Niagara Mohawk Holdings Inc.

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Niagara Mohawk Holdings Inc.

300 Erie Boulevard West
Syracuse, New York 13202
U.S.A.
Telephone: (315) 474-1511
Fax: (315) 460-1429
Web site: http://www.niagaramohawk.com

Wholly Owned Subsidiary of National Grid PLC
Incorporated: 1929 as Niagara Hudson Power Corporation
Employees: 7,600
Sales: $4.54 billion (2000)
Stock Exchanges: New York
Ticker Symbol: NMK
NAIC: 221122 Electric Power Distribution; 22121 Natural Gas Distribution

Niagara Mohawk Holdings Inc. is a holding company for utilities with a long history of providing electricity and gas to the upstate New York region. Its largest subsidiary, Niagara Mohawk Power Corporation, is the second largest combined electricity and gas utility in New York state. This company provides electricity to over 1.5 million customers in upstate New York, and also provides natural gas service to thousands of customers in the eastern, central, and northern parts of the state. Approximately 85 percent of Niagara Mohawk Holdings’ revenue comes from electricity sales. The company sold off its holdings in nuclear power plants in 2000, prior to its merger with British utility company National Grid PLC. The company takes its name from two rivers in the region it serves. The Niagara and Mohawk rivers powered the company’s first generators, as the Industrial Revolution led industry and settlement north up the Hudson River Valley, and west to the Great Lakes to form the backbone of Niagara Mohawk’s area of service.

Selling Hydroelectric Power in the Early 20th Century

The company did not assume its present configuration nor take its present name until 1950. As early as the late 1870s, however, the great natural resource of Niagara Falls had been tapped to provide energy in the form of water that turned a wheel, which in turn generated electricity that operated several mills. In addition, water power from the Niagara River was used to operate a primitive electric light machine, and thus the hydroelectric era at Niagara was inaugurated in the years before 1880. By the early 1890s advances in the design of power plants resulted in the Niagara producing more energy than could be used in the immediate surroundings. In the wake of this success, other hydroelectric stations, which would one day become part of the Niagara Mohawk network, were set up in the late 1890s and early years of the 20th century to exploit the power of the many rivers of upstate New York.

Within a few years, the problem of how to transmit power from its source to the places where it was needed had been solved with the use of transformers and high wires carrying alternating current. In 1896 the streets of the nearby city of Buffalo, New York, were lighted for the first time by energy from Niagara Falls. Slowly, power lines were extended from water-powered generating plants into other urban areas. By 1917 steam-generated electricity had come to play a significant role in providing power to upstate New York.

By the end of the 1920s, three separate holding companies encompassing 59 different firms served the energy needs of northern New York state. One holding company used the waters of the Hudson River to generate electricity for the area around Albany, New York; another was centered primarily on the Mohawk River and its tributaries; and a third drew from the resources of Niagara Falls and a large steam-generating plant near Buffalo, New York. Each company within these groupings provided for the needs of its area with its own generating plant and bought and sold excess power as it was needed or became available. In 1929 all 59 companies were brought together under the aegis of the Niagara Hudson Power Corporation, which had been formed specifically for this purpose. Although this united the companies under one owner, their corporate structure and operations remained much the same as before.

In 1932 Niagara Hudson completed a large Art Deco-style headquarters building in Syracuse, New York, whose architecture incorporated many different kinds of decorative illumination, illustrating the wonders of electric power. In this same year, Niagara Hudson also first mixed natural gas into the manufactured gas that it supplied to its customers for use in furnaces, water heaters, and household appliances such as stoves and ovens.

Company Perspectives:

Niagara Mohawk is committed to maintaining and enforcing the highest standards of fairness, integrity and mutual respect in all business dealings. Our obligation to operate within the law is just the beginning of our commitment.

Although lighting powered by gas manufactured from coal or oil had been seen as a competitor for electric illumination in the late 19th century, it soon gave way before the superior qualities of Thomas Edison’s incandescent light bulb, and purveyors of gas were forced to fall back on the market for household conveniences. In order to finance the construction of larger generating plants and pipelines to residential areas, gas companies allied themselves with electric companies, and pipelines were subsequently constructed under power-line rights-of-way by these new, dual-purpose companies.

In 1937 in the midst of the Great Depression, Niagara Hudson’s twofold electric and gas businesses were reorganized. The 59 separate companies within its structure were reduced to 20, and these companies were separated into three wholly owned principal operating subsidiaries corresponding to their old geographical groupings. These three subsidiaries were Central New York Power Corporation, New York Power and Light Corporation, and Buffalo Niagara Electric Corporation. The entire company was incorporated under the name of Central New York Power Corporation.

With the arrival of the 1940s and the entry of the United States into World War II, the country converted to a wartime economy, and as a symbol of the new austerity the elaborate external decorative lighting of the Niagara Hudson headquarters building was removed. By the end of the 1940s, it had become clear that the geographic administrative divisions that remained within the company were not appropriate for the production of electricity and distribution of natural gas, and a final level of consolidation was undertaken. In 1950 the three operating divisions and the 20 companies within them were combined to form a single operating company, Niagara Mohawk Power Company.

