ITEM 1. BUSINESS.
INTRODUCTION
BayCorp Holdings, Ltd. ("BayCorp" or the "Company") is a holding company incorporated in Delaware in 1996. BayCorp has two wholly-owned subsidiaries that generate and trade wholesale electricity, Great Bay Power Corporation ("Great Bay") and Little Bay Power Corporation ("Little Bay"). In addition, BayCorp owns a 45.9% equity interest in HoustonStreet Exchange, Inc. ("HoustonStreet"), an Internet-based energy trading and information business.
Great Bay and Little Bay's principal asset is a combined 15% joint ownership interest in the Seabrook Nuclear Power Project in Seabrook, New Hampshire (the "Seabrook Project"). This ownership interest entitles the companies to approximately 174 megawatts ("MWs") of the Seabrook Project's power output. Great Bay and Little Bay are exempt wholesale generators ("EWGs") under the Public Utility Holding Company Act of 1935 ("PUHCA"). Unlike regulated public utilities, Great Bay and Little Bay have no franchise area or captive customers. The companies sell their power in the competitive wholesale power markets.
Great Bay was incorporated in New Hampshire in 1986 and was formerly known as EUA Power Corporation. Little Bay was incorporated in New Hampshire in 1998. Great Bay sells its power, including its share of the electricity output of the Seabrook Project, in the wholesale electricity market, primarily in the Northeast United States. Little Bay sells its power solely to Great Bay under an intercompany agreement. Neither BayCorp nor its subsidiaries has operational responsibilities for the Seabrook Project. Great Bay currently sells all but approximately 10 MWs of its share of the Seabrook Project capacity in the wholesale short-term market. In addition to selling its owned generation, Great Bay purchases power on the open market for resale to third parties.
In November 1999, Little Bay purchased an additional 2.9% interest in the Seabrook Project from Montaup Electric Company ("Montaup"), a subsidiary of Eastern Utilities Associates ("EUA"), for a purchase price of $3.2 million, plus approximately $1.7 million for certain prepaid items, primarily nuclear fuel and capital expenditures. In addition, Montaup prefunded the decommissioning liability associated with Little Bay's 2.9% share of Seabrook by transferring approximately $12.4 million into Little Bay's decommissioning account, an irrevocable trust earmarked for Little Bay's share of Seabrook Project decommissioning expenses.
HoustonStreet was incorporated in Delaware in 1999. HoustonStreet developed and operates HoustonStreet.com, an Internet-based trading platform and information portal for wholesale energy-related commodities. Currently, HoustonStreet offers online trading exchanges for electricity, crude oil and refined products in the United States and exchanges for electricity in Europe. HoustonStreet plans to develop and launch trading platforms for natural gas and other energy-related commodities and is also exploring additional opportunities in the European and Asian markets.
HoustonStreet initially launched its Internet-based wholesale electricity trading exchange in the Northeast in July 1999 and nationwide in September 1999. In May 2000, HoustonStreet launched exchanges for crude oil, refined products, and a new electricity platform (SpeedWay) dedicated to standard products trading. In September 2000, HoustonStreet launched an exchange for electricity in Europe with trading floors for the United Kingdom, Germany, Belgium, Switzerland, Austria and the Netherlands.
As of February 2001, over 200 trading companies and over 1,200 individual traders have registered on HoustonStreet. Nine of the top ten U.S. electricity trading companies and all of the top ten international oil trading companies have registered on the Web site. As of February 7, 2001, over $2.0 billion had been transacted on HoustonStreet's oil platforms since their launch in May 2000.
HoustonStreet is also pursuing opportunities that extend beyond the trading platform, including the integration of trading data with customer mid-and back-office applications and facilitating how companies perform the wide range of activities that precede and follow wholesale energy transactions. HoustonStreet is currently developing applications to integrate customers' trading data and has two pilot programs underway for
implementation in the second quarter of 2001. HoustonStreet is currently piloting its integration system with Williams Energy.
HoustonStreet maintains strategic relationships with Equiva Trading Company, Williams Energy, Conoco, Inc., Vivendi S.A., Bowstreet, Enron Net Works, LLC, RWE Trading GmbH, Vattenfall AB, Electrabel, N.V. and others in order to facilitate the development of various energy-related commodity trading platforms. HoustonStreet expects to continue to enter into similar strategic relationships to facilitate expansion into other energy-related trading markets.
RECENT DEVELOPMENTS
Wholesale Electricity Generation and Trading Business
On October 10, 2000, the Company reached an agreement with Northeast Utilities ("NU") under which the Company's generating subsidiaries, Great Bay and Little Bay, will include their aggregate 15% ownership share of the Seabrook Project in the upcoming auction of NU's subsidiaries' shares of the Seabrook Project. Under the terms of the agreement, BayCorp will receive the sales price established by the auction process. In the event that the sale yields proceeds for BayCorp of more than $87.2 million, BayCorp and NU will share the excess proceeds. Should BayCorp's sales proceeds be less than $87.2 million, NU will make up the difference below that amount on a dollar for dollar basis up to a maximum of $17.4 million. Under the agreement, BayCorp will be paid separately for nuclear fuel and inventory. The agreement also limits any top-off amount required to be funded by BayCorp for decommissioning as part of the sale process at the amount required by the Nuclear Regulatory Commission ("NRC") regulations. The auction is expected to begin in the second quarter of 2001 with a closing expected in the first half of 2002.
On February 6, 2001, Great Bay executed a Purchased Power Agreement with Select Energy ("Select") whereby Great Bay will sell 50 MWs of energy associated with Seabrook to Select in exchange for 25 MWs of energy associated with Millstone Unit 2 and 25 MWs of energy associated with Millstone Unit 3. The term of this agreement is April 1, 2001 through December 31, 2001. Delivery of power from either company is contingent on the Seabrook and Millstone units operating at certain capacity. See "-- Wholesale Electricity and Trading Business -- Purchased Power Agreements."
Seabrook Unit 1 transmits its generated power to the New England 345 kilovolt transmission grid, a major network of interconnecting lines covering New England, through three separate transmission lines emanating from the station. On March 5, 2001, the Seabrook Project began experiencing interruptions of the connections to the transmission system due to icing from a severe winter storm that resulted in the plant automatically tripping offline. During this shutdown, a problem was identified with the steam-driven emergency feedwater pump and plant chemistry personnel detected the presence of chlorides in the condenser hotwells, indicating leakage of seawater into the condenser. Repair of the emergency feedwater pump was completed allowing the plant to return on-line on March 15, 2001. Power was limited to approximately 70% while plant personnel continued to repair the condenser leakage. On March 19, 2001, plant operators identified a problem with the main turbine valve control system requiring that the plant be taken off-line. After repairs were completed, the plant was placed on-line on March 22, 2001 and power was increased to approximately 70%. The plant reached full power on March 25, 2001.
Internet-based Energy Trading and Information Business
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 and started accounting for this investment on the equity method.
On March 22, 2001, HoustonStreet received commitments to receive up to approximately $3.9 million in additional funding, including $900,000 from BayCorp. Although HoustonStreet has received some of the funding, until the closing of the financing, there can be no assurance that HoustonStreet will receive the balance of the committed funds. This financing involves the sale by HoustonStreet of senior secured notes,
warrants to purchase HoustonStreet preferred stock and warrants to purchase HoustonStreet common stock. Collectively, these securities are referred to as the "HoustonStreet Series C Units."
In March 2001, BayCorp entered into discussion with HoustonStreet involving the conversion of BayCorp's $7.0 million loan made in September 2000, together with approximately $1.0 million in accrued interest and penalties on the note and past due management fees, into approximately $8.0 million of HoustonStreet Series C Units. There can be no assurance that this proposed refinancing will be successfully completed. The loan, accrued interest and receivables from HoustonStreet had been written down to zero at December 31, 2000, and as such, the conversion of these amounts will have no accounting impact.
WHOLESALE ELECTRICITY GENERATION AND TRADING BUSINESS
BayCorp's principal wholesale electricity generation and trading assets are its 100% equity interests in Great Bay and Little Bay. The business of Great Bay and Little Bay consists 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 has operational responsibility for the Seabrook Project. Great Bay is a party to one long-term power contract for approximately 10 MW of Great Bay's share of the Seabrook Project capacity. Great Bay has also entered into a one-year contract, as of November 19, 1999, with Little Bay to purchase all of the output from the portion of Seabrook owned by Little Bay. This contract was renewed on November 20, 2000. See "-- Purchased Power Agreements." Great Bay's business strategy is to utilize unit contingent and firm forward sales contracts to maximize the value of its 174 MW power supply from the Seabrook Project.
Traditionally, Great Bay sold most of its share of the Seabrook Project electricity output under unit contingent contracts. Under unit contingent contracts, Great Bay is obligated to provide the buyer with power only when the Seabrook Project is operating. In late 1998, Great Bay began to sell some of its electricity as firm power, which entitles the buyer to electricity whether or not the Seabrook Project is operating. Buyers pay a premium for firm power over unit contingent power because they can rely on uninterrupted electricity. In order to supply firm power during Seabrook unscheduled outages, Great Bay purchases power from the spot market during these outages and resells that power to its firm power customers. Spot market sales are subject to price fluctuations based on the relative supply and demand of electricity. As a result of spot market power price fluctuations, Great Bay may have to purchase power at prices exceeding prices paid by Great Bay's firm power customers during outages. Although Great Bay bears the primary risk of these price fluctuations, Great Bay maintains insurance to protect Great Bay during periods of extreme price volatility, subject to certain deductibles and coverage limits. This insurance, provided by ACE USA (formerly CIGNA), currently provides Great Bay up to $18.6 million of coverage through May 2002.
The Seabrook Project
The Seabrook Project is located on an 896-acre site in Seabrook, New Hampshire. It is owned by Great Bay, Little Bay and nine other utility companies, consisting of North Atlantic Energy Company, Connecticut Light and Power, The United Illuminating Company, Canal Electric Company, Massachusetts Municipal Wholesale Electric Company, New England Power Company, New Hampshire Electric Cooperative, Inc., Taunton Municipal Lighting Plant and Hudson Light & Power Department (together with Great Bay and Little Bay, the "Participants").
Seabrook Unit 1 is a 1,150-MW nuclear-fueled steam electricity generating station. It employs a four loop, pressurized water reactor and support auxiliary systems designed by the Westinghouse Electric Company. The reactor is housed in a steel-lined reinforced concrete containment structure and a concrete containment enclosure structure. Reactor cooling water is obtained from the Atlantic Ocean through a 17,000-foot-long intake tunnel and returned through a 16,500-foot-long discharge tunnel. The station has a remaining expected license life of 25 years. As noted above, Seabrook Unit 1 transmits its generated power to the New England 345 kilovolt transmission grid, a major network of interconnecting lines covering New England, through three separate transmission lines emanating from the station. On March 15, 1990, the Participants received from the NRC a full power operating license that authorizes operation of Seabrook
Unit 1 until October 2026. Commercial operation of Seabrook Unit 1 commenced on August 19, 1990. Management believes that Seabrook Unit 1 is in good condition.
Since the Seabrook Project was originally designed to consist of two generating units, Great Bay and Little Bay also own a combined 15% joint ownership interest in Seabrook Unit 2. Great Bay and Little Bay assigned no value to Seabrook Unit 2 because on November 6, 1986, the joint owners of the Seabrook Project voted to dispose of Unit 2. Thereafter, Great Bay wrote off its investment in Unit 2. Little Bay has no investment in Unit 2. Certain assets of Seabrook Unit 2 have been and are being sold from time to time to third parties. However, there have been no material sales of Unit 2 assets since July 1996.
The Participants are considering additional plans regarding disposition of Seabrook Unit 2, but such plans have not yet been finalized and approved. Great Bay and Little Bay are unable to estimate the costs for which they will be responsible in connection with the disposition of Seabrook Unit 2. Because Seabrook Unit 2 was never completed or operated, costs associated with its disposition are not included in the amounts collected for the decommissioning of Unit 1 and the common facilities. Great Bay and Little Bay currently pay their share of monthly expenses required to preserve and protect the value of the Seabrook Unit 2 components.
Joint Ownership of Seabrook
Great Bay, Little Bay and the other Participants are parties to the Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units (the "JOA"), which establishes the respective ownership interests of the Participants in the Seabrook Project and defines their responsibilities with respect to the ongoing operation, maintenance and decommissioning of the Seabrook Project. In general, all ongoing costs of the Seabrook Project are divided proportionately among the Participants in accordance with their ownership interests in the Seabrook Project. Ownership interests in the Seabrook Project are several and not joint, and each Participant is only liable for its share of the Seabrook Project's costs and not liable for any other Participant's share. Great Bay and Little Bay's combined joint ownership interest of 15% is the third largest interest among the Participants, exceeded only by the approximately 40% interest held by NU and its affiliates and the 17.5% interest held by The United Illuminating Company.
A Participant may sell any portion of its ownership interest to any entity that is engaged in the electric utility business in New England. Before such sale, however, such selling Participant must give certain other Participants the right of first refusal to purchase the interest on the same terms. Any Participant may transfer, free from the foregoing right of first refusal, any portion of its interest (a) to a wholly-owned subsidiary, (b) to another company in the same holding company system or a construction trust for the benefit of the transferor or another company in the same holding company system, or (c) in connection with a merger, consolidation or acquisition of substantially all of the properties or all of the generating facilities of a Participant.
The failure to make monthly payments under the JOA by owners of the Seabrook Project other than Great Bay and Little Bay may have a material effect on Great Bay and Little Bay if either should choose to pay a greater proportion of the Seabrook Unit 1 and Seabrook Unit 2 expenses in order to preserve the value of its share of the Seabrook Project. In the past, certain of the owners of the Seabrook Project other than Great Bay and Little Bay have not made their full respective payments. At the current time, the electric utility industry is undergoing significant changes as competition and deregulation are introduced into the marketplace. Some utilities, including certain Participants, have indicated in state regulatory proceedings that they may be forced to seek bankruptcy protection if regulators, as part of the industry restructuring, do not allow for full recovery of stranded costs. If a Participant other than Great Bay or Little Bay filed for bankruptcy, and that Participant was unable to pay its share of Seabrook Project expenses, Great Bay and/or Little Bay might choose to pay a greater portion of Seabrook Project expenses. In the past, the filing of bankruptcy by a Participant has not resulted in a failure to pay Seabrook Project expenses or an increase in the percentage of expenses paid by other Participants.
The JOA provides for a Managing Agent to carry out the daily operational and management responsibilities of the Seabrook Project. The current Managing Agent, appointed by certain of the Participants on June 29, 1992, is North Atlantic Energy Service Corporation ("NAESCO"), a wholly-owned subsidiary of NU. NU, in conjunction with certain of its affiliates, holds the largest joint ownership interest in the Seabrook
Project, as described above. Certain material decisions regarding the Seabrook Project are made by an Executive Committee consisting of the chief executive officers of certain of the Participants or their designees. There are currently five members of the Executive Committee. The Executive Committee acts by a majority vote of its members, although any action of the Executive Committee may be modified by a vote of 51% of the ownership interests. Frank W. Getman Jr., the Company's President and Chief Executive Officer, is currently a member of the Executive Committee. Anthony Callendrello, the Company's Chief Operating Officer, is a member of the Audit Committee and is Vice Chairperson of the Budget Subcommittee and Non-Operating Participants Committee. Under the JOA, the managing agent of the Seabrook Project may be removed and a new managing agent appointed by a 51% interest of the Participants.
Marketing and Customers
Great Bay currently sells most of its power in the Northeast United States in the short-term wholesale power market. Great Bay does not currently depend on any single customer because many utilities and marketers are willing to buy Great Bay's share of electricity from the Seabrook Project at substantially the same price. Prices in the short-term market are typically higher during the summer and winter because the demand for electrical power is higher during these periods in the Northeast United States. The Company utilizes unit contingent and firm forward sale contracts to maximize the value of the uncommitted portion of its 174 megawatt power supply from the Seabrook Project.
During 2000, sales by Great Bay to Enron Power Marketing Inc., Aquila Power Corporation, Select Energy Inc. and Central Vermont Public Service accounted for 17%, 15%, 14% and 13% respectively, of total operating revenues. Sales by Little Bay to Great Bay represent 100% of its operating revenues.
Purchased Power Agreements
Great Bay is party to a purchased power agreement, dated as of April 1, 1993 (the "UNITIL Purchased Power Agreement"), with UNITIL Power Corporation ("UNITIL") that provides for Great Bay to sell to UNITIL approximately 10 MW of power. The UNITIL Purchased Power Agreement commenced on May 1, 1993 and runs through October 31, 2010. The current price of power under the UNITIL Purchased Power Agreement is 5.38 cents per kilowatt-hour ("kWh"). The price is subject to increase in accordance with a formula that provides for adjustments at less than the actual rate of inflation. UNITIL has an option to extend the UNITIL Purchased Power Agreement for an additional 12 years until 2022.
The UNITIL Purchased Power Agreement was front-end loaded whereby UNITIL paid higher prices, on an inflation-adjusted basis, in the early years of the Agreement and lower prices in later years. The amount of the excess paid by UNITIL in the early years of the UNITIL Purchased Power Agreement is quantified in a "Balance Account" which increased annually to a total of $4.1 million in July 1998, and now decreases annually, reaching zero in July 2001. If the UNITIL Purchased Power Agreement terminates prior to its scheduled termination, and if at that time there is a positive amount in the Balance Account, Great Bay is obligated to refund that amount to UNITIL.
