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

This Annual 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 natural gas and
oil, electric generating assets and other energy-related
investments and is considering 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 need to obtain debt or equity
financing in order to pursue certain opportunities.

20

History of Losses. BayCorp reported operating losses in 2004
and in 2003 and reported operating income for 2002 and 2001.
Prior to 2001, BayCorp had never reported an operating profit for
any year since its incorporation.

Liquidity Need. As of December 31, 2004, BayCorp had
approximately $12.1 million in cash and cash equivalents,
restricted cash and short-term investments. On March 15, 2005,
BayCorp closed a $10.25 million convertible debt financing with
Sloan Group Ltd. The debt, which accrues interest at 8% and is
due on December 15, 2005, is convertible at any time between
November 15, 2005 and December 15, 2005 into shares of the
Company's common stock at a price of $14.04 per share. BayCorp
used proceeds from the financing to finance the acquisition of
Benton Falls by GBH Maine and GBH Benton and intends to use
proceeds from the financing to continue the development of
natural gas and oil wells in East Texas under its Project
Development Agreement with Sonerra and for other strategic and
general corporate purposes. The Company believes that such cash,
together with the anticipated proceeds from the sale of
electricity by Great Bay Power Marketing, Great Bay Hydro and
Benton Falls, and from the sale of natural gas and oil by
Nacogdoches Gas, will be sufficient to enable the Company and its
wholly owned subsidiaries to meet their cash requirements in
2005. 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.

Purchased Power Price Risk. The price of electricity is
subject to fluctuations resulting from changes in supply and
demand. The Company is party to a purchased power contract with
Unitil that provides for Great Bay Power Marketing to sell to
Unitil 9.06 MWs at $50.34 per MWh. The Unitil PPA continues
through October 31, 2010, and Unitil has an option, expiring
November 1, 2005, to extend the Unitil PPA for up to 12 years
until 2022. The Company must purchase power to meet its
obligation under the PPA. The prices at which Great Bay Power
Marketing must purchase its power supply could increase
significantly from current levels.

Extensive Government Regulation of Electric Energy Industry.
The electric energy industry is subject to extensive regulation
by federal and state agencies. Great Bay Power Marketing, Great
Bay Hydro and Benton Falls are subject to the jurisdiction of the
FERC and, as a result, are required to file with FERC all
contracts for the sale of electricity. FERC's jurisdiction also
includes, among other things, the sale, lease, merger,
consolidation or other disposition of facilities, interconnection
of certain facilities, accounts, service and property records.
The Sterne Power project is subject to the terms of its
environmental permits. The Sterne Power project currently has an
air quality permit and wastewater discharge permit issued by the
Texas Commission on Environmental Quality. Additional
environmental permits will be required prior to the start of
operation of the project. In addition, prior to operation of the
Sterne Power project, Nacogdoches Power will seek designation by
FERC as an EWG.

Extensive Government Regulation of Oil and Gas Industry. There
are numerous federal and state laws and regulations governing the
oil and gas industry that are often changed in response to the
current political or economic environment. Compliance with this
regulatory burden is often difficult and costly and may carry
substantial penalties for noncompliance. The following are some
specific regulations that may affect oil and gas activities. The
impact of these or future legislative or regulatory initiatives
cannot be predicted.

Federal Energy Bill. After failing to pass legislation in
2003 and 2004, Congress is currently considering a new energy
bill. The potential effect of this legislation is unknown, but
it may include certain tax incentives for oil and gas producers
and changes in the federal regulatory framework.

Federal Regulation of Natural Gas. The interstate
transportation and certain sales for resale of natural gas,
including transportation rates charged and various other matters,
is subject to federal regulation by FERC. Federal wellhead price
controls on all domestic gas were terminated on January 1, 1993,
so gathering systems are currently not subject to FERC
regulation. The impact of future government regulation on any
natural gas facilities cannot be predicted. Although FERC's
regulations should generally facilitate the transportation of gas
produced from producing properties and the direct access to end-
user markets, the future impact of these regulations on marketing
production or on gas transportation business cannot be predicted.
BayCorp and its subsidiaries, however, should not be affected
differently than competing producers and marketers.

21

Federal Regulation of Oil. Sales of crude oil, condensate and
natural gas liquids are not currently regulated and are made at
market prices. The net price received from the sale of these
products is affected by market transportation costs. Under rules
adopted by FERC effective January 1995, interstate oil pipelines
can change rates based on an inflation index, though other rate
mechanisms may be used in specific circumstances.

State Regulation. Oil and gas operations are subject to
various types of regulation at the state and local levels. Such
regulation includes requirements for drilling permits, the method
of developing new fields, the spacing and operations of wells,
and waste prevention. The production rate may be regulated and
the maximum daily production allowable from oil and gas wells may
be established on a market demand or conservation basis. These
regulations may limit production by well and the number of wells
that can be drilled. To the extent that such gas is produced,
transported and consumed wholly within one state, such operations
may, in certain instances, be subject to the state's
administrative authority charged with regulating pipelines. The
rates that can be charged for gas, the transportation of gas, and
the construction and operation of such pipelines would be subject
to the regulations governing such matters. Certain states have
recently adopted regulations with respect to gathering systems,
and other states are considering similar regulations. Whether
new regulations will be adopted or, if adopted, the effect these
rules may have on gathering systems cannot be predicted.

Federal, State or Native American Leases. Operations on
federal, state or Native American oil and gas leases are subject
to numerous restrictions, including nondiscrimination statutes.
Such operations must be conducted pursuant to certain on-site
security regulations and other permits and authorizations issued
by the Bureau of Land Management, Minerals Management Service and
other agencies.

Environmental Regulations. Various federal, state and local
laws regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment,
directly impact oil and gas exploration, development and
production operations, and consequently may impact operations and
costs. These laws and regulations govern, among other things,
emissions to the atmosphere, discharges of pollutants into waters
of the United States, underground injection of waste water, the
generation, storage, transportation and disposal of waste
materials, and protection of public health, natural resources,
and wildlife. These laws and regulations may impose substantial
liabilities for noncompliance and for any contamination resulting
from operations and may require the suspension or cessation of
operations in affected areas. To date, BayCorp has not expended
any material amounts to comply with such regulations, and
management does not currently anticipate that future compliance
will have a materially adverse effect on BayCorp's consolidated
financial position or results of operations. BayCorp is
committed to environmental protection and believes that it is in
substantial compliance with applicable environmental laws and
regulations. There are no known issues that have a significant
adverse effect on the permitting process or permit compliance
status of any of its facilities or operations. BayCorp expects
that it will make expenditures in efforts to comply with
environmental regulations and requirements. These costs are
considered a normal, recurring cost of ongoing operations and not
an extraordinary cost of compliance with government regulations.