A More Centralized Company After World War II

In this new entity, power distribution for the entire area was brought under central control. All energy produced was pooled, and then allotted to users depending on need and supply. The new company was investor-owned, as its predecessors had been. As a utility, with a monopoly to provide an essential service to a particular area, the company operated under the scrutiny of the New York State Public Services Commission, and other such entities. The company was required to submit to this commission requests for periodic increases in rates to cover costs.

Throughout the 1950s Niagara Mohawk acquired a number of power companies and power-generating facilities in its region. By 1958 the Niagara Mohawk system covered more than 21,000 square miles in New York state, and encompassed 83 hydroelectric plants and seven steam-driven plants, as well as several thousand miles of gas mains.

In 1963 Niagara Mohawk announced plans to construct an atomic power plant at Nine Mile Point, New York, near the town of Oswego on Lake Ontario. Two years later, the company received permission from the Atomic Energy Commission to build the plant. That same year Niagara Mohawk’s service area was affected by a blackout that originated with a power surge in a Canadian company’s plant on the Canadian side of the Niagara River. This led Niagara Mohawk, along with other utilities, to improve plant design and construction.

Niagara Mohawk’s Nine Mile Point Nuclear Unit One went into commercial operation in December 1969. Six months later, in June 1970, the utility announced plans to construct a second nuclear power plant at the site. In addition to expanding its nuclear capabilities, Niagara Mohawk modernized and enlarged its conventional power-generating plants at this time in anticipation of increased demand for electricity in the coming years. The company converted four coal-burning plants at its Oswego steam station to oil and constructed an additional oil-burning facility. Two years later, in 1972, the company announced plans to add a sixth oil-burning unit at Oswego, to begin operation in 1976.

Niagara Mohawk, like the rest of the utility industry, was taken by surprise and heavily affected by the OPEC oil embargo of late 1973, which touched off an energy crisis. The price of petroleum, a major raw material for power plants, skyrocketed, and the company duly passed on this increase to its customers, winning permission to increase rates in February 1974, and then again seven months later. An indicator of customer dissatisfaction with rising utility costs came in May 1974, when the town of Massena, New York, voted to take over the company’s facilities on municipal land and operate them itself.

With earnings squeezed by the energy crisis, the company scaled back its construction budget for 1975 and halted work on its sixth generating plant at the Oswego site, delaying its operation for two years. Nine months later, the company announced that it had sold a 24 percent stake in the plant to Rochester Gas & Electric Corporation, a nearby utility. In early 1975 the company cut costs further by eliminating 1,000 jobs.

To strengthen its construction program, Niagara Mohawk sought alliances with other power companies. The company set up Empire State Power Resources, Inc., a joint venture with six other New York utilities to build and operate power plants. Niagara Mohawk also purchased an interest in a nuclear plant being planned for Sterling, New York, and brought in four additional partners to help it construct its Nine Mile Point Two nuclear reactor. These arrangements allowed the company to reduce its budgets for the rest of the 1970s and to begin work in June 1975 on the Nine Mile Point Two facility.

Coping with Changes in the 1980s

By 1977 Niagara Mohawk earnings had come out of a mid-1970s slump. By the following year, however, demand for electricity had begun to fall, and the company announced the first delay of the opening of its second nuclear plant under construction at Nine Mile Point. In addition in 1979 General Electric Company accepted responsibility for damages to Niagara Mohawk’s first nuclear generator at that site, incurred during a routine shutdown for refueling and maintenance, which kept the plant out of operation for a costly month.

Public opposition to nuclear power and skepticism of projected increases in energy needs resulted in hostility toward the nuclear power industry in the 1980s. Niagara Mohawk was further plagued by its Nine Mile Point facilities in 1980, when it was announced that cost projections for Nine Mile Point Two, only one-third completed, had been increased by 78 percent to reach $2.4 billion. Citing concerns about technical and environmental issues, as well as regulatory difficulties, the company postponed the plant’s operating date until late 1986. In addition, plans for the nuclear plant in Sterling, New York, in which Niagara Mohawk had acquired a partial interest, were scrapped by a regulatory commission in 1981.

In March 1982 the utility closed its Nine Mile Point One unit when leaks from cracked pipes were discovered during routine testing. The plant was scheduled to be closed for a year, and Niagara Mohawk purchased energy from Ontario Hydro, its Canadian neighbor, to make up for the loss in supply. In October 1982 the plant closure was extended for six months, when additional flaws in the reactor cooling system were discovered, necessitating repairs totaling $50 million.

In February 1984 progress toward completion of Nine Mile Point Two was jeopardized when one of Niagara Mohawk’s partners, Long Island Lighting Company, temporarily withdrew from the consortium financing construction of the plant, and Niagara Mohawk had to take on its share of the costs. Critics continued to maintain that the project was unnecessary and uneconomical. Niagara Mohawk received a further blow later that month when the New York State Public Service Commission accused the company of “widespread mismanagement” in operating some of its conventional power plants, and recommended an $83.2 million rebate of fuel adjustment charges to customers. The following month, the commission ordered a $100 million rebate relating to charges for nuclear waste disposal.