To secure the obligations of Great Bay under the UNITIL Purchased Power Agreement, including the obligation to repay UNITIL the amount in the Balance Account, the UNITIL Purchased Power Agreement grants UNITIL a mortgage on Great Bay's interest in the Seabrook Project. This mortgage may be subordinated to first mortgage financing of up to a maximum amount of $80,000,000. The UNITIL Purchased Power Agreement further provides that UNITIL's mortgage will rank pari passu with other mortgages that may hereafter be granted by Great Bay to other purchasers of power from Great Bay to secure similar obligations, provided that (i) the maximum amount of indebtedness secured by the first mortgage on the Seabrook Interest may not exceed $80,000,000, and (ii) the combined total of all second mortgages on the Seabrook Interest may not exceed the sum of (a) $80,000,000 less the total amount of Great Bay's debt then outstanding which is secured by a first mortgage plus (b) $57,000,000.
Great Bay originally entered into a power sales agreement, dated as of November 19, 1999, with Little Bay. Great Bay and Little Bay renewed this agreement on November 20, 2000 for a one-year term ending November 19, 2001. Under the terms of the agreement, Little Bay sells at cost, and Great Bay purchases, all
of the output of the portion of Seabrook owned by Little Bay. This agreement is a unit power sale agreement. Accordingly, when all or part of Little Bay's interest in Seabrook is not producing, the obligation of Little Bay to sell (and of Great Bay to purchase) is proportionately eliminated. The agreement can be terminated at any time by mutual consent of the parties, after any notice required by law.
On February 6, 2001, Great Bay executed a Purchase Power Agreement with Select whereby Great Bay will sell 50 MWs of energy associated with Seabrook to Select in exchange for 25 MWs of energy associated with Millstone Unit 2 and 25 MWs of energy associated with Millstone Unit 3. Millstone is a nuclear power plant located in Connecticut. The term of this agreement is April 1, 2001 through December 31, 2001. Delivery of power from either company is contingent on each of the units operating at certain capacity.
As part of the agreement, Select made a prepayment of $3.7 million to Great Bay in February 2001 and a second prepayment of $3.3 million is required in March 2001. Great Bay is compensating Select for the prepayments by (i) paying 12% annual interest for the period from February 6, 2001 through March 31, 2001 and (ii) giving Select a price differential for the power being exchanged until such time as the Select prepayment has been repaid. In order to collateralize the transaction, Great Bay and Little Bay have each provided Select with a mortgage lien and security interest in their respective interests in the Seabrook Project. Once Great Bay has repaid Select, the mortgage liens and security interests will be released and there will be no price differential in exchanging power throughout the remaining terms of the agreement.
Competition
Great Bay sells its share of Seabrook electricity into the wholesale electricity market in the Northeast United States. There are a large number of suppliers to this market and a surplus of capacity, resulting in competition. A source of competition comes from traditional utilities, some of which presently have excess capacity. In addition, non-utility wholesale generators of electricity, such as independent power producers ("IPPs"), Qualifying Facilities ("QFs") and EWGs, as well as power marketers and brokers, actively sell electricity in this market.
Great Bay may face increased competition, primarily based on price, from all the foregoing sources in the future. Great Bay believes that it will be able to compete effectively in the wholesale electricity market because of the current low cost of electricity generated by the Seabrook Project in comparison with existing alternative sources.
NEPOOL
Great Bay is a member of the New England Power Pool ("NEPOOL") and is a party to the New England Power Pool Agreement (the "NEPOOL Agreement"). 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 on its participants obligations concerning generating capacity reserves and the right to use major transmission lines.
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.
NERTO
On January 16, 2001, in response to Federal Energy Regulatory Commission ("FERC") Order No. 2000, ISO-NE and six companies owning transmission facilities in New England filed a joint petition for a declaratory order to form the New England Regional Transmission Organization ("NERTO"). Under the plan submitted to FERC, ISO-NE, Bangor Hydro-Electric Company, Central Maine Power Company,
National Grid USA, Northeast Utilities Service Company, The United Illuminating Company and Vermont Electric Power Company, Inc. proposed a Regional Transmission Organization ("RTO") consisting of two entities working in concert: (1) a new independent transmission company, Northeast Independent Transmission Company, LLC ("NE ITC") and (2) an independent system operator. Like ISO-NE, the NE ITC will be subject to FERC regulations.
FERC Order No. 2000, issued in December 1999, anticipated that transmission owners and operators would develop and join RTOs on a voluntary basis. Order No. 2000 is premised on obtaining public benefits through competition and the effective and reliable operation of a region's transmission system including the upgrading of existing facilities and the development of new transmission facilities.
Nuclear Power, Energy and Utility Regulation
The Seabrook Project and Great Bay and Little Bay, as part owners of a licensed nuclear facility, are subject to the broad jurisdiction of the NRC, which is empowered to authorize the siting, construction and operation of nuclear reactors after consideration of public health and safety, environmental and antitrust matters. Great Bay and Little Bay have been, and will be, affected to the extent of their proportionate share by the cost of any such requirements made applicable to the Seabrook Project.
Great Bay and Little Bay are also subject to the jurisdiction of the FERC under Parts II and III of the Federal Power Act and, as a result, are required to file with FERC all contracts for the sale of electricity. FERC has the authority to suspend the rates at which Great Bay and Little Bay propose to sell power, to allow such rates to go into effect subject to refund and to modify a proposed or existing rate if FERC determines that such rate is not "just and reasonable." FERC's jurisdiction also includes, among other things, the sale, lease, merger, consolidation or other disposition of facilities, interconnection of certain facilities, accounts, service and property records.
Because they both are EWG's, Great Bay and Little Bay are not subject to the jurisdiction of the Securities and Exchange Commission ("SEC") under PUHCA. In order to maintain their EWG status, Great Bay and Little Bay must continue to engage exclusively in the business of owning and/or operating all or part of one or more "eligible facilities" and to sell electricity only at wholesale (i.e. not to end users) and activities incidental thereto. An "eligible facility" is a facility used for the generation of electric energy exclusively at wholesale or used for the generation of electric energy and leased to one or more public utility companies. The term "facility" may include a portion of a facility. In the case of Great Bay and Little Bay, their combined 15% joint ownership interest in the Seabrook Project comprises an "eligible facility."
The New Hampshire Public Utilities Commission ("NHPUC") and the regulatory authorities with jurisdiction over utilities in New Hampshire and state legislatures of several other states in which Great Bay sells electricity are considering or are implementing initiatives relating to the deregulation of the electric utility industry. Simultaneously with the deregulation initiatives occurring in each of the New England states, NEPOOL restructured to create and maintain open, non-discriminatory, competitive, unbundled markets for energy, capacity, and ancillary services. These markets commenced operation in May 1999. All of the deregulation initiatives open electricity markets to competition in the affected states. While Great Bay and Little Bay believe they are low-cost producers of electricity and will benefit from the deregulation of the electric industry, it is not possible to predict the impact of these various initiatives on the companies.
Nuclear Power Issues
Nuclear units in the United States have been subject to widespread criticism and opposition, which has led to construction delays, cost overruns, licensing delays and other difficulties. Various groups have sought to prohibit the completion and operation of nuclear units and the disposal of nuclear waste by litigation, legislation and participation in administrative proceedings. The Seabrook Project was the subject of significant public controversy during its construction and licensing and remains controversial. An increase in public concerns regarding the Seabrook Project or nuclear power in general could adversely affect the operating license of Seabrook Unit 1. While the Company cannot predict the ultimate effect of such controversy, it is possible that it could result in a premature shutdown of the unit.
In the event of a permanent shutdown of any unit, NRC regulations require that the unit be completely decontaminated of any residual radioactivity. While the owners of the Seabrook Project are accumulating monies in a trust fund to pay decommissioning costs, if these costs exceed the amount of the trust fund, the owners, including Great Bay and Little Bay, will be liable for the excess.
Nuclear Related Insurance
In accordance with the Price Anderson Act, the limit of liability for a nuclear-related accident is approximately $9.5 billion, effective November 18, 1994. The primary layer of insurance for this liability is $200 million of coverage provided by the commercial insurance market. The secondary coverage is approximately $9.3 billion, based on the approximately 106 currently licensed reactors in the United States. The secondary layer is based on a retrospective premium assessment of $88.1 million per nuclear accident per licensed reactor, payable at a rate not exceeding $10 million per year per reactor. In addition, the retrospective premium is subject to inflation based indexing at five year intervals and, if the sum of all public liability claims and legal costs arising from any nuclear accident exceeds the maximum amount of financial protection available, then each licensee can be assessed an additional 5% ($4.4 million) of the maximum retrospective assessment. With respect to the Seabrook Project, Great Bay and Little Bay would be obligated to pay their ownership share of any assessment resulting from a nuclear incident at any United States nuclear generating facility. Great Bay and Little Bay estimate their maximum liability per incident currently would be an aggregate amount of approximately $13.2 million per accident, with a maximum annual assessment of about $1.5 million per incident, per year.
Great Bay and Little Bay also independently purchase business interruption insurance from Nuclear Electric Insurance Limited ("NEIL"). The current policy is in effect from April 1, 2000 until April 1, 2001 and a renewal policy has been signed which will be in effect from April 1, 2001 until April 1, 2002. The policy provides for the payment of a fixed weekly loss amount of $670,000 in the event of an outage at the Seabrook Project of more than 23 weeks resulting from the property damage occurring from a "sudden fortuitous event, which happens by chance, is unexpected and unforeseeable." The maximum amount payable to Great Bay and Little Bay is a total of $90.6 million. Under the terms of the policy, Great Bay and Little Bay are subject to a potential retrospective premium adjustment of up to approximately $469,335 should NEIL's board of directors deem that additional funds are necessary to preserve the financial integrity of NEIL. Since NEIL was founded in 1980, there has been no retrospective premium adjustment; however, there can be no assurance that NEIL will not make retrospective adjustments in the future. The liability for this retrospective premium adjustment ceases six years after the end of the policy unless prior demand has been made.
Nuclear Fuel
The Seabrook Project's managing agent has made, or expects to make, various arrangements for the acquisition of uranium concentrate, the conversion, enrichment, fabrication and utilization of nuclear fuel and the disposition of that fuel after use. Many of these arrangements are pursuant to multi-year contracts with concentrate and service providers. Based on the Seabrook Project's existing contractual arrangements, Great Bay and Little Bay believe that the Seabrook Project has available, or under supply contracts, sufficient nuclear fuel for operations through approximately 2003. Uranium concentrate and conversion, enrichment and fabrication services currently are available from a variety of sources. The cost of such concentrate and such services varies based upon market forces.
Nuclear Waste Disposal
Costs associated with nuclear plant operations include amounts for nuclear waste disposal, including spent fuel, as well as for the ultimate decommissioning of the plants. The Nuclear Waste Policy Act of 1982 (the "NWPA") requires the United States Department of Energy (the "DOE"), subject to various contingencies, to design, license, construct and operate a permanent repository for high level radioactive waste and spent nuclear fuel, which are collectively referred to as "high-level waste."
The joint owners of the Seabrook Project, through their managing agent NAESCO, entered into contracts with the DOE for high-level waste disposal in accordance with the NWPA. Under these contracts and the NWPA, the DOE was required to take title to and dispose of the Seabrook Project's high-level waste beginning no later than January 31, 1998. However, the DOE has announced that its first high-level waste repository will not be in operation until 2010 at the earliest.
As a result of this delay, many states and nuclear plant operators, including NAESCO, sued the DOE for injunctive relief and monetary damages. Two U.S. Courts of Appeals ordered the DOE to proceed with its high-level waste disposal obligations and ruled that plant operators are entitled to money damages from DOE. However, there can be no assurance that the Seabrook Project will collect damages from the DOE because, among other things, NAESCO's case against the DOE is still pending.
In March 2000, Congress passed amendments to the NWPA that would require the DOE to begin accepting nuclear waste shipments at a Nevada site in 2007. However, former President Clinton vetoed this legislation and Congress did not override Mr. Clinton's veto. Until the DOE begins receiving nuclear waste materials in accordance with the NWPA and its contracts, nuclear plants such as Seabrook must retain high-level waste on-site or make other storage provisions.
NAESCO, the managing agent of the Seabrook Project, has advised the Company that the Seabrook Project's on-site storage capacity for low-level waste ("LLW") is expected to be sufficient to meet the project's storage requirements through 2006. In addition, NAESCO advises that the Seabrook Project has adequate on-site storage capacity for high-level waste until approximately 2010.
The Low-Level Radioactive Waste Policy Act of 1980 requires each state to provide disposal facilities for LLW generated within the state, either by constructing and operating facilities or by joining regional compacts with other states to jointly fulfill their responsibilities. However, the Low-Level Radioactive Waste Policy Amendments Act of 1985 permits each state in which a currently operating disposal facility is located (South Carolina, Nevada and Washington) to impose volume limits and a surcharge on shipments of LLW from states that are not members of their regional compact.
The Seabrook Project ships certain LLW to privately owned facilities in Tennessee and Utah. All LLW generated by the Seabrook Project that exceeds the maximum radioactivity level of LLW accepted by these facilities is currently stored on-site at the Seabrook facility.
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.
Great Bay and Little Bay are responsible for their pro rata share of the decommissioning and cancellation costs for Seabrook. Great Bay pays its share of decommissioning funding on a monthly basis. Little Bay's share of decommissioning costs was prefunded by Montaup, the owner of the 2.9% interest in the Seabrook Project that Little Bay acquired in November 1999. As part of that acquisition, Montaup transferred approximately $12.4 million into Little Bay's decommissioning account, an irrevocable trust earmarked for Little Bay's share of Seabrook Plant decommissioning expenses.
The Seabrook decommissioning funding schedule is determined by the New Hampshire Nuclear Decommissioning Financing Committee (the "NDFC"). The NDFC reviews the decommissioning funding schedule for the Seabrook Project at least annually and, for good cause, may increase or decrease the amount of the funds or alter the funding schedule.
In January 2001, the NDFC issued an Order relating to proceeding NDFC Docket 2000-1, the comprehensive update of Seabrook Unit #1 Decommissioning Fund. For funding purposes, this Order reflects decommissioning beginning in 2015, shortening the funding period, which commenced in 1990, from 36 to 25 years. Great Bay began funding at an accelerated rate in 1998 in response to New Hampshire legislation,
and as such, the accelerated funding required by this Order is not expected to have a material impact on Great Bay. Great Bay's 2000 decommissioning payments totaled approximately $1.8 million.
Funds collected by Seabrook for decommissioning are deposited in an external irrevocable trust pending their ultimate use. The earnings on the external trusts also accumulate in the fund balance. The trust funds are restricted for use in paying the decommissioning of Unit 1. The investments in the trust are available for sale. Great Bay and Little Bay have therefore reported their investment in trust fund assets at market value and any unrealized gains and losses are reflected in equity. There was an unrealized holding gain of approximately $338,100 as of December 31, 2000.
Although the owners of the Seabrook Project are accumulating funds in an external trust to defray decommissioning costs, these costs could substantially exceed the value of the trust fund, and the owners, including Great Bay and Little Bay, would remain liable for the excess.
In June 1998, the New Hampshire State legislature enacted legislation that provides that in the event of a default by Great Bay on its payments to the decommissioning fund, the other Seabrook joint owners would be obligated to pay their proportional share of such default. As a result of the enactment of this legislation, the staff of the NRC notified Great Bay in July 1998 of the staff's determination that Great Bay complied with the decommissioning funding assurance requirements under NRC regulations.
In response to the obligations imposed on the other Joint Owners under the New Hampshire legislation, Great Bay agreed to make accelerated payments to the Seabrook decommissioning fund such that Great Bay will have contributed sufficient funds by the year 2015 to allow sufficient monies to accumulate, with no further payments by Great Bay to the fund, to the full estimated amount of Great Bay's decommissioning obligation by the time the current Seabrook operating license expires in 2026. Based on the currently approved funding schedule and Great Bay's accelerated funding schedule, Great Bay's decommissioning payments will be approximately $2.6 million in 2001 and escalate at 4% each year thereafter through 2015.
The current estimated cost to decommission the Seabrook Project (based on the NDFC Docket 2000-1, as updated by NDFC Order No. 5 in January 2001) is approximately $609.4 million in 2001 dollars, assuming (for decommissioning funding purposes) a remaining 14-year life for the facility and a future cost escalation rate of 4.0%. Based on this estimate, the value of Great Bay and Little Bay's 15% share of this liability is approximately $91.6 million in 2001 dollars.
On November 15, 1992, Great Bay's former parent, EUA, and certain other parties entered into a settlement agreement. Under the settlement agreement, EUA guaranteed an amount not to exceed $10 million of Great Bay's future decommissioning costs of Seabrook Unit 1 in the event that Great Bay is unable to pay its share of such decommissioning costs.
Environmental Regulation
The Seabrook Project, like other electric generating stations, is subject to standards administered by federal, state and local authorities with respect to the siting of facilities and associated environmental factors. The United States Environmental Protection Agency (the "EPA"), and certain state and local authorities, have jurisdiction over releases of pollutants, contaminants and hazardous substances into the environment and have broad authority in connection therewith, including the ability to require installation of pollution control devices and remedial actions. The NRC has promulgated a variety of standards to protect the public from radiological pollution caused by the normal operation of nuclear generating facilities.