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
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.

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 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.

22

Decommissioning

Great Bay and Little Bay recognized a liability based on the
present value of the estimated future cash outflows required to
satisfy their obligations using a risk free rate. As of December
31, 2004 and 2003, the decommissioning liability was $0 as a
result of the sale of Seabrook and FPL Energy Seabrook's
assumption of all decommissioning liability on November 1, 2002.
Great Bay and Little Bay accreted their share of the Seabrook
Project's decommissioning liability. The accretion was a non-
cash charge and recognized their liability related to the closure
and decommissioning of the nuclear plant in current year dollars
over the licensing period of the plant. The non-cash accretion
charge recorded in the accompanied consolidated statements of
income was $0, $0 and $4,105,000 for the years ended December 31,
2004, 2003 and 2002, respectively.

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.

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 $0, $77,000 and $2,467,700 for 2004, 2003 and 2002,
respectively.

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 in 2004 and 2003 of $172,000 and $153,000, respectively,
for these options.

In December 2004, HoustonStreet issued 25,000 options to its
President under the 1999 plan. The options were granted in three
tranches with exercise prices of $6.47, $12.95 and $25.89. The
options vest monthly over a 3-year period. HoustonStreet did not
record a charge with respect to these options in accordance with
APB No. 25, as the fair market value of HoustonStreet common
stock was equal to or less than each of the exercise prices.

Principles of Consolidation

BayCorp's Consolidated Financial Statements include the
accounts of the Company and all its subsidiaries. Until November
1, 2002, the Company had a 15% joint ownership interest in
Seabrook. The Company recorded in its financial statements its
proportional share of Seabrook's assets, liabilities and
expenses. In November 2004, BayCorp formed Nacogdoches Gas,
which acquired an approximate 10% working interest in two natural
gas and oil producing wells in the fourth quarter of 2004. The
Company recorded in its financial statements its proportional
share of well revenues 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, the FASB issued Interpretation No. ("FIN") 46,
Consolidation of Variable Interest Entities - An Interpretation
of ARB No. 51, as amended by FIN 46R. 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 deemed that its investment,
HoustonStreet , was not a variable interest entity. Therefore,
prior to May 1, 2004 and when BayCorp held a minority interest in
HoustonStreet, the Company accounted for HoustonStreet under the
equity method. A recapitalization of HoustonStreet was completed
effective May 1, 2004, and as

23

a result, BayCorp's ownership interest in HoustonStreet increased
above 50%. As a result of this recapitalization, BayCorp began
consolidating HoustonStreet as of May 1, 2004.

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 or as a hedge
under Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133) are recorded at fair value with changes in fair
value recorded in earnings. 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.

Commodity Price Risk

Great Bay Power Marketing is a party to the Unitil PPA, which
as amended, provides for the sale of 9.06 MWs of power to Unitil
at $50.34 MWh through October 31, 2010. Unitil has an option,
which expires November 1, 2005, to extend the Unitil PPA for up
to 12 years, from November 1, 2010 through October 30, 2022. See
"Item 1. Purchased Power Agreements." Great Bay Power Marketing
purchases power to meet its obligation under this contract and,
as such, is exposed to market price fluctuations for the price of
power.

The Unitil PPA was entered into for purposes other than trading
and is subject to commodity price risk. The prices of
electricity are subject to fluctuations resulting from changes in
supply and demand. In 2004, Great Bay Power Marketing tracked
market exposure on its forward firm energy contract 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 forward firm power commitment represents
an estimation of the gain, or loss, that Great Bay Power
Marketing would have experienced if open firm commitments were
covered at then-current market prices. Great Bay Power Marketing
had unrealized losses in 2004 and 2003 of approximately
$3,427,000 and $2,180,000, respectively, on its forward firm
energy contract.

The Company does not purchase derivative commodity instruments
to hedge its exposure to the commodity price risk. The
generation and sale of electricity by Great Bay Hydro of
approximately 4 megawatts functions as a physical hedge against
the commodity risk.

The following table provides information about the Company's
forward firm energy contract that is subject to changes in
commodity prices, showing the fair value of the contract as of
December 31 2004, 2003 and 2002 and the unrealized gain or loss
for the last three fiscal years.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial statements and supplementary data are presented in
Part IV, Item 15 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES.

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

24

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-14(c) and 15d-14 (c)) within 90 days before the filing of
this Annual 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.

ITEM 9B. OTHER INFORMATION.

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

(a) Directors. The information with respect to directors
required under this item is incorporated by reference to the
section captioned "Election of Directors" in the Company's Proxy
Statement with respect to the Annual Meeting of Stockholders to
be held on May 17, 2005.

(b) Executive Officers. The information with respect to
executive officers required under this item is incorporated by
reference to Part I, Item 1 of this Annual Report on Form 10-K.

(c) Audit Committee and Audit Committee Financial Expert. The
information with respect to the registrant's audit committee
required under this item is incorporated by reference to the
section captioned "Report of the Audit Committee" in the
Company's Proxy Statement with respect to the Annual Meeting of
Shareholders to be held on May 17, 2005.

(d) Code of Ethics. The information with respect to the
registrant's adoption of a Code of Ethics required under this
disclosure is incorporated by reference to the section captioned
"Code of Business Conduct" in the Company's Proxy Statement with
respect to the Annual Meeting of Shareholders to be held on May
17, 2005.

ITEM 11. EXECUTIVE COMPENSATION.

The information required under this item is incorporated herein
by reference to the section entitled "Election of Directors -
Compensation of Directors," "-Executive Compensation,"
"-Employment Agreements," "-Report of the Compensation Committee"
and "-Stock Performance Graph" in the Company's Proxy Statement
with respect to the Annual Meeting of Stockholders to be held May
17, 2005.

25

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required under this item is incorporated herein
by reference to Part II, Item 5. of this Annual Report on Form 10-
K and the section entitled " -Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy
Statement with respect to the Annual Meeting to be held on May
17, 2005.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required under this item is incorporated herein
by reference to the section entitled "Certain Relationships and
Related Transactions" in the Company's Proxy Statement with
respect to the Annual Meeting to be held on May 17, 2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required under this item is incorporated herein
by reference to the section entitled "Matters Relating to the
Independent Auditors" in the Company's Proxy Statement with
respect to the Annual Meeting of Stockholders to be held May 17,
2005.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

Documents filed as a part of this Form 10-K:

1. Financial Statements. The Consolidated Financial Statements
listed in the Index to Consolidated Financial Statements and
Financial Statement Schedules are filed as part of this
Annual Report on Form 10-K.

