Description

BayCorp (MWH - $9.55)

BayCorp is an electricity generator that owns 15% of the Seabrook Nuclear power plant as well as 45.9% of Houston Street, an Internet-based wholesale electricity trading exchange.

We estimate that BayCorp is worth between $11.25 and $14.00 per share. A large portion of this value should be realized by the sale of BayCorp’s 15% stake in the Seabrook nuclear power plant, which is expected to close in later 2002 or early 2003 (it was originally slated to close during 1Q02). Omega Advisors and Elliot Associates own over 50%, and, as a result, a large portion of the cash from the sale should be distributed to shareholders. Depending on the timing of the sale, this could result in an annualized return of 13% to 24%.

On October 12, 2000, BayCorp announced an agreement with Northeast Utilities to sell their respective ownership interests in Seabrook. Northeast has guaranteed BayCorp $87.2MM for BayCorp’s share of Seabrook and if the proceeds fall below, Northeast will make up the difference (subject to a $17.4MM cap). Anything above $87.2MM ($500 per KW), BayCorp and Northeast split 50/50. BayCorp’s $225MM NOL should shield the gain on sale.

The sale of Seabrook should result in a minimum value of roughly $11.25 per share: after-tax proceeds of $87MM from the Seabrook sale plus cash of $15MM and other assets, minus all BayCorp liabilities.

On the high side, we believe the company could be worth roughly $14.00 per share. The sales price of similar plants and conversations we had with an independent utility plant auctioneer indicate that Seabrook could sell for as much as $700 per KW. This would yield $600 per KW to BayCorp or $104MM. We again subtract BayCorp’s liabilities.

Negatives
As Seabrook is the company’s main asset, plant outages are incredibly detrimental making earnings very volatile. Due to outages and lower electricity prices, BayCorp has not shown a full year profit since 1994. In addition, Seabrook was out from 10/21/00 through 2/2/00 and for one week in mid-March.

The company currently has firm contracts on roughly 60% of its production. The company gets higher prices for firm contracts but is obligated to deliver power regardless of whether the plant is operating. When the plant is out the company must buy power for resale in the open market.

Catalyst

The sale of the Seabrook.