The EPA issued a National Pollutant Discharge Elimination System ("NPDES") permit, valid for a period of five years, to NAESCO on October 30, 1993 authorizing discharges from Seabrook Station into the Atlantic Ocean and the Browns River in accordance with limitations, monitoring requirements and conditions specified in the permit. A renewal application was filed in April 1998 and supplemented in August and September of 1998 and in September 1999. NAESCO has advised Great Bay that the Seabrook Station's initial five-year NPDES permit will remain effective during the renewal process.
On July 26, 1999, the New Hampshire Department of Environmental Services issued a renewal of NAESCO permits to operate two auxiliary boilers, two emergency diesel generators and other smaller units in accordance with New Hampshire Revised Statutes Annotated Chapter 125-C. These permits prescribe limits of the emission of air pollutants into the ambient air as well as record keeping and other reporting criteria. Because the liabilities of the Participants under the JOA are several and not joint, in the event that NAESCO violates the emissions limits contained in its permits, if at all, Great Bay and Little Bay will be liable for their pro rata share of any costs and liabilities assessed for the emissions violations.
In some environmental areas, the NRC and the EPA have overlapping jurisdiction. Thus, in addition to being subject to NRC regulations, the Seabrook Project is subject to all conditions imposed by the EPA and a variety of federal environmental statutes, including obtaining permits for the discharge of pollutants (including heat, which is discharged by the Seabrook Project) into the nation's navigable waters. In addition, the EPA has established standards, and is in the process of reviewing existing standards, for certain toxic air pollutants, including radionuclides, under the United States Clean Air Act which apply to NRC-licensed facilities. The effective date for the new EPA radionuclide standard has been stayed as applied to nuclear generating units. Environmental regulation of the Seabrook Project may result in material increases in capital and operating costs, delays or cancellation of construction of planned improvements, or modification or termination of operation of existing facilities. Management believes that Great Bay and Little Bay are in compliance in all material respects with applicable EPA, NRC and other regulations relating to pollution caused by nuclear generating facilities.
INTERNET-BASED ENERGY TRADING AND INFORMATION BUSINESS
Introduction
BayCorp owns a 45.9% equity interest in HoustonStreet, which developed and operates HoustonStreet.com, an Internet-based trading platform and information portal for wholesale energy-related commodity traders. Currently, HoustonStreet offers online energy-related commodity trading exchanges that allow traders to trade electricity, crude oil and refined products for the United States markets over the Internet. HoustonStreet plans to develop and launch trading platforms for natural gas and other energy-related commodities for the United States markets.
HoustonStreet also is exploring opportunities to develop similar energy-related commodity exchanges in both European and Asian markets. In September 2000, HoustonStreet launched an electricity trading platform in the United Kingdom, Germany, Belgium, Switzerland, Austria and the Netherlands through its newly-formed and wholly-owned subsidiary, HoustonStreet B.V. On September 15, 2000, HoustonStreet B.V. entered into an agreement with RWE Trading GmbH, a German private limited liability company, Vattenfall AB, a Swedish public company, and Electrabel, N.V., a Belgian public limited liability company, pursuant to which RWE Trading, Vattenfall and Electrabel use HoustonStreet B.V.'s platform for energy trading activities. There can be no assurance that these relationships will be successful. HoustonStreet plans to enter other European markets in electricity and other energy-related commodities.
HoustonStreet initially launched its Internet-based wholesale electricity trading exchange in the Northeast on July 8, 1999 and achieved first mover position in the online market for electricity trading. On September 13, 1999, HoustonStreet launched electricity trading throughout the United States, four months ahead of schedule. HoustonStreet launched its crude oil and refined products trading platforms on May 18, 2000 and its new electricity trading platform, SpeedWay, on May 22, 2000.
As of February 2001, over 200 companies and over 1,200 individual traders have registered on HoustonStreet. Nine of the top ten U.S. electricity trading companies and all of the top ten international oil trading companies have registered on the Web site. As of February 7, 2001, over $2.0 billion had been transacted on HoustonStreet's oil platform since its launch in May 2000.
HoustonStreet is also pursuing opportunities that extend beyond the wholesale trading platform in its efforts to become "how energy companies do business." HoustonStreet intends to leverage its open architecture in order to integrate trade information with its customers' mid- and back-office applications.
Through its energy portal, HoustonStreet plans to offer a suite of value-added offerings that help energy companies become more efficient and trade on real-time information.
Industry Background
Today, almost all electricity, crude oil, refined products and approximately half of all natural gas trading is conducted by telephone. As online exchanges develop and provide more accurate and comprehensive real-time information and faster execution of trades, HoustonStreet's management believes that energy traders will increasingly adopt the online trading method. In addition, HoustonStreet's management believes that trading companies facing increased competition and lower profit margins will utilize online trading technology to realize cost savings and efficiencies. Moreover, HoustonStreet's management believes that virtually all wholesale energy traders use the Internet for certain aspects of their business, including scheduling, interfacing with various regulatory bodies and accessing information from power pools, such as ISO New England and PJM ISO. Since traders already use the Internet for other business activities, HoustonStreet's management believes that traders will also use the Internet for trading.
State of Wholesale Electricity Market. The electricity market in the United States can be divided into two categories based on the electricity producing entity. The first type of producer, the vertically integrated utility, generates power and sells it directly to its end users. The second type of producer, the independent power producer, generates electricity and sells it on a wholesale basis. Utilities and independent power producers trade wholesale electricity. Wholesale electricity can be traded multiple times, as traders routinely buy and sell power to accommodate varying delivery point and delivery time requirements.
In addition to utilities and independent power producers, electricity is traded by power marketers. Power marketers are non-regulated companies that buy and sell wholesale electricity at market prices. Although power marketers traditionally do not own electrical generation, transmission or distribution assets, they are in some instances affiliated with enterprises that own such assets.
Wholesale trading of electricity in the United States totaled approximately $85 billion in 1999, representing over 3.5 billion-megawatt hours. According to Power Markets Week, power marketer sales alone reached 2.7 billion megawatt hours in 1999.
Electricity Trading and Deregulation. With the onset of electric utility deregulation in the United States, the wholesale power trading market has grown and changed significantly. Historically, electric utilities traded power among themselves primarily on a "real time" (electric power for the next hour) and "day ahead" (today for tomorrow) basis. Forward transactions (beyond the next day) were less common. With vertically integrated utilities, the need for wholesale trading is mainly driven by plant outages and maintenance. Traditional regulated utilities priced transactions based on cost and rate of return rather than market dynamics.
There are two primary factors driving the change and growth of the wholesale power trading market in the United States - the breakup of the vertically integrated model and the introduction of non-rate of return regulated participants. The break up of vertically integrated organizations has increased the need for the resulting organizations to engage in wholesale transactions. When utilities were vertically integrated, captive generation was used to serve captive load and transactions were used to fill in mismatches between the two. Unaffiliated load-serving and generation entities must purchase and sell power to conduct their ongoing businesses.
Twelve states have completed electric utility deregulation as of October 2000. These states represent approximately 29% of the United States' electricity consumption. In addition, 12 other states have enacted restructuring legislation to date. These states represent an additional approximately 25% of the United States' electricity consumption. HoustonStreet's management believes that the ongoing deregulation process will continue and thereby generate a substantially larger market for trading on HoustonStreet.com.
Trading Versus Consumption Volume. Commodity energy products typically trade multiple times prior to consumption. For example, a given cubic foot of natural gas trades approximately eight times before consumption, based on data available from the United States DOE and the New York Mercantile Exchange.
Electricity trading is in its early stages of development, with a trading to consumption multiple of less than one. Based on United States Department of Energy statistics, the production of electricity in 1998 constituted an approximate $80 billion market with a corresponding trading market of $70 billion. HoustonStreet's management believes that this multiple will increase as electricity trading matures, offering HoustonStreet a significant opportunity for growth. Principally as a result of deregulation of the electric utility industry and divestiture of electricity generating assets, management believes that electricity promises to be one of the largest traded commodities in the United States.
Technology
HoustonStreet's modular and scalable architecture is designed to accommodate enhancements, additional capacity and future expansion into other markets. HoustonStreet has developed an e-commerce solution designed to integrate energy trading with companies' mid- and back-office systems, streamlining internal trading processes and providing cost savings and efficiencies. An example of this scalability is an application developed by HoustonStreet, which enables traders to capture details of all of their trades, even those conducted off the HoustonStreet platforms. The integration capability provides the potential for trading information to be passed directly into the company's mid- and back-office systems thereby eliminating manual effort, reducing errors and facilitating real-time risk management.
Sources of Revenue
HoustonStreet receives a fee for every trade completed on its Web site. The transaction fees charged by HoustonStreet are generally at or below the commissions charged by telephone brokers. Commissions on energy trades typically range from 0.01% to 0.05% of the volume of the energy traded online.
Services
HoustonStreet currently offers three trading platforms -- electricity, crude oil and refined products. In May 2000, HoustonStreet launched SpeedWay, a platform for trading standard blocks of power at standard delivery points. HoustonStreet's crude oil platform includes several trading floors, organized by grade and location. The platform allows for a user-customized view where the user can specify which markets it wants to appear together on a floor, regardless of grade, location or type. HoustonStreet's refined products platform also 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. Commodities traded include numerous grades of gasoline and distillates, including jet fuel, number 2 heating oil, low sulfur diesel, regular gas, regular RFG gas, premium gas and premium RFG gas. HoustonStreet is currently developing its natural gas trading platform, which it expects to launch in the second quarter of 2001. HoustonStreet's natural gas platform is designed to cover major geographic points and trading types, including cash, index, swing swap, fixed for float and basis.
Competition
HoustonStreet's trading exchanges compete with brokers who arrange for trades by telephone and, to a lesser extent, electronic brokerage services. Moving traders from the telephone to the Internet is perhaps the largest competitive challenge facing HoustonStreet. Currently, most transactions are conducted on the telephone either directly between two traders or through a telephone broker. The broker does not act as a principal in the transaction. The purchasing and selling entities are disclosed to each other upon completion of every transaction. This process can be inefficient and time consuming. In addition, the human element in the telephone broker market introduces a risk of error or omission in the dissemination of market information. The level of price transparency is low. HoustonStreet is aware of several electronic brokerages currently in operation that, to a varying extent, compete with HoustonStreet. In addition, HoustonStreet is aware of several energy companies that have announced Internet-based systems designed to give users the ability to trade energy-related commodities with only that company. These Web sites are not independent exchanges, but rather Internet-based distribution systems for company-specific products and services.
EMPLOYEES AND MANAGEMENT
As of March 21, 2001, BayCorp had 10 employees. Its subsidiaries, Great Bay and Little Bay, had no employees. HoustonStreet (US) had 31 employees and HoustonStreet (UK) had 14 employees.
BayCorp has entered into Management and Administrative Services Agreements (the "Services Agreements"), with Great Bay and HoustonStreet pursuant to which BayCorp provides Great Bay and HoustonStreet a full range of management services, including general management and administration, accounting and bookkeeping, budgeting and regulatory compliance. Under the Services Agreements, BayCorp charged Great Bay $1,114,100 in 2000 and charged HoustonStreet $641,400 in 2000. Each Services Agreement has a one-year term and provides for automatic one-year renewals.
ITEM 2.
ITEM 2. PROPERTIES.
BayCorp's principal assets include its 100% equity interests in Great Bay and Little Bay. In turn, Great Bay and Little Bay's principal asset is a combined 15% joint ownership interest in the Seabrook Project. The Seabrook Project is a nuclear-fueled, steam electricity, generating plant located in Seabrook, New Hampshire, which was planned to have two Westinghouse pressurized water reactors, Seabrook Unit 1 and Seabrook Unit 2 (each with a rated capacity of 1,150 megawatts), utilizing ocean water for condenser cooling purposes. Seabrook Unit 1 entered commercial service on August 19, 1990. Seabrook Unit 2 has been canceled. See "Business -- The Seabrook Project." BayCorp has a 45.9% equity interest in HoustonStreet.
BayCorp's corporate headquarters is located in Portsmouth, New Hampshire where it occupies approximately 2,600 square feet of office space. BayCorp's management believes that the corporate headquarters in Portsmouth, New Hampshire meets its current requirements and that additional space can be obtained to meet requirements for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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 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. 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 Nuclear Power Plant, 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 in New York.
Mr. Callendrello has a Master of Engineering -- Mechanical degree and a Bachelor of Engineering degree from Stevens Institute of Technology in Hoboken, New Jersey.
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 15 years experience in multi-national, corporate accounting and finance. From 1978 until 1993, Ms. Barnard was employed by BTR, Plc., most recently as Assistant Controller for Clarostat Mfg. Co. Inc., currently located in Plano, Texas and Juarez, Mexico. 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.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Following are the reported high and low sales prices of BayCorp common stock ("MWH") on the American Stock Exchange ("ASE") as reported in the Wall Street Journal daily as traded, for each quarter of 1999 and 2000:
As of March 21, 2001, the Company had 26 holders of record of its common stock. The Company believes that as of March 21, 2001, the Company had approximately 1,037 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 and currently expects that it will retain all of its future earnings and does not anticipate paying a dividend in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company as of and for the years ended December 31, 2000, 1999, 1998, 1997 and 1996. The information below should be read in conjunction with the "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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
BayCorp derives substantially all of its revenue through its energy trading activities and its 100% equity interest in Great Bay and Little Bay. Great Bay and Little Bay are electric generating companies whose principal asset is a combined 15% joint ownership interest in the Seabrook Nuclear Power Project in Seabrook, New Hampshire.
BayCorp reported net losses for the years ended December 31, 2000, 1999, 1998, 1997 and reported net income for the year ended December 31, 1996. The 2000 net loss was primarily attributable to the non-cash charge to earnings for unrealized losses on firm forward energy trading contracts and the 2000 Seabrook refueling outage. The 1999 net loss was primarily due to costs associated with the refueling outage that began on March 27, 1999, with the plant resuming full operating capacity on May 21, 1999. The 1998 net loss was primarily due to unscheduled outages at the Seabrook Project that occurred during the year and to the charge related to the termination of a power marketing agreement between Great Bay and PECO Energy Company. The 1997 net loss was primarily due to scheduled and unscheduled outages at the Seabrook Project that occurred during that year. The 1996 net income was primarily due to a gain of $7,036,800 from the sale of unused steam generators from Seabrook Unit 2.
The Seabrook Project from time to time experiences both scheduled and unscheduled outages. BayCorp incurs losses during outage periods due to the loss of all revenues from the sale of generation and additional costs associated with the outages as well as continuing operating and maintenance expenses and depreciation. Unscheduled outages or operation of the unit at reduced capacity can occur due to the automatic operation of safety systems following the detection of a malfunction. In addition, it is possible for the unit to be shut down or operated at reduced capacity based on the results of scheduled and unscheduled inspections and routine surveillance by Seabrook Project personnel. It is not possible for BayCorp to predict the frequency or duration of any future unscheduled outages; however, it is likely that such unscheduled outages will occur. The Seabrook Project conducted a refueling outage in 2000, which began on October 21, 2000. This refueling outage was scheduled for approximately 30 days, however due to unexpected mechanical problems, the Seabrook Project did not return to full power until February 1, 2001. Refueling outages are generally scheduled every 18 months depending upon the Seabrook Project capacity factor and the rate at which the nuclear fuel is consumed. The next refueling outage is scheduled to begin in May 2002.
The following discussion focuses solely on operating revenues and operating expenses that are presented in a substantially consistent manner for all of the periods discussed.
RESULTS OF OPERATIONS
Operating Revenues
BayCorp's operating revenues for 2000 increased by approximately $10.6 million, or 23.2%, to $56,347,000 as compared to $45,731,000 for 1999. This increase was primarily attributable to increases in selling prices in 2000 as compared to 1999. During 2000, the sales price per kilowatt-hour ("kWh") (determined by dividing total sales revenue by the total number of kWhs sold in the applicable period) increased 23% to 3.87 cents per kWh as compared with 3.13 cents per kWh in 1999. Sales of electricity decreased slightly by approximately 0.2% to 1,453,263,900 kWhs in 2000 as compared to 1,457,110,270 kWhs in 1999. The 2000 capacity factor at the Seabrook Project was 85.2% of the rated capacity as compared to a capacity factor of 85.6% for 1999. Operating revenues and capacity factor were adversely impacted in 2000 by the scheduled refueling outage at the Seabrook Project that began on October 21, 2000. A return to full power was expected on November 21, 2000. The outage was extended when damage to one of the plant's emergency diesel generators occurred, requiring an extensive repair effort. The Plant returned to full power on February 1, 2001. Operating revenues and capacity factor were adversely impacted in 1999 by the scheduled refueling outage that began on March 27, 1999. The Plant resumed full operating capacity on May 21, 1999. Great Bay purchased approximately 262,409,300 kWhs for resale in 2000 primarily to cover firm contracts during the extended outage in the fourth quarter. Great Bay purchased approximately 369,703,000 kWhs in 1999 to cover firm contracts and for resale. Average purchase prices for power were approximately 5.06 cents per kWh in 2000 and 3.02 cents per kWh in 1999.
Great Bay's cost of power (determined by dividing total operating expenses by kWhs sold during the applicable period) increased 38% to 4.61 cents per kWh in 2000 as compared to 3.33 cents per kWh in 1999. This increase was primarily the result of the expense associated with the unrealized losses on firm forward contracts of approximately $12.2 million in 2000 as compared to $806,000 in 1999.