2. Exhibits. The Exhibits listed in the Exhibit Index
immediately preceding such Exhibits are filed as part of
this Annual Report on Form 10-K.

26

INDEX TO FINANCIAL STATEMENTS

BAYCORP HOLDINGS, LTD.

27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors & Shareholders of
BayCorp Holdings, Ltd.

We have audited the accompanying consolidated balance sheets of
BayCorp Holdings, Ltd. (a Delaware corporation) and its
subsidiaries, as of December 31, 2004 and 2003, and the related
consolidated statements of operations and comprehensive income
(loss), changes in stockholders' equity and cash flows for each
of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States.) Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control over
financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of BayCorp Holdings, Ltd. and its subsidiaries as of
December 31, 2004 and 2003, and the results of their operations
and cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States.

VITALE, CATURANO & COMPANY LTD.

Boston, Massachusetts
February 11, 2005,
(except for certain matters discussed in
Footnotes 1 and 8 as to which the date is March 16, 2005.)

F-1

BAYCORP HOLDINGS, LTD.

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

F-2

BAYCORP HOLDINGS, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

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

F-3

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

F-4

BAYCORP HOLDINGS, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)

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

F-5

BAYCORP HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

1. SUMMARY OF OPERATIONS, SIGNIFICANT TRANSACTIONS AND
ACCOUNTING POLICIES

A. THE COMPANY

BayCorp Holdings, Ltd. ("BayCorp" or the "Company") is an
unregulated holding company incorporated in Delaware in 1996. As
of December 31, 2004, BayCorp had five wholly owned subsidiaries
including Great Bay Power Marketing, Inc., Great Bay Hydro
Corporation, Nacogdoches Power, LLC, Nacogdoches Gas, LLC, and
BayCorp Ventures, LLC. BayCorp also held a majority interest in
HoustonStreet Exchange, Inc. as of December 31, 2004.

Until January 1, 2003, BayCorp had two principal operating
subsidiaries that generated and traded 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. In December
2002, BayCorp dissolved Great Bay and Little Bay.

In October 2002, BayCorp formed two subsidiaries, Great Bay
Power Marketing, Inc. ("Great Bay Power Marketing") and BayCorp
Ventures, LLC. ("BayCorp Ventures"). Great Bay Power Marketing,
incorporated in Maine as a wholly owned subsidiary, 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 4. Purchased Power
Agreements." Effective January 1, 2003, Great Bay Power
Marketing assumed the Unitil contract and holds the letter of
credit established to secure Great Bay Power Marketing's
obligations under the Unitil contract. BayCorp formed BayCorp
Ventures, a Delaware limited liability company and a wholly owned
subsidiary, 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 that took place in 2003.

In September 2003, BayCorp formed Great Bay Hydro Corporation
("Great Bay Hydro"), a New Hampshire corporation, as a wholly
owned subsidiary. Great Bay Hydro 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. Great Bay Hydro completed the acquisition 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 and West Charleston, Vermont.
Great Bay Hydro uses the output of the Newport plant as a
physical hedge for a portion of BayCorp's contractual obligation
to supply 9.06 megawatts to Unitil through 2010. 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, and this amount is reflected in the
Company's financial statements. In addition, Citizens agreed to
indemnify Great Bay Hydro 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. On September 28, 2004, Great Bay Hydro agreed
to terminate Citizens' indemnification requirements in exchange
for Citizens' payment to Great Bay Hydro of approximately $4.4
million, since the receipt of which Great Bay Hydro paid
approximately $1.2 million for costs incurred through December
31, 2004 for FERC compliance. The balance sheet at December 31,
2004 reflects corresponding short-term and long-term liabilities
of $719,000 and $2,479,000, respectively, for the estimated
remaining cost of FERC compliance.

In June 2004, Great Bay Hydro received FERC approval of its
designation as an exempt wholesale generator ("EWG"). In order
to maintain EWG status, Great Bay Hydro must engage exclusively
in the business of owning or operating one or more "eligible
facilities" and selling electricity only at wholesale (i.e. not
to end users) and incidental activities. An "eligible facility"
is a facility used for the generation of electric energy
exclusively at wholesale or used for the generation of electric
energy and leased to one or more public utility companies. In
the case of Great Bay Hydro, its Vermont generating facility is
an "eligible facility."

In October 2004, BayCorp formed Nacogdoches Power, LLC
("Nacogdoches Power"), a New Hampshire limited liability company,
as a wholly owned subsidiary. On October 19, 2004, Nacogdoches
Power acquired the development

F-6

rights to an approximate 1000 MW natural gas-fired power plant
project in Nacogdoches County, Texas, located in east Texas. The
project received its air quality permit and its wastewater
discharge permit and has options to acquire the land and a number
of easements for the plant. The proposed plant site is located
near the Electric Reliability Council of Texas ("ERCOT") and the
Southwest Power Pool high voltage transmission lines as well as a
source of cooling water and natural gas lines. Nacogdoches Power
is pursuing the development of this project with an initial focus
on securing gas supply and power offtake contracts.

In November 2004, BayCorp formed Nacogdoches Gas, LLC
("Nacogdoches Gas"), a New Hampshire limited liability company,
as a wholly owned subsidiary. In the fourth quarter of 2004,
Nacogdoches Gas entered into agreements with Sonerra Resources
Corporation ("Sonerra"), an independent oil and gas exploration,
development and operating company, under which Nacogdoches Gas
acquired an approximate 10% working interest (of a 77% net
revenue interest) in two natural gas and oil producing wells. Oil
and gas investments in 2004 were approximately $690,000 for the
10% interests in two wells. Nacogdoches Gas entered into an
agreement, dated January 7, 2005 with Sonerra, under which
Nacogdoches Gas will fund the development of three natural gas
and oil wells. This agreement was amended as of March 14, 2005,
increasing the number of wells from three to four. In addition,
Nacogdoches Gas has an option to participate in Sonerra's
continued development of up to 15 additional natural gas and oil
wells over the next two years. Under the agreement with Sonerra,
Nacogdoches Gas will fund the total cost of the new wells (with
the provision that up to 25% of the working interest may be
funded and acquired by other parties) and will receive a priority
return of 90% of the working interest funded until its aggregate
investment is recovered. Once Nacogdoches Gas has recovered all
of its investment in the wells from the net proceeds of all wells
and any other revenues from the assets acquired under the
development agreement, Sonerra and Nacogdoches Gas will own equal
amounts of the working interests funded. The working interests
include undivided leasehold interests in the gas units and the
production and gathering equipment.