BayCorp's operating revenues for 1999 increased by approximately $13.7 million, or 42.8%, to $45,731,000 as compared with $32,034,000 for 1998. This increase was primarily due to an increase in sales by Great Bay of power purchased in the open market in 1999. The 1999 capacity factor at the Seabrook Project was 85.6% of the rated capacity as compared to a capacity factor of 83.3% for 1998. Operating revenues and capacity factor were adversely impacted in 1999 by the scheduled refueling outage at the Seabrook Project that began on March 27. The Plant resumed full operating capacity on May 21 and operated at full capacity thru December 31, 1999. In contrast, while there was no refueling outage in 1998, the Seabrook Project had approximately 64 unscheduled outage days in 1998.
Sales of electricity increased by approximately 38.2% to 1,457,110,270 kWhs in 1999 as compared to 1,054,203,800 kWhs in 1998. During 1999, the sales price per kWh increased 3% to 3.13 cents per kWh as compared with 3.04 cents per kWh in 1998. Great Bay's cost of power decreased 5.9% to 3.33 cents per kWh in 1999 as compared to 3.54 cents per kWh in 1998. This decrease was primarily the result of the higher capacity factor at the Seabrook Project during 1999 as compared to 1998. Scheduled and unscheduled outage time increases Great Bay's cost of power because Seabrook costs are spread over fewer kWhs.
Expenses
BayCorp's total operating expenses for 2000 increased $21.4 million, or 47%, in comparison with 1999. This increase was primarily the result of the non-cash charge to earnings for unrealized losses on firm energy trading contracts. Unrealized losses for firm energy trading contracts was $12,232,000 for 2000 as compared to $806,000 for 1999. In December 1998, the Emerging Issues Task Force reached consensus on Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities ("EITF 98-10"). EITF 98-10 is effective for fiscal years beginning after December 15, 1998. EITF 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. The effects of initial application of EITF 98-10 were reported as a cumulative
effect of a change in accounting principle. Financial statements for periods prior to initial adoption of EITF 98-10 were not restated. The cumulative effect of this accounting change as of January 1, 1999 was an increase in net income of approximately $159,000 to recognize gains on net open physical purchase and sales commitments considered to be trading activity.
Production costs increased approximately $6.8 million, or 37.3%, from $18,220,000 in 1999 to $25,016,000 in 2000. This increase was primarily the result of the Company's increased ownership in the Seabrook Project, from approximately 12.1% for the first eleven months of 1999 to approximately 15% for December 1999 and all of 2000. In addition, the increase in operating expenses in 2000 as compared to 1999 was attributable to the costs associated with the extended refueling outage in the fourth quarter of 2000. Purchased power expenses increased approximately $1 million, or 8.5%, from $12,232,000 in 1999 to $13,270,000 in 2000. This increase was primarily attributable to an increase in the purchase price of power in 2000 as compared to 1999. Purchased power expenses have increased primarily because Great Bay purchased power in 2000 and 1999 in the open market to resell to third parties and to cover firm sales during scheduled and unscheduled outages in 2000 and 1999. As Great Bay enters into more sales transaction agreements to supply firm power, Great Bay's expenses to purchase power to cover firm power obligations during scheduled and unscheduled outages may increase.
Administrative and general expenses increased approximately $666,000, or 9.9%, from $6,706,000 in 1999 to $7,372,000 in 2000. Depreciation and amortization increased approximately $336,000, or 8.8%, from $3,823,000 in 1999 to $4,159,000 in 2000. These increases were primarily attributable to the increased ownership in the Seabrook Project in 2000 as compared to 1999. Taxes other than income increased approximately $972,000, or 32.8%, from $2,966,000 in 1999 to $3,938,000 in 2000. In addition to expenses increasing as a result of the Company's increased ownership in the Seabrook Project, Great Bay also received a property tax refund in 1999 as settlement for changes in assessed property values.
Interest income increased approximately $514,000, or 79.3%, from $648,000 in 1999 to $1,162,000 in 2000, primarily due to higher average cash balances during 2000 as compared to 1999. Decommissioning cost accretion increased $313,000, or 9.4%, to $3,633,000 in 2000 as compared to $3,320,000 in 1999. This accretion is a non-cash charge that reflects Great Bay's liability related to the closure and decommissioning of the Seabrook Project in current year dollars over the licensing period during which the Seabrook Project is licensed to operate. Decommissioning trust fund income increased $971,000, or 128%, to $1,726,000 in 2000 as compared to $755,000 in 1999. The increase in interest earned on the decommissioning trust fund reflected the higher 2000 fund balances as Great Bay continued to make contributions to the Great Bay decommissioning trust fund and the addition of the Little Bay decommissioning trust funds in 2000. Other Income increased approximately $443,000, or 143%, to $753,000 in 2000 as compared to $310,000 in 1999, primarily due to miscellaneous sales of Unit 2 equipment at Seabrook.
Equity loss in HoustonStreet investment was $4,352,000 in 2000 and $3,396,000 in 1999. As of December 31, 1999, the Company owned 100% of HoustonStreet. The Company recognized its ownership share of HoustonStreet's losses, $3,396,000, for 1999. 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 and started accounting for this investment on the equity method. The net financial impact of this deconsolidation was $4,352,000, recorded in 2000 (see Note 12. Investment in Unconsolidated Affiliates.)
BayCorp's total operating expenses for 1999 increased $8.3 million, or 22.3%, in comparison with 1998. This increase was primarily the result of purchased power costs in 1999. Purchased power increased approximately $11,186,000, from $1,069,000 in 1998 to $12,232,000 in 1999. Purchased power expenses have increased primarily because Great Bay purchased power in 1999 in the open market to resell to third parties and to cover firm sales during unscheduled outages in 1999. Production costs decreased approximately $2.6 million, or 12.3%, from $20.8 million in 1998 to $18.2 million in 1999. This decrease was primarily the result of fewer unscheduled outage days in 1999 compared to 1998. Administrative and general expenses decreased approximately $1.3 million, or 16%, from $7,988,000 in 1998 to $6,706,000 in 1999. Depreciation and amortization decreased approximately $167,000, or 4.6%, from $3,656,000 in 1998 to $3,823,000 in 1999.
In 1999, the Company recognized $806,000 in unrealized losses on firm energy trading contracts. There was no comparable charge in 1998. The effects of initial application of EITF 98-10 were reported as a cumulative effect of a change in accounting principle. Financial statements for periods prior to initial adoption of EITF 98-10 were not restated.
Other Deductions increased $3.5 million, or 235%, in 1999 as compared to 1998. This increase was primarily attributable to the equity loss in HoustonStreet investment in 1999. There was no HoustonStreet investment in 1998. Decommissioning cost accretion increased $447,000, or 15.6%, to $3.3 million in 1999 as compared to $2.9 million in 1998. Decommissioning trust fund income increased $142,000, or 23.2%, to $755,000 in 1999 as compared to $613,000 in 1998. The increase in interest earned on the decommissioning trust fund reflected the higher 1999 fund balance as Great Bay continued to make contributions to the decommissioning trust fund.
Net Operating Losses
For federal income tax purposes, as of December 31, 2000, the Company had net operating loss carry forwards ("NOLs") of approximately $225 million, which are scheduled to expire between 2005 and 2019. Because the Company has experienced one or more ownership changes, within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, an annual limitation is imposed on the ability of the Company to use $131 million of these carryforwards. The Company's best estimate at this time is that the annual limitation on the use of $131 million of the Company's NOLs is approximately $5.5 million per year. Any unused portion of the $5.5 million annual limitation applicable to the Company's restricted NOL's is available for use in future years until such NOL's are scheduled to expire. The Company's other $94 million of NOLs are not currently subject to such limitations.
LIQUIDITY AND CAPITAL RESOURCES
BayCorp's subsidiary, Great Bay, currently sells most of its power in the Northeast United States short-term wholesale power market. The cash generated from electricity sales by Great Bay was sufficient to meet the Company's ongoing cash requirements in 2000. If the Seabrook Project operates at a capacity factor below historical levels, or if expenses associated with the ownership or operation of the Seabrook Project, including without limitation decommissioning costs, are materially higher than anticipated, or if the prices at which Great Bay is able to sell its share of the Seabrook Project electricity decrease from current price levels, BayCorp or Great Bay would be required to raise additional capital, either through a debt financing or an equity financing, to meet ongoing cash requirements. Nonetheless, there can be no assurance that BayCorp or Great Bay will be able to raise additional capital on acceptable terms or at all.
During 2000, the Company loaned $7,000,000 to HoustonStreet. Due to the continuous losses at HoustonStreet, the Company wrote down its equity investment in HoustonStreet and subsequently its loan and receivable from HoustonStreet. As of December 31, 2000, the Company had no investments or receivables from HoustonStreet recognized on its balance sheet.
BayCorp's total cash and short term investments increased approximately $8.2 million during 2000. Liquidity improved principally because BayCorp's operating revenues exceeded its cash operating expenses in 2000. Operating expenses consist of both cash and non-cash charges. The Company had a net loss for 2000 of approximately $15.7 million. This loss included a non-cash charge to income in 2000 of approximately $12.2 million for unrealized losses on firm energy trading contracts. Other non-cash charges to income included $4.3 million for the equity loss in HoustonStreet, $4.2 million for depreciation and amortization, $4.8 million for nuclear fuel amortization and $3.6 million for decommissioning trust fund accretion. A decrease in prepaids and other assets of approximately $1.9 million was primarily due to the timing of funding as requested by Seabrook for operating expenses. There was an increase in accounts payable of approximately $7.2 million primarily due to purchased power expenses of $6.6 million for November and December 2000. Offsetting these non-cash charges to income were cash charges to income including a $5.5 million increase in December 2000 accounts receivable. Other cash charges included approximately $2.1 million for capital expenditures and $6.8 million for nuclear fuel.
Great Bay's 2000 decommissioning payments totaled approximately $1.8 million. The decommissioning funding schedule is determined by the NDFC, which reviews the schedule for the Seabrook Project at least annually. Great Bay expects to use revenues from the sale of power to make decommissioning payments. See "Business -- Decommissioning."
Great Bay and Little Bay anticipate that their share of the Seabrook Project's capital expenditures for the 2001 fiscal year will total approximately $6.8 million for nuclear fuel and various capital projects. In addition, Great Bay and Little Bay are required under the JOA to pay their share of Seabrook Unit 1 and Seabrook Unit 2 expenses, including, without limitation, operation and maintenance expenses, construction and nuclear fuel expenditures and decommissioning costs, regardless of the level of Seabrook Unit 1's operations.
On February 6, 2001, Great Bay executed a Purchase Power Agreement with Select whereby Great Bay will sell 50 MWs of energy associated with Seabrook to Select in exchange for 25 MWs of energy associated with Millstone Unit 2 and 25 MWs of energy associated with Millstone Unit 3. The term of this agreement is April 1, 2001 through December 31, 2001. Delivery of power from either company is contingent on each of the units operating at certain capacity.
As part of the agreement, Select made a prepayment of $3.7 million to Great Bay in February 2001 and a second prepayment of $3.3 million is required in March 2001. Great Bay is compensating Select for the prepayments by (i) paying 12% annual interest for the period from February 6, 2001 through March 31, 2001 and (ii) giving Select a price differential for the power being exchanged until such time as the Select prepayment has been repaid. In order to collateralize the transaction, Great Bay and Little Bay have each provided Select with a mortgage lien and security interest in their respective interests in the Seabrook Project. Once Great Bay has repaid Select, the mortgage liens and security interests will be released and there will be no price differential in exchanging power throughout the remaining terms of the agreement.
The Company's principal asset available to serve as collateral for borrowings is Great Bay's and Little Bay's combined 15% interest in the Seabrook Project. Pursuant to a purchased power agreement, dated as of April 1, 1993, between Great Bay and UNITIL, Great Bay's interest in the Seabrook Project is encumbered by a mortgage. This mortgage may be subordinated to up to $80 million of senior secured financing. Also, as noted above, in order to collateralize the transaction with Select, Great Bay and Little Bay each provided Select with a mortgage lien and security interest in their respective interests in the Seabrook Project. See "Business -- Purchased Power Agreements."
Seabrook Unit 1 transmits its generated power to the New England 345 kilovolt transmission grid, a major network of interconnecting lines covering New England, through three separate transmission lines emanating from the station. On March 5, 2001, the Seabrook Project began experiencing interruptions of the connections to the transmission system due to icing from a severe winter storm that resulted in the plant automatically tripping offline. During this shutdown, a problem was identified with the steam-driven emergency feedwater pump and plant chemistry personnel detected the presence of chlorides in the condenser hotwells, indicating leakage of seawater into the condenser. Repair of the emergency feedwater pump were completed allowing the plant to return on-line on March 15, 2001. Power was limited to approximately 70% while plant personnel continued to repair the condenser leakage. On March 19, 2001, plant operators identified a problem with the main turbine valve control system requiring that the plant be taken off-line. After repairs were completed, the plant was placed on-line on March 22, 2001 and power was increased to approximately 70%. The plant reached full power on March 25, 2001.
Management believes the plant will operate at historical levels and believes that it will be able to fulfill its obligations with respect to the agreement with Select. As mentioned previously, if this does not happen, the company will be required to raise additional funding.
The Company expects that HoustonStreet expenses and capital expenditures will substantially exceed HoustonStreet's revenues until late in 2001. HoustonStreet raised approximately $37.4 million from investors to date.
On March 22, 2001, HoustonStreet received commitments to receive up to approximately $3.9 million in additional funding, including $900,000 from BayCorp. Although HoustonStreet has received some of the funding, until the closing of the financing, there can be no assurance that HoustonStreet will receive the balance of the committed funds. This financing involves the sale by HoustonStreet of senior secured notes, warrants to purchase HoustonStreet preferred stock and warrants to purchase HoustonStreet common stock.
In March 2001, BayCorp entered into discussion with HoustonStreet involving the conversion of BayCorp's $7.0 million loan made in September 2000, together with approximately $1.0 million in accrued interest and penalties on the note and past due management fees, into approximately $8.0 million of HoustonStreet Series C Units. There can be no assurance that this proposed financing will be successfully completed. The loan, accrued interest and receivables from HoustonStreet had been written down to zero at December 31, 2000, and as such, the conversion of these amounts will have no accounting impact.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K contains forward-looking statements. For this purpose, any statements contained herein 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 Annual Report.
History of Losses
BayCorp has never reported an operating profit for any year since its incorporation. Historically, electricity sales at short-term rates have not resulted in sufficient revenue to enable BayCorp to meet its cash requirements for operations, maintenance and capital related costs. In addition, and despite recently increasing prices for electricity in the northeast United States, there can be no assurance that Great Bay or Little Bay will be able to sell power at prices that will enable them to meet their cash requirements.
Liquidity Needs
As of December 31, 2000, BayCorp had approximately $14.1 million in cash and cash equivalents, restricted cash and short-term investments. The Company believes that such cash, together with the anticipated proceeds from the sale of electricity by Great Bay and Little Bay, will be sufficient to enable the Company and its wholly-owned subsidiaries to meet their cash requirements in 2001. However, if in 2001 or thereafter, the Seabrook Project operated at a capacity factor below historical levels, or if expenses associated with the ownership or operation of the Seabrook Project, including without limitation decommissioning costs, are materially higher than anticipated, or if the prices at which Great Bay and Little Bay are able to sell their share of the Seabrook Project electricity decrease from current price levels, the Company or its wholly-owned subsidiaries would be required to raise additional capital, either through a debt financing or an equity financing, to meet ongoing cash requirements. In any event, the Company and its wholly-owned subsidiaries will likely need to raise additional capital from outside sources. There is no assurance that the Company or its subsidiaries would be able to raise such capital or that the terms on which any additional capital is available would be acceptable. If additional funds are raised by issuing equity securities, dilution to then existing stockholders will result.
Factors Related to Great Bay and Little Bay
Primary Reliance on a Single Asset. BayCorp's principal source of revenue is its wholesale electricity generation and trading business, which depends in large part on Great Bay and Little Bay's 15% combined joint interest in the Seabrook Nuclear Power Project in Seabrook, New Hampshire. Accordingly, BayCorp's results of operations significantly depend on the successful and continued operation of the Seabrook Project.
In particular, if the Seabrook Project experiences unscheduled outages of significant duration, BayCorp's results of operations will be materially adversely affected.
Changes in the New England Wholesale Power Market. During recent years in New England, the combination of (1) small increases in the demand for electricity and (2) electric industry deregulation has resulted in increased uncertainty regarding the price of electricity in the wholesale power market. Although Great Bay's average selling price per kWh (determined by dividing total sales revenue by the total number of kWhs sold in the applicable period) increased from 3.04 cents in 1998 to 3.13 cents in 1999 and to 3.87 cents in 2000, there can be no assurance that Great Bay or Little Bay will be able to sell their power at these prices or higher prices in the future.
Risks in Connection with Joint Ownership of Seabrook Project. Great Bay and Little Bay are required under the JOA to pay their share of Seabrook Unit 1 and Seabrook Unit 2 expenses, including without limitation operations and maintenance expenses, construction and nuclear fuel expenditures and decommissioning costs, regardless of Seabrook Unit 1's operations. Under certain circumstances, a failure by Great Bay or Little Bay to make their monthly payments under the JOA entitles certain other joint owners of the Seabrook Project to purchase Great Bay or Little Bay's interest in the Seabrook Project for 75% of the then fair market value thereof.
In addition, the failure to make monthly payments under the JOA by owners of the Seabrook Project other than Great Bay and Little Bay may have a material adverse effect on the Company. For example, Great Bay or Little Bay could opt to pay a greater proportion of the Seabrook Project expenses in order to preserve the value of their share of the Seabrook Project. In the past, certain of the owners of the Seabrook Project other than Great Bay and Little Bay have not made their full respective payments. The electric utility industry is undergoing significant changes as competition and deregulation are introduced into the marketplace. Some utilities, including certain Participants, have indicated in state regulatory proceedings that they may be forced to seek bankruptcy protection if regulators, as part of the industry restructuring, do not allow for full recovery of stranded costs. If a Participant other than Great Bay or Little Bay filed for bankruptcy and that Participant was unable to pay its share of Seabrook Project expenses, Great Bay or Little Bay might opt to pay a greater portion of Seabrook Project expenses in order to preserve the value of their share of the Seabrook Project. In the past, the filing of bankruptcy by a Participant has not resulted in a failure to pay Seabrook Project expenses or an increase in the percentage of expenses paid by other Participants.
The Seabrook Project is owned by Great Bay, Little Bay and the other owners thereof as tenants in common, with the various owners holding varying ownership shares. This means that Great Bay and Little Bay, which together own only a 15% interest, do not have control of the management of the Seabrook Project. As a result, decisions may be made affecting the Seabrook Project notwithstanding Great Bay and/or Little Bay's opposition.
Certain costs and expenses of operating the Seabrook Project or owning an interest therein, such as certain insurance and decommissioning costs, are subject to increase or retroactive adjustment based on factors beyond the control of BayCorp or its subsidiaries. The cost of disposing of Unit 2 of the Seabrook Project is not known at this time. These various costs and expenses may adversely affect BayCorp, Great Bay and Little Bay, possibly materially.
Risks Associated with Agreement to Sell Seabrook Ownership Interests. On October 10, 2000, the Company and its wholly-owned subsidiaries entered into an agreement with Northeast Utilities ("NU") under which Great Bay and Little Bay will join with NU in the sale of NU's ownership interests in the Seabrook Project. Under the terms of the agreement, BayCorp will receive the sales price established by an auction process led by NU. Although the auction is expected to begin in the second quarter of 2001 with a closing expected the first half of 2002, the Company cannot control the procedure or timing of the joint sale of the Seabrook Project, and the sale may be delayed, abandoned or otherwise affected by factors beyond the Company's control. Significantly, the price obtained by Great Bay and Little Bay in the sale of their Seabrook interests cannot be predicted. Further, the value of the fuel and inventory owned by Great Bay and Little Bay, currently estimated at between $10 million to $14 million, may be materially different than estimated.
Extensive Government Regulation. The Seabrook Project is subject to extensive regulation by federal and state agencies. In particular, the Seabrook Project, and Great Bay and Little Bay as part owners of a licensed nuclear facility, are subject to the broad jurisdiction of the NRC, which is empowered to authorize the siting, construction and operation of nuclear reactors after consideration of public health and safety, environmental and antitrust matters. Great Bay and Little Bay are also 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. Noncompliance with NRC requirements may result, among other things, in a shutdown of the Seabrook Project.
The NRC has promulgated a broad range of regulations affecting all aspects of the design, construction and operation of a nuclear facility, such as the Seabrook Project, including performance of nuclear safety systems, fire protection, emergency response planning and notification systems, insurance and quality assurance. The NRC retains authority to modify, suspend or withdraw operating licenses, such as the license pursuant to which the Seabrook project operates, at any time that conditions warrant. For example, the NRC might order Seabrook Unit 1 shut down (i) if flaws were discovered in the construction or operation of Seabrook Unit 1, (ii) if problems developed with respect to other nuclear generating plants of a design and construction similar to Unit 1, or (iii) if accidents at other nuclear facilities suggested that nuclear generating plants generally were less safe than previously believed.
Risk of Nuclear Accident. Nuclear reactors have been used to generate electric power for more than 35 years and there are currently more than 100 nuclear reactors used for electric power generation in the United States. Although the safety record of these nuclear reactors in the United States generally has been very good, accidents and other unforeseen problems have occurred both in the United States and elsewhere, including the well-publicized incidents at Three Mile Island in Pennsylvania and Chernobyl in the former Soviet Union. The consequences of such an accident can be severe, including loss of life and property damage, and the available insurance coverage may not be sufficient to pay all the damages incurred.
Waste Disposal; Decommissioning Cost. There has been considerable public concern and regulatory attention focused upon the disposal of low- and high-level nuclear wastes produced at nuclear facilities and the ultimate decommissioning of such facilities. As to waste disposal concerns, both the federal government and the State of New Hampshire are currently delinquent in the performance of their statutory obligations.
The joint owners of the Seabrook Project, through their managing agent NAESCO, entered into contracts with the DOE for high-level waste disposal in accordance with the NWPA. Under these contracts and the NWPA, the DOE was required to take title to and dispose of the Seabrook Project's high-level waste beginning no later than January 31, 1998. However, the DOE has announced that its first high-level waste repository will not be in operation until 2010 at the earliest.
The Seabrook Project increased its on-site storage capacity for low-level waste ("LLW") in 1996 and that capacity is expected to be sufficient to meet the Project's storage requirements through 2006. In addition, the managing agent of the Seabrook Project has advised the Joint Owners that the Seabrook Project has adequate on-site storage capacity for high-level waste until approximately 2010. If the Seabrook Project were unable to store nuclear waste on site or make other disposal provisions, the Company's business, results of operations and financial condition would be materially and adversely affected. See "Business -- Wholesale Electricity Generation and Trading Business -- Nuclear Waste Disposal."
As to decommissioning, NRC regulations require that upon permanent shutdown of a nuclear facility, appropriate arrangements for full decontamination and decommissioning of the facility be made. These regulations require that during the operation of a facility, the owners of the facility must set aside sufficient funds to defray decommissioning costs. While the owners of the Seabrook Project are accumulating monies in a trust fund to defray decommissioning costs, these costs could substantially exceed the value of the trust fund, and the owners (including Great Bay and Little Bay) would remain liable for the excess. Moreover, the amount that is required to be deposited in the trust fund is subject to periodic review and adjustment by an independent commission of the State of New Hampshire, which could result in material increases in such amounts.
Factors Related to HoustonStreet
Need for Additional Financing. Based on current levels of operations and planned growth, HoustonStreet's management anticipates that the net proceeds from sales of its stock and other securities, from commitments for further cash investments based on HoustonStreet's meeting certain performance goals and from cash generated from operations will be sufficient to meet HoustonStreet's needs through December 2001. If HoustonStreet is unable to close the sale of its Series C Units, requires additional funding or determines that it is appropriate to raise additional funding, HoustonStreet may be unable to raise additional funds. Further, any such funding may result in significant dilution to existing HoustonStreet stockholders, including BayCorp. The inability to obtain sufficient funds from operations and external sources when needed would have a material adverse effect on HoustonStreet's business, results of operations and financial condition.
Limited Operating History. HoustonStreet was incorporated in Delaware on April 27, 1999. HoustonStreet initially launched its online electricity trading platform in the Northeast on July 8, 1999 and nationwide on September 13, 1999. HoustonStreet launched its online oil trading floor on May 18, 2000. HoustonStreet has only a limited operating history upon which to evaluate its performance.
Significant Future Losses Expected. HoustonStreet's business is subject to the risks and uncertainties encountered by companies in early stages of development, particularly enterprises in new and rapidly evolving markets, such as electronic trading of energy products over the Internet. HoustonStreet's substantial operating expenses and capital expenditures from formation to date have greatly exceeded its revenues over the same period. HoustonStreet expects to continue to incur substantial operating losses until later in 2001. However, there is no assurance that HoustonStreet will be able to achieve or sustain profitability in 2001 or thereafter.
Internet-based Wholesale Energy Trading is a New and Evolving Market. Wholesale trading of energy products over the Internet is a new and rapidly evolving market. HoustonStreet cannot be certain that a viable market will emerge or be sustainable. If the market for Internet-based wholesale energy trading fails to develop, if it develops more slowly than expected, if it becomes saturated with competitors or if it does not achieve widespread market acceptance, HoustonStreet would be materially adversely affected.
Dependence on Internet-based Wholesale Energy Trading. Substantially all of HoustonStreet's revenues depend on the continued and expanded use of Internet-based wholesale energy trading platforms. HoustonStreet currently depends on its wholesale crude and refined oil trading platform for substantially all of its current revenues. During 2000, approximately 45% of HoustonStreet's revenue consisted of commission on wholesale electricity trading and the other 55% of HoustonStreet's revenue consisted of commissions on wholesale crude oil and refined products trading. From January 1, 2001 to March 15, 2001, nearly all of HoustonStreet's revenue was generated by commissions on wholesale crude and refined products. HoustonStreet will likely depend on other energy trading platforms, including platforms for natural gas trading, if planned expansion is successful.
Businesses have only recently begun significant use of the Internet for electronic commerce. Although Internet usage has grown dramatically, HoustonStreet cannot assure you that usage will continue to increase for commerce or trading wholesale energy products. A decrease in the use of the Internet or a reduction in the currently anticipated growth in the use of the Internet would have a material adverse effect on HoustonStreet. Businesses may reject the Internet as a viable commercial medium for a number of reasons, including potentially inadequate network infrastructure, slow development of enabling technologies, insufficient commercial support or privacy concerns. The Internet's infrastructure may be unable to support the demands placed on it by increased usage. In addition, delays in developing or adopting new standards and protocols required to handle increased levels of Internet activity, or increased government regulation, could cause the Internet to lose its viability as a commercial medium.
Dependence on Trading Liquidity. HoustonStreet will need to achieve trading liquidity on its Internet-based wholesale energy trading exchange in order to increase and sustain revenues. If the volume and level of trades on the exchange do not increase, HoustonStreet will not achieve profitability. If HoustonStreet fails to register additional users or generate increased traffic on its Web site, the number of trades completed on the
exchange may not increase. If the number, size and frequency of transactions do not increase, HoustonStreet will be unable to increase its revenues and HoustonStreet's business will not achieve profitability.
Dependence on Increased Business from Unaffiliated Customers. If HoustonStreet fails to grow its customer base or generate repeat and expanded business from customers that are not affiliated with HoustonStreet, HoustonStreet will be unable to achieve or sustain profitability. During 2000, Equiva Trading Company, the oil trading alliance of Shell Oil Company, Texaco and Saudi Aramco, was a party to 56% of all crude and refined oil trades on HoustonStreet. In addition, Sithe Energies, Inc. was a party to 47% of all electricity trades on HoustonStreet. HoustonStreet earns standard commissions from all trades on HoustonStreet, including trades by Equiva Trading Company and Sithe Energies, Inc. and its counterparties. Equiva Trading Company and Sithe Energies, Inc. have made private investments in HoustonStreet and are holders of HoustonStreet capital stock. To date, a substantial majority of HoustonStreet's revenue has been derived from commissions from trades involving affiliated parties and their counterparties.
HoustonStreet's management expects that commissions from trades involving affiliated parties and their counterparties will be a less significant portion of revenue in the future as the number of registered traders and the volume of trades increases. If trading volume does not increase as anticipated, HoustonStreet's revenue will not increase and HoustonStreet's business and financial results will be materially adversely affected.
Reliance on Strategic Relationships. HoustonStreet may be unable to implement its strategic growth plans without successfully identifying, forming, maintaining and enhancing strategic relationships, such as its strategic relationship with Equiva. HoustonStreet's ability to achieve significant future revenue growth will depend in part on adding new strategic partners. If HoustonStreet is unable to form or successfully develop additional strategic relationships, HoustonStreet may be unable to grow its revenues and HoustonStreet could be materially adversely affected.
International Expansion. HoustonStreet currently has foreign subsidiary offices located in Amsterdam and London. HoustonStreet expects to continue expanding its international presence. If HoustonStreet is unable to expand its international presence further, HoustonStreet may be unable to take advantage of the potential revenue associated with energy trading on a global level. While HoustonStreet's management believes that HoustonStreet can become profitable if its services are widely adopted by power traders in the United States, the global energy market represents a much larger source of revenue.
To be successful, HoustonStreet's management believes that HoustonStreet must expand further its operations in international markets. International operations subject HoustonStreet to a number of risks that may increase HoustonStreet's costs and require significant management attention. These risks include:
- difficulties and increased expenses associated with staffing and managing foreign operations,
- differing technology standards that may impede HoustonStreet's ability to integrate its trading platforms across international borders,
- reluctance or inability of energy traders abroad to accept Internet-based wholesale energy trading as a method of conducting business,
- changes in regulatory requirements,
- currency exchange rate fluctuations, and
- potentially adverse tax consequences, including restrictions on the repatriation of earnings.
Regulatory Risks and Privacy Concerns. As use of the Internet 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 limit the market for HoustonStreet's services.
In order to use HoustonStreet's trading exchange, traders must first register with HoustonStreet. The registration process requires that users provide certain information about themselves and the companies for which they trade. Although HoustonStreet collects this data only with the consent of a visitor, privacy concerns may cause visitors to resist registering to use the exchange. In addition, legislative or regulatory
requirements may heighten privacy concerns. Other countries and political entities, such as the European Economic Community, have adopted legislation or regulatory requirements relating to privacy. The United States may adopt similar legislation or regulatory requirements. If privacy legislation is enacted or privacy concerns are not adequately addressed, HoustonStreet's business could be materially adversely affected.
Unpredictability of Future Revenues; Potential Fluctuation in Quarterly Operating Results. As a result of HoustonStreet's limited operating history and the emerging nature of the market for Internet-based trading of wholesale energy products, HoustonStreet is unable to forecast its revenues accurately. HoustonStreet expects to experience significant fluctuations in its future quarterly operating results due to a variety of factors, many of which are outside HoustonStreet's control. These factors include the demand for HoustonStreet's trading services, the introduction and market acceptance of new services in the industry, reductions in trading commissions or changes in how services are priced, and the amount and timing of operating costs and capital expenditures related to expanding HoustonStreet's business, operations and infrastructure. Quarterly results also can be affected by changes in the use of the Internet and electronic commerce, changes in governmental regulations, and changes in general economic conditions and economic conditions specifically related to the Internet and energy trading markets.
In addition, trading volumes can fluctuate due to the seasonal nature of the wholesale electricity trading market. Typically, there are substantial declines in the volume of wholesale electricity trading during the fourth quarter of the calendar year. HoustonStreet's management believes that fourth quarter trading can be adversely affected by seasonal trading patterns, the inclination of some utilities, independent power producers and power marketers to maintain existing trading positions near year-end and other factors.
It is difficult to forecast the effect such factors, or the combination of any of these factors, would have on HoustonStreet's results of operations for any given fiscal quarter. HoustonStreet's management believes that HoustonStreet's quarterly revenues, expenses and operating results could vary significantly in the future and that period-to-period comparisons should not be relied on as indications of future performance.
System Maintenance and Protection. Unanticipated problems at the third party facility that houses substantially all of HoustonStreet's computer and communications hardware systems could cause interruptions or delays in HoustonStreet's business, loss of data or render HoustonStreet unable to process wholesale energy trades. Any such interruptions or delays at the facility would harm HoustonStreet's revenue and results of operations. In addition, these third-party systems and operations are vulnerable to damage or interruption from intentional malicious acts, fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events. HoustonStreet does not carry business interruption insurance. In addition, the failure by the third-party facility to provide the data communications capacity required by HoustonStreet, as a result of human error, natural disaster or other operational disruptions, could result in interruptions in HoustonStreet's service. The occurrence of any or all of these events could harm HoustonStreet's reputation and brand and business.
Traders on the HoustonStreet.com may also be harmed by any system or equipment failures experienced by HoustonStreet. In that event, HoustonStreet's relationship with these traders may be adversely affected, HoustonStreet may lose traders, HoustonStreet's ability to attract new users may be adversely affected and HoustonStreet could be exposed to liability.
If users of HoustonStreet's trading platform suffer similar interruptions in their operations, for any of the reasons discussed above or for other reasons, HoustonStreet's business could also be adversely affected. In addition, if traders' computer systems suffer interruptions, the link to HoustonStreet's Web site could be severed and the traders' wholesale energy trades could be delayed or stopped.
Rapid Technological Change. To remain competitive, HoustonStreet must continue to enhance and improve its services. The Internet is characterized by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices. HoustonStreet's success will depend, in part, on its ability to:
- develop leading Internet-based technologies useful for wholesale energy trading,
- enhance its existing services,
- develop new services and technology that address the increasingly sophisticated and varied needs of wholesale energy traders, and
- respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
HoustonStreet would be materially adversely affected if it is unable, for technical, legal, financial or other reasons, to adapt in a timely manner to changing market conditions or customer requirements.
Intense Competition. Wholesale energy trading markets are dynamic and intensely competitive. Competition is likely to increase in the future as new companies enter the market and current competitors expand their products and services. See "Business -- Internet-based Energy Trading and Information Business -- Competition." Many of these potential competitors are likely to enjoy substantial competitive advantages, including:
- larger technical, production and marketing staffs,
- a more established presence in the wholesale energy trading community,
- greater brand recognition, and
- substantially greater financial, marketing, technical and other resources.