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.
HoustonStreet developed and operates HoustonStreet.com, an
Internet-based independent crude oil and refined products trading
exchange in the United States.

As of December 31, 1999, the Company owned 100% of
HoustonStreet. HoustonStreet raised additional equity in 2000
from outside investors and as a result, as of December 4, 2000,
the Company's ownership fell below 50%, to 45.9%. Subsequently,
the Company deconsolidated HoustonStreet as of December 4, 2000,
started accounting for this investment on the equity method and
suspended recognition of additional HoustonStreet losses as of
that date. A recapitalization of HoustonStreet was completed in
the second quarter of 2004, and as a result, BayCorp's ownership
interest in HoustonStreet increased above 50%. As a result of
this recapitalization, BayCorp began consolidating its financial
statements with HoustonStreet as of May 1, 2004.

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.

B. PRINCIPLES OF CONSOLIDATION

BayCorp's Consolidated Financial Statements include the
accounts of the Company and all its subsidiaries. Until November
1, 2002, the Company had a 15% joint ownership interest in
Seabrook. The Company recorded in its financial statements its
proportional share of Seabrook's assets, liabilities and
expenses. In November 2004, BayCorp formed Nacogdoches Gas,
which acquired an approximate 10% working interest in two natural
gas and oil producing wells in the fourth quarter of 2004. The
Company recorded in its financial statements its proportional
share of well revenues and expenses. The Company consolidates
all majority owned and controlled subsidiaries and

F-7

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, the FASB issued Interpretation No. ("FIN") 46,
Consolidation of Variable Interest Entities - An Interpretation
of ARB No. 51, as amended by FIN 46R. 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 deemed that its investment,
HoustonStreet, was not a variable interest entity. Therefore,
prior to May 1, 2004 and when BayCorp held a minority interest in
HoustonStreet, the Company accounted for HoustonStreet under the
equity method. A recapitalization of HoustonStreet was completed
effective May 1, 2004, and as a result, BayCorp's ownership
interest in HoustonStreet increased above 50%. As a result of
this recapitalization, BayCorp began consolidating HoustonStreet
as of May 1, 2004.

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."

The Company has an agreement with HoustonStreet under which it
is providing certain accounting and administrative services to
HoustonStreet for the periods April 1999 to December 2004.
Income related to such services was $30,000 for the year ended
December 31, 2004, $30,000 for the year ended December 31, 2003
and $60,000 for the year ended December 31, 2002. See Note 7 for
further discussion.

C. SALE OF SEABROOK OWNERSHIP

In April 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 of Seabrook, for $836.6 million, which
included Great Bay's and Little Bay's aggregate 15% ownership
share, 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 other 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 2004 in accordance with the terms of the
Escrow Agreements among the selling owners. 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 2004. Also in 2004,
the Company negotiated a final settlement of the remaining
accrued liability related to the sale of Seabrook and paid
approximately $168,000 in settlement of this liability. As a
result of this liability being settled for less than the Company
had previously estimated and accrued for, the Company recorded
other income of approximately $634,000 in 2004.

The following unaudited pro forma income statement assumes the
disposition of the Seabrook investment occurred on December 31,
2001. 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 December
31, 2001, nor do they purport to indicate results which may be
attained in the future.

F-8

(1) Pro forma income statement amounts represent short term
sales and sales under the Unitil contract along with related
purchased power. The 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. Pro forma results also do not
include assumed earnings on the proceeds from the sale of
Seabrook.

D. REGULATION

Great Bay and Little Bay were subject to the regulatory
authority of the FERC, the Nuclear Regulatory Commission ("NRC"),
the New Hampshire Public Utilities Commission ("NHPUC") and other
federal and state agencies as to rates, operations and other
matters. Great Bay Power Marketing, Great Bay Hydro and Benton
Falls are subject to the regulatory authority of the FERC. Great
Bay's and Little Bay's cost of service, however, was not
regulated. Great Bay Power Marketing's, Great Bay Hydro's and
Benton Falls' cost of service is not regulated. As such, these
companies' accounting policies were and are not subject to the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of
Regulation."

E. USE OF ESTIMATES

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The
Company's significant estimates relate to the estimate of the
mark-to-market value of the Unitil PPA and the estimate of the
cost of FERC compliance to be performed by Great Bay Hydro.

F. DEPRECIATION

Utility plant was depreciated on the straight-line method at
rates designed to fully depreciate all depreciable properties
over the lesser of estimated useful lives or the Seabrook
Project's remaining NRC license life, which expires in 2026.

Capital projects constituting retirement units were charged to
electric plant. Minor repairs were charged to maintenance
expense. When properties were retired, the original costs, plus
costs of removal, less salvage, were charged to the accumulated
provision for depreciation.

The Company follows the successful efforts method of accounting
for its natural gas and oil activities. Under the successful
efforts method, lease acquisition costs and all development costs
are capitalized. Unproved properties are reviewed quarterly to
determine if there has been an impairment of the carrying value,
and any such impairment is charged to expense in that period.
Exploratory drilling costs are capitalized until the results are
determined. If proved reserves are not discovered, the
exploratory drilling costs are expensed. Other exploratory
costs, such as seismic costs and geological and geophysical
expenses, are expensed as incurred. The provision for
depreciation, depletion and amortization is based upon the units
of production method.

G. AMORTIZATION OF NUCLEAR FUEL

The cost of nuclear fuel was amortized to expense based on the
rate of burn-up of the individual assemblies comprising the total
core. Great Bay and Little Bay also provided for the cost of
disposing of spent nuclear fuel at rates specified by the United
States Department of Energy ("DOE") under a contract for disposal
between Great Bay and Little Bay, through their managing agent
North Atlantic Energy Service Corporation ("NAESCO"), and the
DOE.

H. AMORTIZATION OF MATERIALS AND SUPPLIES

Great Bay and Little Bay recorded an expense designed to fully
amortize the cost of the material and supplies inventory that was
expected to be on hand at the expiration of the Seabrook
Project's NRC operating license.

F-9

I. DECOMMISSIONING

Great Bay and Little Bay recognized a liability based on the
present value of the estimated future cash outflows required to
satisfy their obligations using a risk free rate. As of December
31, 2004 and December 31, 2003, the decommissioning liability was
$0 as a result of the sale of Seabrook and FPL Energy Seabrook's
assumption of all decommissioning liability on November 1, 2002.