If HoustonStreet does not compete effectively or if it experiences pricing pressures, reduced margins or loss of market share resulting from increased competition, HoustonStreet's business would be materially adversely affected.
Dependence on Management and Key Employees. HoustonStreet is, and for the foreseeable future will be, dependent upon the services of its directors, executive officers and key employees. HoustonStreet's future success depends on its ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial, marketing, sales and customer service personnel. The loss of the services of current key personnel and the failure to hire new personnel could have a material adverse effect upon HoustonStreet's results of operations, product development efforts and ability to grow.
In 2000, each of BayCorp and HoustonStreet entered into a new employment agreement with Frank W. Getman Jr. Mr. Getman serves as the President and Chief Executive Officer of each company and is separately compensated by each company. Although HoustonStreet purchased key man term life insurance on the life of Frank W. Getman Jr. in 2000, HoustonStreet does not plan to purchase life insurance on the lives of any of its other key personnel.
Management of Growth. In 2000, HoustonStreet experienced significant growth in its business operations. This growth placed a substantial strain on HoustonStreet's resources. HoustonStreet's need to manage its growth successfully will require it to implement appropriate operational, financial, accounting and management information systems and controls. HoustonStreet's failure to manage its growth effectively would have a material adverse effect on HoustonStreet.
Protection of Proprietary Rights. HoustonStreet's ability to compete depends significantly on the proprietary nature of its Web site technology as well as its patent applications. HoustonStreet has filed three patent applications to date. HoustonStreet seeks to protect its proprietary rights through a combination of patent, copyright and trade secret law and confidentiality agreements. However, there can be no assurance that a third party will not misappropriate or otherwise obtain access to HoustonStreet's proprietary technology or develop similar technology independently. Competitors may also be able to circumvent any patents that HoustonStreet obtains.
In recent years, there has been significant litigation involving patents and other intellectual property rights. HoustonStreet could incur substantial costs to prosecute or defend any intellectual property litigation. If HoustonStreet litigated to enforce its rights, it would be expensive, would divert management resources and may not be adequate to prevent the use of its intellectual property by third parties.
Potential Intellectual Property Infringement. While 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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
COMMODITY PRICE RISK
The prices of electricity are subject to fluctuations resulting from changes in supply and demand. Great Bay sells a portion of its physical electrical output through forward, fixed-price power contracts. Great Bay tracks its market exposure for these forward contracts in a mark-to-market model that is updated daily with current market prices and is reflected in the company's balance sheet. See Note 5 -- Energy Marketing. The positive, or negative, value of Great Bay's portfolio of firm power commitments represents an estimation of the gain, or loss, that Great Bay would experience if open firm commitments were covered at then-current market prices.
The table below presents total megawatt-hour ("MWh") volumes and mark-to-market values for replacing the contracts that Great Bay has entered into as of year-end (December 31, 2000.)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is submitted in the response found under Item 14(a)(1) in this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors. The information with respect to directors required under this item is incorporated herein 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 2, 2001.
(b) Executive Officers. The information with respect to executive officers required under this item is incorporated by reference to Part I of the Report.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by reference to the sections entitled "Election of Directors -- Compensation for 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 on May 2, 2001.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement with respect to the Annual Meeting of Stockholders to be held on May 2, 2001.
ITEM 13.
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 of Stockholders to be held on May 2, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 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. Financial Statement Schedules. The Financial Statement Schedules listed in the Index to Consolidated Financial Statements and Financial Statement Schedules are filed as part of this Annual Report on Form 10-K.
3. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
On October 16, 2000, the Company filed a Current Report on Form 8-K dated October 10, 2000 reporting that the Company, Great Bay and Little Bay agreed to sell the interests in the Seabrook Nuclear Power Plant of Great Bay and Little Bay by including their aggregate 15% ownership share in the upcoming sale of Northeast Utilities' subsidiaries' shares of the Seabrook Plant.
BAYCORP HOLDINGS, LTD.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of BayCorp Holdings, Ltd.
We have audited the accompanying consolidated balance sheets of BayCorp Holdings, Ltd. (a Delaware corporation) and its wholly-owned subsidiaries, as of December 31, 2000 and 1999, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the 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 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 wholly-owned subsidiaries as of December 31, 2000 and 1999, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts February 8, 2001 (except for the matters discussed in Note 13, as to which the date is March 25, 2001)
BAYCORP HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
(The accompanying notes are an integral part of these consolidated statements.)
BAYCORP HOLDINGS, LTD. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, (DOLLARS IN THOUSANDS)
(The accompanying notes are an integral part of these consolidated statements.)
BAYCORP HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
(The accompanying notes are an integral part of these consolidated statements.)
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 statements).
BAYCORP HOLDINGS, LTD.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. THE COMPANY
BayCorp Holdings, Ltd. ("BayCorp" or the "Company") is a holding company incorporated in Delaware in 1996. BayCorp has two wholly-owned subsidiaries that generate and trade wholesale electricity, Great Bay Power Corporation ("Great Bay") and Little Bay Power Corporation ("Little Bay"). In addition, BayCorp owns a 45.9% equity interest in HoustonStreet Exchange, Inc. ("HoustonStreet"), an Internet-based energy trading and information business. The Company accounts for HoustonStreet under the equity method.
Great Bay and Little Bay's principal asset is a combined 15% joint ownership interest in the Seabrook Nuclear Power Project in Seabrook, New Hampshire (the "Seabrook Project"). This ownership interest entitles the companies to approximately 174 megawatts ("MWs") of the Seabrook Project's power output. Great Bay and Little Bay are exempt wholesale generators ("EWGs") under the Public Utility Holding Company Act of 1935 ("PUHCA"). Unlike regulated public utilities, Great Bay and Little Bay have no franchise area or captive customers. The companies sell their power in the competitive wholesale power markets.
Great Bay was incorporated in New Hampshire in 1986 and was formerly known as EUA Power Corporation. Little Bay was incorporated in New Hampshire in 1998. Great Bay sells its share of the electricity output of the Seabrook Project in the wholesale electricity market, primarily in the Northeast United States. Little Bay sells its power solely to Great Bay under an intercompany agreement. Intercompany revenues are eliminated in consolidation. Neither BayCorp nor its subsidiaries have operational responsibilities for the Seabrook Project. Great Bay currently sells all but approximately 10 MWs of its share of the Seabrook Project capacity in the wholesale short-term market. In addition to selling its owned generation, Great Bay purchases power on the open market for resale to third parties.
On November 19, 1999, Little Bay purchased a 2.9% interest in the Seabrook Project from Montaup Electric Company ("Montaup") for a purchase price of $3.2 million, plus approximately $1.7 million of certain prepaid items (see N. Acquisitions.)
On October 10, 2000, the Company entered into an agreement with Northeast Utilities ("NU") under which the Company's generating subsidiaries, Great Bay and Little Bay, will include their aggregate 15% ownership share of Seabrook in the upcoming auction of NU's subsidiaries' shares of the Seabrook plant. Under the terms of the agreement, BayCorp will receive the sales price established by the auction process. In the event that the sale yields proceeds for BayCorp of more than $87.2 million, BayCorp and NU will share the excess proceeds. Should BayCorp's sales proceeds be less than $87.2 million, NU will make up the difference below that amount on a dollar for dollar basis up to a maximum of $17.4 million. Under the agreement, BayCorp will be paid separately for nuclear fuel and inventory. The agreement also limits any top-off amount required to be funded by BayCorp for decommissioning as part of the sale process at the amount required by the Nuclear Regulatory Commission ("NRC") regulations. The auction is expected to begin in the second quarter of 2001 with a closing expected in the first half of 2002.
The Seabrook Project is a nuclear-fueled, steam electricity, generating plant located in Seabrook, New Hampshire, which was originally planned to have two Westinghouse pressurized water reactors, Seabrook Unit 1 and Seabrook Unit 2 (each with a rated capacity of 1,150 megawatts), utilizing ocean water for condenser cooling purposes. Seabrook Unit 1 entered commercial service on August 19, 1990. Seabrook Unit 2 has been canceled. Great Bay became a wholesale generating company when Seabrook Unit 1 commenced commercial operation on August 19, 1990. In 1993, the Company became an EWG under the Energy Policy Act of 1992.
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NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The Seabrook Project is owned by Great Bay, Little Bay and nine other utility companies, consisting of North Atlantic Energy Company, Connecticut Light and Power, The United Illuminating Company, Canal Electric Company, Massachusetts Municipal Wholesale Electric Company, New England Power Company, New Hampshire Electric Cooperative, Inc., Taunton Municipal Lighting Plant and Hudson Light & Power Department (together with Great Bay and Little Bay, the "Participants"). Great Bay, Little Bay and the other Participants are parties to the Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units (the "JOA"), which establishes the respective ownership interests of the Participants in the Seabrook Project and defines their responsibilities with respect to the ongoing operation, maintenance and decommissioning of the Seabrook Project. In general, all ongoing costs of the Seabrook Project are divided proportionately among the Participants in accordance with their ownership interests in the Seabrook Project. Each Participant is only liable for its share of the Seabrook Project's costs and not liable for any other Participant's share as ownership interests in the Seabrook Project are several and not joint. Great Bay's and Little Bay's combined joint ownership interest of 15% is the third largest interest among the Participants, exceeded only by the approximately 40% interest held by NU and its affiliates and the 17.5% interest held by The United Illuminating Company.
Great Bay's business strategy is to utilize unit contingent and firm forward sales contracts to maximize the value of its and Little Bay's 174 MW power supply from the Seabrook Project. Traditionally, Great Bay sold most of its share of the Seabrook Project electricity output under unit contingent contracts. Under unit contingent contracts, Great Bay is obligated to provide the buyer with power only when the Seabrook Project is operating. In late 1998, Great Bay began to sell some of its electricity as firm power, which entitles the buyer to electricity whether or not the Seabrook Project is operating. Buyers pay a premium for firm power over unit contingent power because they can rely on uninterrupted electricity. In order to supply firm power during Seabrook unscheduled outages, Great Bay purchases power from the spot market during these outages and resells that power to its firm power customers. Spot market sales are subject to price fluctuations based on the relative supply and demand of electricity. As a result of spot market power price fluctuations, Great Bay has, and may in the future have, to purchase power at prices exceeding prices paid by Great Bay's firm power customers during outages. Although Great Bay bears the primary risk of these price fluctuations, Great Bay maintains insurance to protect Great Bay during periods of extreme price volatility, subject to certain deductibles and coverage limits. This insurance, provided by ACE USA (formerly CIGNA), currently provides Great Bay up to $18.6 million of coverage through May 2002.
As of February 8, 2001, BayCorp had ten employees. BayCorp's subsidiaries, Great Bay and Little Bay, had no employees.
HoustonStreet developed and operates HoustonStreet.com, an Internet-based trading platform and information portal for energy traders. Currently, HoustonStreet offers online trading exchanges for electricity and crude oil and refined products. HoustonStreet is developing an interconnection with EnronOnline, a global Internet-based transaction system for wholesale energy and other commodities whereby North American electricity and natural gas prices posted on EnronOnline will automatically be posted on HoustonStreet. HoustonStreet has continued to develop its platform for trading natural gas and anticipates that it will launch the natural gas platform at approximately the same time as the anticipated interconnection with EnronOnline. HoustonStreet expects the interconnection with EnronOnline will go live in the second quarter of 2001. BayCorp remains the largest stockholder in HoustonStreet with an equity interest of 45.9% as of December 31, 2000.
In September 2000, the Company loaned $7,000,000 to HoustonStreet. HoustonStreet is still in the early stages of development, operation and expansion and has continued to incur substantial cash deficits. During 2000, HoustonStreet covered such deficits with third-party invested capital. As a result of changes in market conditions, HoustonStreet had been unable to raise additional invested capital and thus amounts loaned to HoustonStreet have not been repaid as anticipated.
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NOTES TO FINANCIAL STATEMENTS -- CONTINUED
On October 2, 2000, the Seabrook Project began a refueling outage with a return to full power operation planned for November 21, 2000. The outage was extended when damage to one of the plant's emergency diesel generators occurred, requiring an extensive repair effort. The Seabrook Project did not return to full power until February 1, 2001. The replacement power costs, normal operating costs and additional costs of the extended outage significantly impacted earnings and cash flow.
The Seabrook outage and HoustonStreet loan impacted the Company's unrestricted cash, which was approximately $3,500,000 as of February 8, 2001. To deal with the adverse effects of these events the Company entered into an agreement with Select Energy ("Select") (see Note 6) whereby Select advanced approximately $7,000,000 to the Company. Management believes this advance will be sufficient to solve any liquidity issues until such time as revenues are collected from customers in April. However, if subsequent to February 2001, the Seabrook Project operates at below historical levels or expenses associated with the Seabrook Project are materially higher than anticipated, the Company would be required to raise additional funds to meet ongoing cash requirements. Management believes that they will be able to raise additional funds if necessary, due to the expected Seabrook auction price and the related agreements with NU.
B. REGULATION
Great Bay and Little Bay are subject to the regulatory authority of the Federal Energy Regulatory Commission ("FERC"), the NRC, the New Hampshire Public Utilities Commission ("NHPUC") and other federal and state agencies as to rates, operations and other matters. Great Bay's and Little Bay's cost of service, however, is not regulated. As such, Great Bay's and Little Bay's accounting policies are not subject to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation."
C. 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.
D. UTILITY PLANT
The costs of additions to utility plant and non-utility plant are recorded at original cost.
E. DEPRECIATION
Utility plant is 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 are charged to electric plant. Minor repairs are charged to maintenance expense. When properties are retired, the original costs, plus costs of removal, less salvage, are charged to the accumulated provision for depreciation.
F. AMORTIZATION OF NUCLEAR FUEL
The cost of nuclear fuel is amortized to expense based on the rate of burn-up of the individual assemblies comprising the total core. Great Bay and Little Bay also provide 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
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NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Great Bay and Little Bay, through their managing agent North Atlantic Energy Service Corporation ("NAESCO"), and the DOE.
Great Bay recorded the estimated cost of the final unspent nuclear fuel core, which is expected to be in place at the expiration of the Seabrook Project's NRC operating license, as part of Great Bay's original "Fresh Start" balance sheet.
G. AMORTIZATION OF MATERIALS AND SUPPLIES
Great Bay and Little Bay amortize to expense an amount designed to fully amortize the cost of the material and supplies inventory that is expected to be on hand at the expiration of the Plant's NRC operating license.
H. DECOMMISSIONING
Based on the Financial Accounting Standards Board's ("FASB") tentative conclusions, reflected on the February 7, 1996, Exposure Draft titled "Accounting for Certain Liabilities Related to Closure and Removal of Long-Lived Assets," Great Bay and Little Bay have recognized as a liability their proportionate share of the present value of the estimated cost of Seabrook Project decommissioning. For Great Bay, the initial recognition of this liability was capitalized as part of the Fair Value of the Utility Plant at November 23, 1994. For Little Bay, the amount was provided for in the purchase price allocation.
New Hampshire enacted a law in 1981 requiring the creation of a state-managed fund to finance decommissioning of any nuclear units in the state. The Seabrook Project's decommissioning estimate and funding schedule is subject to review each year by the New Hampshire Nuclear Decommissioning Financing Committee ("NDFC"). This estimate is based on a number of assumptions. Changes in assumptions for such things as labor and material costs, technology, inflation and timing of decommissioning could cause these estimates to change, possibly materially, in the near term. During March 2000, the NDFC issued an order that adjusted the decommissioning collection period and funding levels as if decommissioning would begin in 2015 and the decommissioning fund would be fully funded by 2015. The current estimated cost to decommission the Seabrook Project (based on the NDFC Docket 2000-1, as updated by NDFC Order No. 5 in January 2001) is approximately $609.4 million in 2001 dollars, assuming for decommissioning funding purposes, a remaining 14-year life for the facility and a future cost escalation rate of 4.0%.
The Staff of the Securities and Exchange Commission ("SEC") has questioned certain of the current accounting practices of the electric utility industry regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations and joint owners in the financial statements of these entities. In response to these questions, the FASB agreed to review the accounting for nuclear decommissioning costs. On February 17, 2000, the FASB issued a "Revision of Exposure Draft issued February 7, 1996, Proposed Statement of Financial Accounting Standards: Accounting for Obligations Associated with the Retirement of Long-Lived Assets." On June 30, 2000, the respective proposed statement was issued by the FASB. The final statement is expected to be issued by the fourth quarter of 2001. Great Bay's and Little Bay's accounting for decommissioning is based on the FASB's original tentative conclusions. The proposed statement requires that an obligation associated with the retirement of a tangible long-lived asset be recognized as a liability when incurred, and that the amount of the liability resulting from (a) the passage of time and (b) revisions to either the timing or amount of estimated cash flows should also be recognized. The proposed statement also requires that, upon initial recognition of a liability for an asset retirement obligation, an entity capitalize that cost by recognizing an increase in the carrying amount of the related long-lived asset. Upon adoption, the proposed statement would be effective for financial statements issued for fiscal years beginning after December 15, 2001.