Great Bay and Little Bay accreted their share of the Seabrook
Project's decommissioning liability. The accretion was a non-
cash charge and recognized their liability related to the closure
and decommissioning of their nuclear plant in current year
dollars over the licensing period of the plant. The non-cash
accretion charge recorded in the accompanied consolidated
statements of income was $0, $0, and $4,105,000 for the years
ended December 31, 2004, 2003 and 2002, respectively.

J. OPERATING REVENUES

The Company's revenues are recorded on an accrual basis. Great
Bay Power Marketing and Great Bay Hydro revenues from the sale of
electricity are recorded in the period during which the delivery
of electricity is made based on billing rates provided for in
contracts and approved by FERC on a gross basis. During the
years ended December 31, 2004 and 2003, Great Bay Power Marketing
had one long-term sales contract with Unitil that accounted for
72.3% of the Company's total 2004 operating revenues and 100% of
the Company's total 2003 operating revenues. During the year
ended December 31, 2002, two customers accounted for 46% and 37%
of total operating revenues. See Note 4 for further discussion.

Great Bay Power Marketing's revenues from energy commodity
trading activity are recorded net on an accrual basis. 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. The gross retail sales
volume of such activity was approximately $1,999,600 and the
related costs of sales was approximately $1,917,600.

Great Bay Hydro's revenues from the sale of NEPOOL GIS
certificates are recorded in the month during which the
certificates are generated, and accounted for approximately 2.4%
of the Company's total 2004 operating revenues. For each MWh
generated at Great Bay Hydro's Newport facility, Great Bay Hydro
receives a corresponding credit in the NEPOOL GIS. These credits
are available for sale. Great Bay Hydro's Newport certificates
qualify for Connecticut Class I renewable status during certain
operating periods and in 2004 were sold in the Connecticut energy
market.

Nacogdoches Gas operating revenues are recorded in the month of
production and are based on million cubic feet (MCF) produced and
sold. All gas production is sold in the month of production.
Nacogdoches Gas revenues accounted for approximately 1% of the
Company's total 2004 operating revenues.

HoustonStreet operating revenue consists of commissions for
thousands of barrels (BBLS) traded on HoustonStreet.com and are
recorded in the period during which the terms of the trade have
been accepted by both parties and the transaction is executed.
HoustonStreet revenues accounted for approximately 11.4% of the
Company's total 2004 operating revenues.

K. TAXES ON INCOME

The Company accounts for taxes on income under the liability
method required by SFAS No. 109, "Accounting for Income Taxes."
Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using
enacted tax rates. A valuation allowance is established against
deferred tax assets unless the Company believes it is more likely
than not that the benefit will be realized.

L. CASH EQUIVALENTS AND SHORT TERM INVESTMENTS

For purposes of the Statements of Cash Flows, the Company
considers all highly liquid short-term investments with an
original maturity of three months or less to be cash equivalents.
The carrying amounts approximate fair value because of the short-
term maturity of the investments.

All other short-term investments with a maturity of greater
than three months were classified as available-for-sale and
reflected as a current asset at market value. Changes in the
market value of such securities were reflected in equity. There
were no short-term investments, and accordingly no unrealized
gains or losses on short-term investments, for the years ended
December 31, 2004, 2003 and 2002. The cost of short-term
investments that were sold was based on specific identification
in determining realized gains

F-10

and losses recorded in the accompanying statement of operations.
The net realized gain is recorded as a component of interest and
dividend income. The net realized loss on the sale of available-
for-sale investments of $296,200 in 2002 resulted from gross
realized gains of $50,000 and gross realized losses of $346,200.

M. SEGMENT INFORMATION

The Company has adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the reporting of information about
operating segments in annual and interim financial statements.
Operating segments are defined as components of an enterprise for
which separate financial information is available that is
evaluated regularly by the chief operating decision maker(s) in
deciding how to allocate resources and in assessing performance.
SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers.

BayCorp is a holding company for Great Bay Power Marketing,
Great Bay Hydro, BayCorp Ventures, Nacogdoches Power, Nacogdoches
Gas 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 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.

(1) Great Bay Power Marketing was formed October 2002; Great Bay
Hydro was formed September 2003; Great Bay Power and Little Bay
Power were dissolved as of December 31, 2002. See "Note A. The
Company."
(2) BayCorp began consolidating HoustonStreet as of May 1, 2004.
See "Note A. The Company."
(3) Includes BayCorp Ventures, formed October 2002, Nacogdoches
Power, formed October 2004 and Nacogdoches Gas, formed November
2004. See "Note A. The Company."

F-11

N. EARNINGS PER SHARE

Basic earnings (loss) per share is computed by dividing net
earnings by the weighted number of common shares outstanding for
all periods presented. Diluted earnings (loss) per share
reflects the dilutive effect of shares under option plans.
Potentially dilutive shares outstanding during 2004 and 2003 were
excluded from dilutive earnings (loss) per share because their
effect would be antidilutive.

Based on an average market price of common stock of $12.71 per
share for the year ended December 31, 2004, $13.06 per share for
the year ended December 31, 2003 and $14.74 per share for the
year ended December 31, 2002, the following table reconciles the
weighted average common shares outstanding to the shares used in
the computation of the basic and diluted earnings per share
outstanding.

O. ACCUMULATED OTHER COMPREHENSIVE INCOME

In accordance with SFAS No. 130, "Reporting Comprehensive
Income" the Company reports changes in stockholders' equity from
all sources during the period other than those resulting from
investments by stockholders (i.e., issuance or repurchase of
common shares and dividends.) The composition of other
comprehensive income is as follows:

P. RECLASSIFICATIONS

Certain reclassifications have been made in prior years'
financial statements to conform to classifications used in the
current year.

Q. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of the Company's financial instruments
as of December 31, 2004 and 2003 are as follows:

The carrying amounts for all assets other than energy trading
contracts approximate fair value because of the short maturity of
these instruments. The fair value of the energy trading contract
is based on current projections of power prices over the life of
the contract.

F-12

R. DETAIL OF OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following as of
December 31, 2004 and 2003:

Accrued Seabrook costs represented management's best estimate
of final Seabrook closing costs. Accrued Great Bay Hydro FERC
compliance costs represent management's best estimate of the cost
of compliance with the requirements of the FERC operating license
issued to Great Bay Hydro on November 1, 2003, and is net of the
long term portion of approximately $2.5 million.

S. 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 had 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 was approved by the bankruptcy court on July 15,
2004. In December 2003, BayCorp sold a $1,041,600 portion of its
power delivery claim to an institutional investor for $343,700.
In September 2004, BayCorp sold the remaining $175,400 of the
power delivery claim, as well as the claim for damages, to the
same institutional investor for $77,200. The Company recorded
each of these transactions as a recovery of bad debt, reducing
total administrative and general expenses.