BAYCORP HOLDINGS, LTD.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The proposed statement requires the initial measurement of the liability to be based on fair value, where the fair value is the amount that an entity would be required to pay in an active market to settle the asset retirement obligation in a current transaction in circumstances other than a forced liquidation or settlement. Because in most circumstances, a market for settling asset retirement obligations does not exist, the FASB described an expected present value technique for estimating fair value. If the proposed statement is adopted, Great Bay's and Little Bay's decommissioning liability and annual provision for decommissioning accretion could change relative to 2000. Great Bay and Little Bay have not quantified the impact, if any, that the proposed statement will have on the consolidated financial statements.
Great Bay and Little Bay, based on the initial exposure draft, have been recognizing a liability based on the present value of the estimated future cash outflows required to satisfy their obligations using a risk free rate. As of December 31, 2000, the estimated undiscounted cash outflows for Great Bay and Little Bay, for decommissioning, based on the March 2000 NDFC study, with decommissioning expenditures starting in 2013 and being completed in 2042, was $217.2 million, which discounted at an average rate of 4.75%, to December 31, 2000 represented a liability of $71.6 million reflected in the accompanying balance sheet. As of December 31, 1999, and based on the prior NDFC study, the estimated undiscounted cash outflows for Great Bay and Little Bay, for decommissioning, starting in 2013 and being completed in 2039 was $253.4 million, which discounted at an average rate of 4.75%, to December 31, 1999 represented a liability of $79.4 million reflected in the accompanying consolidated balance sheet. In accordance with the original exposure draft the companies record any adjustments to the decommissioning liability due to changes in estimates in the utility plant account.
Great Bay and Little Bay accrete their share of the Seabrook Project's decommissioning liability. This accretion is a non cash charge and recognizes their liability related to the closure and decommissioning of their nuclear plant in current year dollars over the licensing period of the plant. The non cash accretion charge recorded in the accompanied consolidated statements of income was $3,633,000, $3,320,000 and $2,873,000 for the years ended December 31, 2000, 1999 and 1998. The change in the accretion between years reflects adjustments to the estimated decommissioning by the NDFC.
Funds collected by Seabrook for decommissioning are deposited in an external irrevocable trust pending their ultimate use. The earnings on the external trusts also accumulate in the fund balance. The trust funds are restricted for use in paying the decommissioning of Unit 1. The investments in the trust are available for sale. Great Bay and Little Bay have therefore reported their investment in trust fund assets at market value and any unrealized gains and losses are reflected in equity. There was an unrealized holding gain of $338,100 and $42,000 as of December 31, 2000 and 1999.
Although the owners of Seabrook are accumulating funds in an external trust to defray decommissioning costs, these costs could substantially exceed the value of the trust fund, and the owners, including Great Bay and Little Bay, would remain liable for the excess.
In June 1998, the New Hampshire State legislature enacted legislation that provides that in the event of a default by Great Bay on its payments to the decommissioning fund, the other Seabrook joint owners would be obligated to pay their proportionate share of such default. As a result of the enactment of this legislation, the staff of the NRC notified Great Bay in July 1998 of the staff's determination that Great Bay complies with the decommissioning funding assurance requirements under NRC regulations.
In response to the obligations imposed on the other Joint Owners under the New Hampshire legislation, Great Bay agreed to make accelerated payments to the Seabrook decommissioning fund such that Great Bay would have contributed sufficient funds by the year 2015 to allow sufficient monies to accumulate, with no further payments by Great Bay to the fund, to the full estimated amount of Great Bay's decommissioning obligation by the time the current Seabrook operating license expires in 2026. Based on the currently approved
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NOTES TO FINANCIAL STATEMENTS -- CONTINUED
funding schedule and Great Bay's accelerated funding schedule, Great Bay's decommissioning payments will be approximately $2.6 million in 2001 and escalate at 4% each year thereafter through 2015. Little Bay's share of decommissioning costs was prefunded by Montaup, the owner of the 2.9% interest in the Seabrook Project that Little Bay acquired in November 1999. As part of that acquisition, Montaup transferred approximately $12.4 million into Little Bay's decommissioning account, an irrevocable trust earmarked for Little Bay's share of Seabrook Plant decommissioning expenses. As of December 31, 2000, the fair market value of the Little Bay decommissioning account was $13.2 million.
On November 15, 1992, Great Bay, the Bondholder's Committee and the Predecessor's former parent, Eastern Utilities Associates ("EUA") entered into a settlement agreement that resolved certain proceedings against EUA brought by the Bondholder's Committee. Under the settlement agreement, EUA reaffirmed its guarantee of up to $10 million of Great Bay's future decommissioning costs of Seabrook Unit 1.
I. OPERATING REVENUES
Revenues are recorded on an accrual basis based on billing rates provided for in contracts and approved by FERC. During the year ended December 31, 2000, four customers accounted for 17%, 15%, 14% and 13% of total operating revenues. For the year ended December 31, 1999, two customers accounted for 29%, and 24% of total operating revenues. For the year ended December 31, 1998, three customers accounted for 28%, 17% and 12% of total operating revenues.
J. TAXES ON INCOME
The Company accounts for taxes on income under the liability method required by SFAS No. 109, "Accounting for Income Taxes."
K. 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 are classified as available for sale and reflected as a current asset at market value. Changes in the market value of such securities are reflected in equity. The unrealized holding loss on short-term investments was $20,100 as of December 31, 2000 and the unrealized holding gain on short-term investments was $44,000 as of December 31, 1999.
L. SEABROOK UNIT 2
Since the Seabrook Project was originally designed to consist of two generating units, Great Bay and Little Bay also own a 15% joint ownership interest in Seabrook Unit 2. Great Bay and Little Bay assign no value to Seabrook Unit 2 because on November 6, 1986, the joint owners of the Seabrook Project, recognizing that Seabrook Unit 2 had been canceled in 1984, voted to dispose of Unit 2. Certain assets of Seabrook Unit 2 have been and are being sold from time to time to third parties. There were no material sales of Unit 2 assets in 2000 or 1999.
The Participants are considering plans regarding disposition of Seabrook Unit 2, but such plans have not yet been finalized and approved. Great Bay and Little Bay are unable to estimate the costs for which they will be responsible in connection with the disposition of Seabrook Unit 2. Because Seabrook Unit 2 was never completed or operated, costs associated with its disposition will not include any amounts for decommissioning. The costs associated with the disposition of Seabrook Unit 2 are not included in the decommissioning estimate. Great Bay and Little Bay currently pay their share of monthly expenses required to preserve and protect the value of the Seabrook Unit 2 components. Any sales of Unit 2 property or inventory are reflected in
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NOTES TO FINANCIAL STATEMENTS -- CONTINUED
other income as gains on the sale or transfer of assets. Transfers of Unit 2 items to Unit 1 were done at the historical basis of Unit 2 property or components.
M. SEABROOK OUTAGE COSTS
The Company's operating results and the comparability of these results on an interim and annual basis are directly impacted by the operations of the Seabrook Project, including the cyclical refueling outages (generally 18 months apart) as well as unscheduled outages. During outage periods at the Seabrook Project, Great Bay and Little Bay have no electricity for resale from the Seabrook Project and consequently no related revenues. Therefore the impact of outages on the Company's and Great Bay's and Little Bay's results of operations and financial position are materially adverse.
Great Bay and Little Bay accrue for the incremental costs of the Seabrook Project's scheduled outages over the periods between those outages. However, Great Bay and Little Bay continue to expense the normal Seabrook operating and maintenance expenses as incurred. Therefore, the Company will incur losses during scheduled outage periods as a result of the combination of the lack of revenue and the recognition of normal recurring operation and maintenance costs as well as the continuing depreciation of the utility plant. At the Seabrook Project, a scheduled refueling outage began on October 21, 2000. Seabrook resumed full operating capacity on February 1, 2001. Great Bay's share of the incremental operations and maintenance costs was approximately $6.1 million for the year ended December 31, 2000.
N. ACQUISITIONS
On November 19, 1999, BayCorp's wholly-owned subsidiary, Little Bay, purchased an additional 2.9% interest in the Seabrook Nuclear Power Project from Montaup, a subsidiary of EUA. The purchase price was $3.2 million plus approximately $1.9 million for certain prepaid items, primarily nuclear fuel and capital expenditures. The purchase price was funded with existing cash. Little Bay allocated the purchase price based on the estimated fair value of the assets acquired and liabilities assumed. A summary of the components of the purchase price and the purchase price allocation is as follows:
In addition, Montaup prefunded the decommissioning liability associated with Little Bay's 2.9% share of Seabrook by transferring approximately $12.4 million into Little Bay's decommissioning account, an irrevocable trust earmarked for Little Bay's share of the Seabrook Plant decommissioning expenses. Little Bay recorded an asset, Decommissioning Trust Fund, for $12.4 million and a corresponding liability for the same amount. The purchase agreement required that a restricted cash-escrow account be established for $2.5 million to cover Little Bay's share of budgeted cash requirements for a six-month period. This fund is to be used to pay Little Bay's share of Seabrook costs of operations and capital expenditures during periods of Seabrook shutdowns.
Little Bay sells its power solely to Great Bay under an intercompany agreement at cost. Great Bay then sells the power purchased from Little Bay in the wholesale electricity market. The accompanying consolidated
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NOTES TO FINANCIAL STATEMENTS -- CONTINUED
financial statements include the results of the acquisition since November 19, 1999. Intercompany amounts between Little Bay and Great Bay have been eliminated in consolidation.
O. 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 and requires restatement of prior year information. 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. The Company currently operates only in the electric generating segment in the Northeast United States.
P. 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, warrants and preferred stock. Potentially dilutive shares outstanding during the period have been excluded from dilutive earnings (loss) per share because their effect would be antidilutive.
Based on an average market price of common stock of $11.35 per share for the year ended December 31, 2000 and $5.58 per share for the year ended December 31, 1999, 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.
There were no potentially dilutive shares outstanding during 1998.
Q. ACCUMULATED OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income" which requires the Company to report the changes in shareholders' equity from all sources during the period other than those resulting from investments by shareholders (i.e., issuance or repurchase of common shares and dividends.) Although adoption of this standard has not resulted in any change to the historic basis of determination of earnings or shareholders' equity, the other comprehensive income components recorded under generally accepted accounting principles and previously included under the category "retained earnings"
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NOTES TO FINANCIAL STATEMENTS -- CONTINUED
are displayed as "accumulated other comprehensive income" within the balance sheet. The composition of other comprehensive income is as follows:
R. RECLASSIFICATIONS
Certain reclassifications have been made in prior years' financial statements to conform to classifications and presentation used in the current year.
S. PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company and all its subsidiaries. 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. At December 31, 1999, BayCorp owned 100% of HoustonStreet. As of December 31, 2000, the Company owned 45.9% of HoustonStreet. Therefore, during 2000, the Company deconsolidated HoustonStreet. At December 31, 2000, the Company accounts for this investment on the equity method and is presenting the prior-year financial statements on a comparative basis (see Note 12.) The Company has an agreement with HoustonStreet under which it is providing certain management and administrative services to HoustonStreet for the periods April 1999 to December 2000 and for the calendar year 2001. Income related to such services was $641,400 for the period ending December 31, 2000 of which $569,800 remained outstanding at December 31, 2000. In addition, the company loaned HoustonStreet $7,000,000 (see Note 12).
T. LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", requires that long-lived assets held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review of the recoverability, the entity should estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. This statement requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The sales agreement with NU established an expected value for the Company's investment in the Seabrook plant. The company estimates that the current carrying amount for the respective investment is the lower of the carrying amount or fair value less cost to sell in accordance with SFAS No. 121.
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2. NUCLEAR ISSUES
Like other nuclear generating facilities, the Seabrook Project is subject to extensive regulation by the NRC. The NRC is empowered to authorize the siting, construction and operation of nuclear reactors after consideration of public health, safety, environmental and antitrust matters.
The NRC has promulgated numerous requirements affecting safety systems, fire protection, emergency response planning and notification systems and other aspects of nuclear plant construction, equipment and operation. Great Bay and Little Bay have been, and may be, affected to the extent of their proportionate shares by the cost of any such modifications to Seabrook Unit 1.
Nuclear units in the United States have been subject to widespread criticism and opposition. Some nuclear projects have been canceled following substantial construction delays and cost overruns as the result of licensing problems, unanticipated construction defects and other difficulties. Various groups have by litigation, legislation and participation in administrative proceedings sought to prohibit the completion and operation of nuclear units and the disposal of nuclear waste. In the event of a shutdown of any unit, NRC regulations require that it be completely decontaminated of any residual radioactivity. The cost of such decommissioning, depending on the circumstances, could substantially exceed the owners' investment at the time of cancellation.
Public controversy concerning nuclear power could adversely affect the operating license of Seabrook Unit 1. While the Company cannot predict the ultimate effect of such controversy, it is possible that it could result in a premature shutdown of the unit.
A. NUCLEAR FUEL
The Seabrook Project's managing agent has made, or expects to make, various arrangements for the acquisition of uranium concentrate, the conversion, enrichment, fabrication and utilization of nuclear fuel and the disposition of that fuel after use. Many of these arrangements are pursuant to multi-year contracts with concentrate and service providers. Based on the Seabrook Project's existing contractual arrangements, Great Bay and Little Bay believe that the Seabrook Project has available, or under supply contracts, sufficient nuclear fuel for operations through approximately 2003. Uranium concentrate and conversion, enrichment and fabrication services currently are available from a variety of sources. The cost of such concentrate and such services varies based upon market forces.
Costs associated with nuclear plant operations include amounts for nuclear waste disposal, including spent fuel, as well as for the ultimate decommissioning of the plants. The Nuclear Waste Policy Act of 1982 (the "NWPA") requires the United States DOE, subject to various contingencies, to design, license, construct and operate a permanent repository for high-level radioactive waste and spent nuclear fuel, which are collectively referred to as "high-level waste."
The joint owners of the Seabrook Project, through their managing agent NAESCO, entered into contracts with the DOE for high-level waste disposal in accordance with the NWPA. Under these contracts and the NWPA, the DOE was required to take title to and dispose of the Seabrook Project's high-level waste beginning no later than January 31, 1998. However, the DOE has announced that its first high-level waste repository will not be in operation until 2010 at the earliest.
As a result of this delay, many states and nuclear plant operators, including NAESCO, sued the DOE for injunctive relief and monetary damages. Two U.S. Courts of Appeals ordered the DOE to proceed with its high-level waste disposal obligations and ruled that plant operators are entitled to money damages from DOE. However, there can be no assurance that the Seabrook Project will collect damages from the DOE because, among other things, NAESCO's case against the DOE is still pending.
In March 2000, Congress passed amendments to the NWPA that would require the DOE to begin accepting nuclear waste shipments at a Nevada site in 2007. However, former President Clinton vetoed this
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legislation and Congress did not override Mr. Clinton's veto. Until the DOE begins receiving nuclear waste materials in accordance with the NWPA and its contracts, nuclear plants such as Seabrook must retain high-level waste on-site or make other storage provisions.
NAESCO, the managing agent of the Seabrook Project, has advised the Company that the Seabrook Project's capacity for on-site storage capacity for low level waste ("LLW") is expected to be sufficient to meet the project's storage requirements through 2006. In addition, NAESCO advises that the Seabrook Project has adequate on-site storage capacity for high-level waste until approximately 2010.
The Low-Level Radioactive Waste Policy Act of 1980 requires each state to provide disposal facilities for LLW generated within the state, either by constructing and operating facilities or by joining regional compacts with other states to jointly fulfill their responsibilities. However, the Low-Level Radioactive Waste Policy Amendments Act of 1985 permits each state in which a currently operating disposal facility is located (South Carolina, Nevada and Washington) to impose volume limits and a surcharge on shipments of LLW from states that are not members of their regional compact.
In April 1995, a privately owned facility in Utah was approved as a disposal facility for certain types of LLW. The Seabrook Project began shipping certain LLW to the Utah facility in December 1995. In 1999, the Seabrook Project also began shipping some LLW to a privately owned facility in Tennessee. All LLW generated by the Seabrook Project that exceeds the maximum radioactivity level of LLW accepted by these facilities is currently stored on-site at the Seabrook facility.
B. FEDERAL DEPARTMENT OF ENERGY DECONTAMINATION AND DECOMMISSIONING ASSESSMENT
Title XI of the Energy Policy Act of 1992 (the "Policy Act") provides for decontaminating and decommissioning of the Federal DOE's enrichment facilities to be partially funded by a special assessment against domestic utilities. Each utility's share of the assessment is to be based on its cumulative consumption of DOE enrichment services. As of December 31, 2000, the Company had accrued its pro rata estimated obligation of $451,974 related to the project's prior years' usage to be paid over the 15-year period beginning October 1, 1992.
C. PRICE ANDERSEN ACT
In accordance with the Price Anderson Act, the limit of liability for a nuclear-related accident is approximately $9.5 billion, effective November 18, 1994. The primary layer of insurance for this liability is $200 million of coverage provided by the commercial insurance market. The secondary coverage is approximately $9.3 billion, based on the approximately 106 currently licensed reactors in the United States. The secondary layer is based on a retrospective premium assessment of $88.1 million per nuclear accident per licensed reactor, payable at a rate not exceeding $10 million per year per reactor. In addition, the retrospective premium is subject to inflation based indexing at five-year intervals and, if the sum of all public liability claims and legal costs arising from any nuclear accident exceeds the maximum amount of financial protection available, then each licensee can be assessed an additional 5% ($4.4 million) of the maximum retrospective assessment. With respect to the Seabrook Project, Great Bay and Little Bay would be obligated to pay its ownership share of any assessment resulting from a nuclear incident at any U.S. nuclear generating facility. Great Bay and Little Bay estimate their maximum liability per incident currently would be an aggregate amount of approximately $13.2 million per accident, with a maximum annual assessment of about $1.5 million per incident, per year.