T. ISSUER 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"). At the
extended Tender Offer 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 December 31, 2004 the Company
had 557,945 shares outstanding and cash and cash equivalents and
restricted cash of approximately $12,127,000.

U. 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 or as a hedge
under Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133) are recorded at fair value with changes in fair
value recorded in earnings. 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.

V. ACCOUNTING FOR 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

F-13

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, 2003 and 2002 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.

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 $0, $77,000 and $2,467,700 for 2004, 2003 and 2002,
respectively.

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 in 2004 and 2003 of $172,000 and $153,000, respectively,
for these options.

Had compensation cost for these plans been determined
consistent with SFAS No. 123, Accounting for Stock Based
Compensation, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts
(dollars are in thousands, except per share amounts.)

The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions used for grants in 2003 and 2002
respectively: weighted average risk-free interest rates of 3.4
and 4.9 percent, expected dividend yields of 0 % and expected
lives of 7 and 5 years and expected volatility of 47% and 47%,
respectively. There were no option grants in 2004.

W. NEW ACCOUNTING PRONOUNCEMENT

FASB Statement No. 123 (Revised 2004), Share-Based Payment
(SFAS 123R) was issued in December 2004. SFAS 123R replaces SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS 123), and
supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS 123R requires companies to recognize in the
financial statements the compensation cost related to share-based
payment transactions with employees. The compensation cost is
measured based upon the fair value of the instrument issued.
Share-based compensation transactions with employees covered
within SFAS 123R include share options, restricted share plans,
performance-based awards, share appreciation rights, and employee
share purchase plans.

SFAS 123R will be effective as of the first interim or annual
reporting period that begins after June 15, 2005. Since January
2003, the Company used the fair value based method recognition of
compensation expense and is required to apply the modified
prospective application transition method under SFAS 123R. The
modified prospective application transition method requires the
application of this standard to all new awards issued after the
effective date, all modifications, repurchased or cancellations
of existing awards after the effective date, and unvested awards
at the effective date.

For unvested awards, the compensation cost related to the
remaining service period that has not been rendered at the
effective date will be determined by the compensation cost
calculated currently under SFAS 123. The Company will be
adopting the modified prospective application of SFAS 123R.
Based on the current options outstanding, the Company anticipates
the adoption of this statement to not result in the recognition
of any incremental compensation cost to be recognized in the year
of adoption.

2. TAXES ON INCOME

The following is a summary of the provision (benefit) for
income taxes for the years ended December 31, 2004 and 2003:

F-14

Accumulated deferred income taxes consisted of the following at December 31,
2004 and 2003:

The following table reconciles the statutory federal income tax rate to those
reflected in the federal income tax provision set forth above.

Valuation allowances have been provided against any deferred
tax assets (net), due to the limitations on the use of
carryforwards, discussed below, and the uncertainty associated
with future taxable income.

At December 31, 2003 and 2004, the Company had net operating
loss carryforwards ("NOLs") for federal income tax purposes of
approximately $167 million and $188 million, respectively, before
limitations discussed in the following paragraph. The Company's
NOL before limitations at December 31, 2004 includes $167 million
attributable to BayCorp and $21 million attributable to
HoustonStreet. The Company's federal NOLs will expire during the
years ending December 31, 2005 through 2023 if not used to offset
future taxable income.

An ownership change occurs within the meaning of Internal
Revenue Code ("IRC") Section 382 when the ownership percentage of
5% or greater shareholders in a company increases by more than
50% over a three-year period. The Company believes that the
Tender Offer in March 2003 and related transactions resulted in a
change in ownership of BayCorp within the meaning of IRC Section
382. As such, BayCorp may be precluded from utilizing its
federal and state NOLs originating prior to the ownership change.
BayCorp estimates that approximately $165 million its NOL is
subject to an annual limitation for purposes of IRC Section 382
of approximately $390,000 per year. As a result of this
limitation, all or a portion of BayCorp's federal and state NOLs
may expire unused. Additional NOLs and other tax attributes
generated subsequent to the Tender Offer may be limited in the
event of certain future changes of ownership by significant
shareholders. The Company also believes that all or a portion of
HoustonStreet's NOLs may be subject to an IRC Section 382
limitation. Accordingly, all or a portion of HoustonStreet's
federal and state NOLs may expire unused.

F-15

The Company has recorded a valuation allowance against its
deferred tax assets. In assessing whether deferred tax assets
will be realized, management considers all available evidence,
historical and prospective, with greater weight given to
historical evidence, in determining whether it is more likely
than not that some portion or all of its deferred tax assets will
not be realized. Realization of the Company's deferred tax
assets is dependent upon resolution of the matters described in
the preceding paragraph and generation of future taxable income.

Deferred tax assets and related valuation allowance of $2.5
million related to the net operating loss carryforward results
from the exercise of employee stock options, the tax benefit of
which, when recognized, will be accounted for as a credit to
additional paid-in capital rather than a reduction of income tax
expense.

The Company filed its 2002 tax return in September 2003 and
requested a refund of approximately $941,000 from the State of
New Hampshire for overpayment of 2002 state income taxes. The
State of New Hampshire Department of Revenue Administration
("NHDRA") began an examination of the Company's 2000, 2001 and
2002 tax returns in December 2003. Given the uncertainty as to
the outcome of the audit, the Company did not record the
requested refund as of December 31, 2003. The audit was
concluded in January 2005. A settlement was reached between the
Company and the NHDRA in February 2005, and the Company received
a refund of $225,000 in Feburary 2005, which it will record as
income during 2005.

3. ENERGY MARKETING

Until November 1, 2002, the Company utilized unit contingent
and firm forward sales contracts to maximize the value of its 174
MW power supply from the Seabrook Project. It currently utilizes
firm forward and spot purchases to maximize the value of the
Unitil PPA and currently sells its generation from Great Bay
Hydro in the spot market. The net unrealized loss on trading
activities was $3,165,000 for the year ended December 31, 2004
and $1,926,000 for the year ended December 31, 2003 and is
included in the accompanying consolidated statement of operations
for 2004 and 2003. The net unrealized gain on trading activities
for the year ended December 31, 2002 was $115,300 and is included
in the accompanying consolidated statement of operations for
2002.

The Company purchases a portion of its power needed for resale
from ISO New England ("ISO NE".) ISO NE requires financial
assurance to protect the New England Power Pool ("NEPOOL")
against a payment default of one of its participants. The
Company has provided this assurance in the form of a cash deposit
at ISO NE. The amount of this deposit was approximately $518,000
as of December 31, 2004 and $1,508,000 as of December 31, 2003.
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.

4. PURCHASED POWER AGREEMENTS

Great Bay was party to a purchased power contract, dated as of
April 1, 1993, (the "Unitil PPA" or "PPA"), with Unitil that
provided for Great Bay to sell to Unitil 0.8696% of the energy
and capacity of Seabrook, or approximately 10 MWs. The Unitil
PPA commenced on May 1, 1993 and continues through October 31,
2010. On November first of each year the purchase price is
subject to increase at the rate of inflation less four percent.

In anticipation of the Seabrook sale, the Unitil PPA was
amended as of November 1, 2002. The amendment primarily modified
the existing Unitil PPA to reduce the amount of power delivered
to 9.06 MWs and the price that Unitil pays for power to $50.34
per MW hour, subject to an annual increase at the rate of
inflation less four percent, and provided 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 mortgage on Seabrook that
secured Great Bay's performance of the Unitil PPA. In connection
with the amended Unitil 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 Great Bay
Power Marketing as of January 1, 2003.

Unitil has an option, expiring November 1, 2005, to extend the
Unitil PPA for up to 12 years, until 2022. If Unitil exercises
its option to extend the PPA, the purchase price for power for
the first year of the extended term, beginning November 1, 2010,
will be $65.00 per MW hour (in 1992 dollars) multiplied by a
factor that equals the cumulative inflation from October 1992
through October 2010. For the remaining term of the extension,
the purchase price will be increased annually by the rate of
inflation over the previous year.

F-16

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 the FASB's EITF issue
no. 02-03 the inception gain (initial value of $2.1 million) on
the Unitil PPA has been deferred and will be recognized over the
life of the contract. The fair value of the contract was a
negative $3.4 million as of December 31, 2004 and was $3,400 as
of December 31, 2003. The deferred gain on the contract was $1.5
million as of December 31, 2004 and $1.8 million as of December
31, 2003. These amounts are reflected in the Company's balance
sheet.

On March 17, 2003, Unitil announced the approval of a contract
with Mirant Americas Energy Marketing, LP ("Mirant"), which
provided for the sale of Unitil's existing power supply
entitlements, including the PPA with Great Bay Power Marketing,
effective on May 1, 2003. Great Bay Power Marketing's PPA with
Unitil has not been assigned to Mirant. Rather, Unitil has
appointed Mirant as their agent for purposes of administering the
PPA with Great Bay Power Marketing and Mirant is purchasing
Unitil's entitlement under the PPA.

5. STOCK BASED COMPENSATION

In April 1995, the Board of Directors of the Company
established the 1995 Stock Option Plan (the "1996 Plan"). In May
2001, the Board of Directors of the Company established the 2001
Non-Statutory Stock Option Plan (the "2001 Plan"). Options
granted pursuant to the 1996 Plan may be either incentive stock
options meeting the requirements of Section 422 of the Internal
Revenue Code or nonstatutory options, which are not intended to
meet the requirements of Section 422. Options granted pursuant
to the 2001 plan will be non-statutory options that are not
intended to meet the requirements of Section 422 of the Internal
Revenue Code. The 1996 Plan and the 2001 Plan are administered
by the Board of Directors of the Company and may be modified or
amended by the Board in any respect, subject to stockholder
approval in certain instances in the case of the 1996 Plan.

FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation ("FIN 44"), effective July 1, 2000
and applied prospectively (except for direct or indirect option
repricings and the definition of an employee in which case the
effective date is December 15, 1998), addresses compensation
issues regarding the definition of an employee, modifications to
plan awards, changes in grantee status, business combinations and
share repurchase features. For transactions subject to the
December 15, 1998 effective date, no compensation expense is
recognized for the period between December 15, 1998 and July 1,
2000. FIN 44 requires variable accounting when direct or
indirect reductions of the exercise price occur. The following
events occurred which were deemed to be modifications and created
variable accounting for options impacted by those events.

On December 3, 1998, the Board of Directors of the Company
voted to reprice all of the outstanding options of the Company,
at that date, as the then outstanding options were "out of the
money." The Board of Directors determined that the then
outstanding options no longer had the desired motivational effect
or compensatory benefit for the employees. The repricing of the
options was based on the current market value of the stock as of
December 18, 1998. Simultaneously with the repricing, 139,583
existing options were forfeited. During 2000, the Board of
Directors of the Company accelerated the vesting period of the
options held by certain employees of the Company.

In October 2001, the Company issued 240,000 non-qualified
options pursuant to the 2001 Non-Statutory Stock Option Plan.
These options had an exercise price of $9.05 and vested upon the
closing of the sale of the Seabrook Project. In March 2002, the
Company issued loans of $756,029 to its President, Frank Getman,
and a director, John Tillinghast, in order for them to exercise
150,384 options for common stock. These loans had limited
recourse and were repaid in November 2002.

In January 2003, the Board of Directors voted to allow cashless
exercise of all outstanding options. All options previously not
accounted for as a variable plan as of January 2003 were subject
to variable plan accounting through the date of exercise.

In accordance with APB 25 and FIN 44, the Company recorded
compensation expense related to contingent options, repriced
options and options accounted for as a variable plan of $0,
$77,000 and $2,467,700 for 2004, 2003 and 2002, respectively. As
of December 31, 2004 and 2003, 70,538 and 79,713 options ,
respectively, continue to be subject to variable plan accounting.

Effective January 1, 2003, the Company adopted SFAS 123
pursuant to the prospective method as described in SFAS 148. In
2003, the Company issued 142,000 options 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 in 2004 and 2003 of $172,000 and
$153,000, respectively, for these options.

F-17

The following table summarizes information concerning outstanding and
exercisable
options at December 31, 2004, 2003 and 2002

The Company's majority owned subsidary, HoustonStreet, adopted
the HoustonStreet 1999 Stock Option Plan in June 1999 ("HS 1999
Plan"). Options granted pursuant to the HS 1999 Plan may be
either incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code or nonstatutory options,
which are not intended to meet the requirements of Section 422.
The HS 1999 Plan is administered by the Board of Directors of
HoustonStreet and may be modified or amended by the Board in any
respect. Pursant to the recapitalization of HoustonStreet (see
Note 7), all options outstanding under the plan were exchanged
for common stock.

In December 2004, HoustonStreet issued 25,000 options to its
President under the HS 1999 Plan. The options were granted in
three tranches with exercise prices of $6.47, $12.95 and $25.89.
The options vest monthly over a 3-year period. HoustonStreet did
not record a charge with respect to these options in accordance
with APB No. 25, as the fair market value of HoustonStreet common
stock was equal to or less than each of the exercise prices.