D. NUCLEAR INSURANCE
Insurance has been purchased by the Seabrook Project from Nuclear Electric Insurance Limited ("NEIL") to cover the costs of property damage, decontamination or premature decommissioning resulting
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from a nuclear incident and American Nuclear Insurance/Mutual Atomic Energy Liability Underwriters ("ANI") to cover workers' claims. All companies insured with NEIL and ANI are subject to retroactive assessments, if losses exceed the accumulated funds available to NEIL and ANI, respectively. The maximum potential assessment against the Seabrook Project with respect to losses arising during the current policy years are $10.9 million. The Company's liability for the retrospective premium adjustment for any policy year ceases six years after the end of that policy year unless prior demand has been made.
Great Bay and Little Bay also independently purchase business interruption insurance from NEIL. The current policy is in effect from April 1, 2000 until April 1, 2001 and a renewal policy has been signed that will be in effect from April 1, 2001 until April 1, 2002. The policy provides for the payment of a fixed weekly loss amount of $670,000 in the event of an outage at the Seabrook Project of more than 23 weeks resulting from the property damage occurring from a "sudden fortuitous event, which happens by chance, is unexpected and unforeseeable." The maximum amount payable to Great Bay and Little Bay is $90.6 million. Under the terms of the policy, Great Bay and Little Bay are subject to a potential retrospective premium adjustment of up to approximately $469,335 should NEIL's board of directors deem that additional funds are necessary to preserve the financial integrity of NEIL. Since NEIL was founded in 1980, there has been no retrospective premium adjustment; however, there can be no assurance that NEIL will not make retrospective adjustments in the future. The liability for this retrospective premium adjustment ceases six years after the end of the policy unless prior demand has been made.
3. TAXES ON INCOME
The following is a summary of the provision for income taxes for the years ended December 31, 2000, 1999 and 1998:
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Accumulated deferred income taxes consisted of the following at December 31, 2000 and 1999:
The federal income tax provision set forth above represents 1%, 0% and 0% of pre-tax loss in the years ended December 31, 2000, 1999 and 1998. The following table reconciles the statutory federal income tax rate to those percentages:
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. The valuation allowance of $56,086,000 as of December 31, 1994, if subsequently recognized, will be allocated directly to paid in capital.
For federal income tax purposes, as of December 31, 2000, the Company had net operating loss carry forwards ("NOLs") of approximately $225 million, which are scheduled to expire between 2005 and 2019. Because the Company has experienced one or more ownership changes, within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, an annual limitation is imposed on the ability of the Company to use $131 million of these carryforwards. The Company's best estimate at this time is that the annual limitation on the use of $131 million of the Company's NOLs is approximately $5.5 million per year. Any unused portion of the $5.5 million annual limitation applicable to the Company's restricted NOLs is available for use in future years until such NOLs are scheduled to expire. The Company's other $94 million of NOLs are not currently subject to such limitations.
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4. CAPITAL EXPENDITURES
The Company's cash capital expenditures, including nuclear fuel, are estimated to be approximately $6.8 million in 2001 and to aggregate approximately $10.4 million for the years 2002 through 2003.
5. ENERGY MARKETING
The Company utilizes unit contingent and firm forward sales contracts to maximize the value of its 174 MW power supply from the Seabrook Project. As of December 31, 2000, the Company had forward sales commitments that extend to the end of 2001. As of December 31, 1998, the unrealized gain on these open positions was $159,000. The value of open positions was determined using exchange settlement prices or, if applicable, over the counter prices.
Effective January 1, 1999, Great Bay adopted Emerging Issues Task Force Issue ("EITF") No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF Issue No. 98-10 requires energy trading contracts to be recorded at fair value on the balance sheet, with the changes in fair value included in earnings. The cumulative effect of the accounting change as of January 1, 1999 was to decrease net loss by $159,000, or $0.02 per weighted average common share, and to recognize gains on net open firm purchase and sales commitments considered to be trading activity.
EITF Issue No. 00-17, "Measuring the Fair Value of Energy-Related Contracts in Applying Issue 98-10", ("EITF 00-17"), reached a consensus that energy contracts within the scope of EITF Issue No. 98-10 should be reported at fair value on a stand-alone, or individual contract, basis. The estimate of fair value should be based on the best information available in the circumstances. The price at which an energy contract is exchanged normally is its initial fair value. The Company is marking the related contracts to market based on the estimated, contract replacement value at each balance sheet date.
As of December 31, 2000, the Company had a net unrealized loss of approximately $12,879,427 recorded in accrued expenses. The net change in unrealized loss on trading activities for the year ended December 31, 2000 was $12,232,427 and is included in the accompanying consolidated statement of income for 2000.
As of December 31, 1999, the Company had a net unrealized loss of approximately $647,000 recorded in accrued expenses. The net change in unrealized loss on trading activities for the year ended December 31, 1999 was $806,000 and is included in the accompanying consolidated statement of income for 1999.
6. PURCHASED POWER AGREEMENTS
Great Bay is party to a purchased power agreement, dated as of April 1, 1993 (the "UNITIL Purchased Power Agreement"), with UNITIL Power ("UNITIL") that provides for Great Bay to sell to UNITIL approximately 10 MW of power. The UNITIL Purchased Power Agreement commenced on May 1, 1993 and runs through October 31, 2010. The current price of power under the UNITIL Purchased Power Agreement is 5.38 cents per kilowatt-hour ("kWh"). The price is subject to increase in accordance with a formula that provides for adjustments at less than the actual rate of inflation. UNITIL has an option to extend the UNITIL Purchased Power Agreement for an additional 12 years until 2022.
The UNITIL Purchased Power Agreement was front-end loaded whereby UNITIL paid higher prices, on an inflation adjusted basis, in the early years of the Agreement and lower prices in later years. The average price per kWh and the contract formula rate in the contract are fixed over the life of the contract, so that any excess cash received in the beginning of the contract will be returned by the end of the contract, provided the contract does not terminate early. The difference between revenue billed under each rate is recorded in a "Balance Account", which increased annually to $4.1 million in July 1998, and now decreases annually, reaching zero in July 2001. Therefore, contract revenue is recorded under generally accepted accounting principles and EITF Ruling 91-6 based on the contract rates and no liability for the "Balance Account" is
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recognized provided that it is not probable that the contract will terminate early. If the UNITIL Purchased Power Agreement terminates prior to its scheduled termination, and if at that time there is a positive amount in the Balance Account, Great Bay is obligated to refund that amount to UNITIL. Management believes it is not probable that either party will terminate this contract prior to the end of its initial term.
To secure the obligations of Great Bay under the UNITIL Purchased Power Agreement, including the obligation to repay UNITIL the amount in the Balance Account, the UNITIL Purchased Power agreement grants UNITIL a mortgage on Great Bay's interest in the Seabrook Project. This mortgage may be subordinated to first mortgage financing of up to a maximum amount of $80,000,000. The UNITIL Power Purchase Agreement further provides that UNITIL's mortgage will rank pari passu with other mortgages that may hereafter be granted by Great Bay to other purchasers of power from Great Bay to secure similar obligations, provided that (i) the maximum amount of indebtedness secured by the first mortgage on the Seabrook Interest may not exceed $80,000,000 and (ii) the combined total of all second mortgages on the Seabrook Interest may not exceed the sum of (a) $80,000,000 less the total amount of Great Bay's debt then outstanding, which is secured by a first mortgage plus (b) $57,000,000.
On February 6, 2001, Great Bay executed a Purchase Power Agreement with Select whereby Great Bay will sell 50 MWs of energy associated with Seabrook to Select in exchange for 25 MWs of energy associated with Millstone Unit 2 and 25 MWs of energy associated with Millstone Unit 3. Millstone is a nuclear power plant located in Connecticut. The term of this agreement is April 1, 2001 through December 31, 2001. Delivery of power from either company is contingent on each of the units operating at certain capacity.
As part of the agreement, Select made a prepayment of $3.7 million to Great Bay in February 2001 and a second prepayment of $3.3 million is required in March 2001. Great Bay is compensating Select for the prepayments by (i) paying 12% annual interest for the period from February 6, 2001 through March 31, 2001 and (ii) giving Select a price differential for the power being exchanged until such time as the Select prepayment has been repaid. In order to collateralize the transaction, Great Bay and Little Bay have each provided Select with a mortgage lien and security interest in their respective interests in the Seabrook Project. Once Great Bay has repaid Select, the mortgage liens and security interests will be released and there will be no price differential in exchanging power throughout the remaining terms of the agreement.
7. PECO ENERGY COMPANY SERVICES AGREEMENT AND WARRANT AGREEMENT
Great Bay and PECO Energy Company ("PECO") entered into a Services Agreement as of November 3, 1995, pursuant to which PECO was appointed as Great Bay's exclusive agent to market and sell Great Bay's uncommitted portion of electricity generated by the Seabrook Project. In June 1998, Great Bay and PECO terminated the power marketing agreement between the companies and Great Bay paid PECO approximately $2.5 million. During the quarter ended June 30, 1998, Great Bay made an approximate $2.5 million charge to income for this expense. This expense is reflected in administrative and general expenses in the accompanying 1998 Consolidated Statement of Income.
8. STOCK OPTION PLAN
On April 24, 1995, the Board of Directors of the Company established the 1995 Stock Option Plan (the "Plan"), which received shareholder approval at the Company's annual meeting on April 16, 1996. The purpose of the Plan is to secure for the Company and its shareholders the benefits arising from capital stock ownership by employees, officers and directors of, and consultants or advisors to, the Company who are expected to contribute to the Company's future growth and success. Options granted pursuant to the 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 Plan is administered by the Board of Directors of the Company and may be modified or amended by the Board in any respect, subject to shareholder approval in certain instances. In July 1999, the Board of Directors increased the
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number of shares reserved for issuance under the Plan from 600,000 to 900,000 shares, subject to stockholder approval. The Company's stockholders approved that increase in May 2000.
The Company accounts for the plan under APB Opinion No. 25, and as such no compensation cost has been recognized as the options are granted at Fair Market Value.
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.
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 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. During 2000 the Board of Directors of the Company accelerated the vesting period of the options held by certain employees of the Company. In accordance with FIN 44, the Company recorded the expense related to the repriced and the accelerated options with the total credit of $105,000 being recorded in equity.
Had compensation cost for the Plan 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.
A summary of the Company's stock option plan at December 31, 2000, 1999 and 1998, and changes during the years then ended, is presented in the table and narrative below:
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The 711,001 options outstanding at December 31, 2000 have exercise prices between $2.88 and $12.69, with a weighted average exercise price of $6.14, and a remaining weighted average contractual life of 5.21 years.
The 700,917 options outstanding at December 31, 1999 have exercise prices between $2.88 and $6.88, with a weighted average exercise price of $5.36, and a remaining weighted average contractual life of 5.8 years.
The 417,417 options outstanding at December 31, 1998 had exercise prices between $4.90 and $7.25, with a weighted average exercise price of $4.92 and a remaining weighted contractual life of 5 years.
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 2000, 1999 and 1998 respectively: weighted average risk-free interest rates of 6.4%, 5.5% and 4.7%; expected dividend yields of 0 %; and expected live of seven years and expected volatility of 71%, 54% and 31%, respectively.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
SFAS No. 133, as amended by SFAS No. 137, was effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998).
The Company completed its review and implementation of SFAS No. 133, effective January 1, 2001. The Company has taken an inventory of its contracts and identified the forward sale and purchase contracts that are currently marked to market in accordance with EITF 98-10, as derivatives under SFAS No. 133. The Company did not identify any other contracts to be derivatives under SFAS No. 133. The Company will continue to mark to market its forward sale and purchase contracts in accordance with EITF 98-10 and EITF 00-17 and thus the adoption of SFAS No. 133 is not expected to have an impact on the Company's financial position or results of operations.
10. PROPERTY TAXES
For each of the tax years 1994, 1995, 1996, 1997 and 1998, Great Bay filed property tax abatement applications with the towns of Hampton and Hampton Falls. The abatement requests were denied. Great Bay filed appeals for each of those years with the New Hampshire Board of Tax and Land Appeals (the "BTLA"). On November 11, 1999, Great Bay reached agreements settling the property tax litigation. As a result of the settlement agreement, Great Bay received $146,450 from the Town of Hampton and $21,967 from the Town of Hampton Falls. With regard to Hampton Falls, the settlement established an assessed valuation of $7,000,000 for 1999 and $2,500,000 for 2000. With regard to the Town of Hampton, the settlement established an assessed valuation of $20,000,000 for 1999 and $15,000,000 for 2000.
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11. COMMITMENTS AND CONTINGENCIES
BayCorp and its wholly owned subsidiaries currently lease office space under noncancelable operating leases. Rental expense under operating lease agreements for the years ended December 31, 2000 and 1999 was $78,747 and $96,500, respectively.
Future minimum commitments for operating leases as of December 31, 2000 are as follows:
12. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
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. Prior-year financial statements are presented in conformance with the equity method of accounting. Prior to the deconsolidation, the Company recognized its share of the losses of HoustonStreet in the consolidated financial statements. Summarized financial information for the Company's investment in HoustonStreet, as accounted by the equity method, is as follows:
HoustonStreet
During 2000, the Company loaned $7,000,000 to HoustonStreet. Due to the continuous losses at HoustonStreet, the Company wrote down its equity investment in HoustonStreet and subsequently its loan and receivable from HoustonStreet. As of December 31, 2000, the Company had no investments or receivables from HoustonStreet recognized on the accompanying balance sheet. A reconciliation from the beginning of the year carrying value to the carrying value as of December 31, 2000 is as follows:
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13. SUBSEQUENT EVENTS
Seabrook Unit 1 transmits its generated power to the New England 345 kilovolt transmission grid, a major network of interconnecting lines covering New England, through three separate transmission lines emanating from the station. On March 5, 2001, the Seabrook Project began experiencing interruptions of the connections to the 345 kV transmission system due to icing from a severe winter storm that resulted in the plant automatically tripping offline. During this shutdown, a problem was identified with the steam-driven emergency feedwater pump and plant chemistry personnel detected the presence of chlorides in the condenser hotwells, indicating leakage of seawater into the condenser. Repair of the emergency feedwater pump was completed allowing the plant to return on-line on March 15, 2001. Power was limited to approximately 70% while plant personnel continued to repair the condenser leakage. On March 19, 2001, plant operators identified a problem with the main turbine valve control system requiring that the plant be taken off-line. After repairs were completed, the plant was placed on-line on March 22, 2001 and power was increased to approximately 70%. The plant reached full power on March 25, 2001.
Management believes the plant will operate at historical levels and believes that it will be able to fulfill its obligations with respect to the agreement with Select. As mentioned previously, if this does not happen, the Company will be required to raise additional funding.
On March 22, 2001, HoustonStreet received commitments to receive up to approximately $3.9 million in additional funding, including $900,000 from BayCorp. Although HoustonStreet has received some of the funding, until the closing of the financing, there can be no assurance that HoustonStreet will receive the balance of the committed funds. This financing involves the sale by HoustonStreet of senior secured notes, warrants to purchase HoustonStreet preferred stock and warrants to purchase HoustonStreet common stock. Collectively, these securities are referred to as the "HoustonStreet Series C Units."
In March 2001, BayCorp entered into discussion with HoustonStreet involving the conversion of BayCorp's $7.0 million loan made in September 2000, together with approximately $1.0 million in accrued interest and penalties on the note and past due management fees, into approximately $8.0 million of HoustonStreet Series C Units. There can be no assurance that this proposed refinancing will be successfully completed. The loan, accrued interest and receivables from HoustonStreet had been written down to zero at December 31, 2000, and as such, the conversion of these amounts will have no accounting impact.
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 30, 2001 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.
EXHIBIT INDEX
- --------------- (1) Filed as an exhibit to the Registration Statement on Form S-4 of BayCorp Holdings, Ltd. (Registration Statement 333-3362) filed on July 12, 1996 and incorporated herein by reference.
(2) Filed as an exhibit to the Registration Statement on Form S-1 of Great Bay Power Corporation (Registration No. 33-88232) declared effective on April 17, 1995 and incorporated herein by reference.
(3) Filed as an exhibit to the Quarterly Report on Form 10-Q of BayCorp Holdings, Ltd. for the quarter ended July 30, 1998 (File No. 1-12527) on August 13, 1998 and incorporated herein by reference.
(4) Management contract or compensation plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 1-12527) on March 31, 1999 and incorporated herein by reference.
(6) Filed as an exhibit to the Quarterly Report on Form 10-Q of Great Bay Power Corporation for the quarter ended March 31, 1995 (File No. 0-25748) on May 9, 1995 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 1-12527) on March 26, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to the Quarterly Report on Form 10-Q of BayCorp Holdings, Ltd. for the quarter ended June 30, 1998 (File No. 1-12527) on August 13, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to the Current Report on Form 8-K of BayCorp Holdings, Ltd. (File No. 1-12527) dated November 19, 1999 and filed on December 3, 1999 and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 1-12527) on March 30, 2000 and incorporated herein by reference.
(11) Filed as an exhibit to this Annual Report on Form 10-K.