In April 2004, the Company issued 32,000 shares of common
stock to two of its customers in connection with marketing
agreements. The common stock was granted subject to certain
performance criteria. HoustonStreet recorded an expense of
$43,500 in connection with this common stock grant

6. COMMITMENTS AND CONTINGENCIES

F-18

BayCorp and its wholly owned subsidiaries lease office space
under a short-term noncancelable operating lease that is
renewable every six months. Rental expense under operating lease
agreements for the years ended December 31, 2004, 2003 and 2002
was $52,800, $52,800 and $81,144, respectively.

Future minimum commitments for operating leases as of December
31, 2004 are as follows:

Year Ending Operating Lease
----------- ---------------
December 31, 2004 $8,800

7. INVESTMENT IN HOUSTONSTREET

BayCorp owns shares representing approximately 59.7% of the
voting power of all outstanding common shares of HoustonStreet.
HoustonStreet developed and operates HoustonStreet.com, an
Internet-based, independent crude oil and refined products
trading exchange in the United States.

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 the 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 owns shares
representing approximately 59.7% of the outstanding common shares
of HoustonStreet 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 and accounted for
HoustonStreet under the equity method.

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

8. SUBSEQUENT EVENTS

F-19

Nacogdoches Gas entered into an agreement dated January 7, 2005
with Sonerra, under which Nacogdoches Gas will fund the
development of three natural gas and oil wells. This agreement
was amended as of March 14, 2005, increasing the number of wells
from three to four. In addition, Nacogdoches Gas has an option
to participate in Sonerra's continued development of up to 15
additional natural gas and oil wells over the next two years.
Under the agreement with Sonerra, Nacogdoches Gas will fund the
total cost of the new wells (with the provision that up to 25% of
the working interest may be funded and acquired by other parties)
and will receive a priority return of 90% of the working interest
funded until its aggregate investment is recovered. Once
Nacogdoches Gas has recovered all of its investment in the wells
from the net proceeds of all wells and any other revenues from
the assets acquired under the development agreement, Sonerra and
Nacogdoches Gas will own equal amounts of the working interests
funded. The working interests include undivided leasehold
interests in the gas units and the production and gathering
equipment.

Since entering the January 7, 2005 agreement with Sonerra,
Nacogdoches Gas has funded the development of three wells for a
total of approximately $8.6 million. The net revenue interest in
each of the wells being funded by Nacogdoches Gas is 77%, which
means that the working interests bear 100% of the operating costs
of the wells but receive 77% of the net revenues from the wells
with the remaining 23% of the net revenues paid to the lessor and
other royalty interests. The first of those wells, Round
Mountain, a James Lime horizontal natural gas well, began
production in January 2005 and through the end of February 2005
has produced 95 million cubic feet of natural gas. The second
well, Wicked Wolf, a James Lime horizontal natural gas well,
began production in early March 2005. The third well, Painted
Horse, a Rodessa vertical natural gas well, is being developed.

Under the terms of the January 7, 2005 agreement as amended,
Sonerra will sequentially present five additional sets of three
well prospects to Nacogdoches Gas. Upon the presentation of a
set of three well prospects, Nacogdoches Gas at its option, may
proceed with the development of those three well prospects.
Should Nacogdoches Gas decide not to proceed with the development
of any given set of three well prospects, its right to
participate in future well sets terminates.

The total cost of an individual well typically ranges from $2.0
million to $3.5 million and includes the acquisition of leases
for the land, the drilling and completion of the wells and the
construction of extensions of the gas gathering system. The
total cost depends on the type of well, the amount of land
required for the production unit, the length of gas gathering
pipeline and the completion technique.

In March 2005, BayCorp formed Great Bay Hydro Maine, LLC ("GBH
Maine"), a Maine limited liability company, as a wholly owned
subsidiary, and formed Great Bay Hydro Benton, LLC ("GBH
Benton"), also a Maine limited liability company, as a wholly
owned subsidiary of GBH Maine. On March 16, 2005, GBH Maine and
GBH Benton acquired Benton Falls Associates, a limited
partnership that owns a 4.3 megawatt hydroelectric generation
plant in Benton, Maine ("Benton Falls") from The Arcadia
Companies for approximately $2.2 million. The Company assumed
operating responsibility for Benton Falls, the output of which is
sold to Central Maine Power Corporation ("CMP") under a power
purchase agreement ("CMP PPA") that expires in December 2007.
The rates under the CMP PPA are indexed to CMP's standard rates
for energy and capacity purchases established annually by the
Maine Public Utilities Commission.

On March 15, 2005, the Company and all of its wholly owned
subsidiaries entered into a $10,250,000 Convertible Note (the
"Note") and a Pledge Agreement (the "Pledge Agreement") with
Sloan Group Ltd., a Bahamas corporation (the "Sloan Group"). The
debt, which accrues interest at 8% per annum and is due and
payable in full on December 15, 2005, is convertible by the Sloan
Group at any time between November 15, 2005 and December 15, 2005
(or any time after the occurrence and during the continuance of a
material event of default under the Note) into shares of
BayCorp's common stock, $.01 par value at a price of $14.04 per
share. The Note does not allow BayCorp to prepay the debt and
provides for a 2% premium on the interest rate in the event of a
default. Payment of the Note may be accelerated in the event of
a material event of default, which is customary for this type of
financing.

In addition to BayCorp, the borrowers under the Note include
the following subsidiaries of BayCorp: GBH Maine, GBH Benton,
Great Bay Power Marketing, Great Bay Hydro, BayCorp Ventures,
Nacogdoches Power and Nacogdoches Gas. As security for the Note,
the borrowers entered into the Pledge Agreement with the Sloan
Group. Under the Pledge Agreement, BayCorp pledged its equity
interests in GBH Maine and Nacogdoches Gas to the Sloan Group,
GBH Maine pledged its equity interests in GBH Benton and Benton
Falls to the Sloan Group, GBH Benton pledged its equity interests
in Benton Falls to the Sloan Group, and Nacogdoches Gas, GBH
Maine and GBH Benton pledged to the Sloan Group any equity
interest that they may obtain in other entities while the debt is
outstanding.

F-20

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

March 31, 2005 By: /s / Frank W. Getman Jr.
------------------------------
Frank W. Getman Jr.
President

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.

F-21

EXHIBIT INDEX

* Management contract or compensatory plan or arrangement.

(1) All disclosure schedules and exhibits have been omitted pursuant
to Item 601(b)(2) of Regulation S-K. The Registrant will furnish
supplementally a copy of any omitted schedule or exhibit to the
Secuities and Exchange Commission upon request.

F-23