In the same month, Niagara Mohawk suffered another rebuke at the hands of a different regulatory agency when the Nuclear Regulatory Commission levied its seventh fine against the utility since its Nine Mile Point One nuclear generating unit had opened, ordering the company to pay $180,000 for failing to test equipment and failing to follow quality control procedures. By April 1984 when the Nine Mile Point Two plant was 75 percent completed, its estimated cost was raised again by one-fifth, to $5.1 billion. Since the company was forbidden by regulations to pass on more than 80 percent of cost overruns on the project to its customers, this meant that Niagara Mohawk shareholders would absorb a total loss of $100 million.

Niagara Mohawk’s regulatory troubles continued in 1985. In January the company was ordered to refund an additional $20 million to its customers after an investigation of its management of plants burning fossil fuels, and two months later a further $32.5 million refund was added.

Construction of the Nine Mile Point Two reactor finally came to an end in March 1988, and the facility went into commercial operation in April. The total cost of building the plant was $6.4 billion. This was offset by the closing of Nine Mile Point One in December 1987 for repairs and inspections that would ultimately take 31 months to complete, depressing the company’s earnings. The closing came after the plant had set a U.S. record for continuous operation by a boiling-water reactor, with 415 consecutive days. In August 1988 Niagara Mohawk sued three of its subcontractors on Nine Mile Point Two in an attempt to win back some of the money it had lost on the project. The company eventually settled with the subcontractors out of court. In October 1988 the newly operational Nine Mile Point Two plant was also forced to close temporarily, and the utility had to buy power from other sources to meet demand.

In August 1989 Niagara Mohawk completed an extensive agreement with its regulators in the hope of having Nine Mile Point removed from a list of problem plants and returned to profitable operation. Nine Mile Point was removed from this list in 1991 and received its best-ever rating from the Nuclear Regulatory Commission. Despite lowered income and the failure to pay dividends on its common stock throughout 1990, the company was able to conclude agreements closing out the era of construction on Nine Mile Point Two and instituted a cost-reduction plan that included eliminating 1,100 jobs.

In August 1991 Niagara Mohawk experienced further difficulties with Nine Mile Point Two when a failure in the plant’s monitoring system automatically shut down the reactor and sent out an alert at the second-highest level of emergency. Regulatory officials closed the plant until an investigation into the causes of the incident was completed, resulting in yet further loss of revenue for Niagara Mohawk. The reactor returned to service six weeks later. Niagara Mohawk had to overcome the obstacles of operation in a strict regulatory environment in order to balance economic and environmental concerns as well as the needs of its customers for power and its shareholders for profit. The company’s financial picture, however, improved somewhat in 1991, as its credit ratings were upgraded and it was able to resume dividend payments.

Key Dates:

1929:: Fifty-nine companies are brought together as the Niagara Hudson Power Corp.
1937:: Company is restructured, renamed Central New York Power Corporation.
1950:: Company is again reorganized, becomes Niagara Mohawk Power Co.
1965:: Niagara Mohawk builds first nuclear plant.
1988:: Second nuclear plant comes on line after long construction process.
1998:: Deal to buy out costly independent power producer contracts is finalized.
2000:: Company is acquired by U.K.’s National Grid PLC.

Restructuring and Buyout in the Late 1990s

Difficult business conditions intensified for Niagara Mohawk in the 1990s. The company suffered a fate that afflicted many utilities around the country as a result of energy policies put in place decades earlier. Congress passed the Public Utility Regulatory Policies Act in 1978, which was meant to encourage new players in the energy market. These new companies were known as independent power producers, or IPPs, which sold the power they produced at state-regulated rates. In New York in 1983, the state legislature set a minimum electricity rate of six cents per kilowatt hour that Niagara Mohawk and other utilities could pay for power from IPPs. The legislators set this floor price presuming that power rates would rise. Instead, they began to fall in the mid-1980s. Niagara Mohawk ended up locked into long-term contracts with dozens of IPPs for power at well above current market rates. In 1990, Niagara Mohawk paid out around $200 million for power from independent producers. By 1993, it was shelling out $745 million, and only a year later its payments increased to $967 million. Not only was the company paying above-market rates for power, but it was forced by its contract obligations to buy more than it needed. Several large Niagara customers, such as General Motors, Miller Brewing, and International Paper, closed plants in upstate New York as the regional economy turned down. With fewer big customers, Niagara needed less power. But it had to honor the IPP contracts, and so continued to buy excess amounts. As new CEO William Davis took the helm of Niagara Mohawk in May 1993, the company saw its credit rating slashed. Over the next year, the company’s stock price fell by almost half.

Davis attempted to control costs by cutting the workforce and asking for a hike in the rate it charged consumers. Its request for a rate hike was turned down in 1996. At that point, Niagara Mohawk’s fate looked dire. Attempts to renegotiate contracts with the IPPs had led to dozens of lawsuits, and tensions between the utility and the independent producers ran high. The company announced that it was contemplating filing for bankruptcy. This move would have put many of the IPPs that sold power to Niagara in bankruptcy themselves. To help with the negotiations, Niagara hired the law firm Donaldson Lufkin & Jenrette in 1996. Its director Mike Ranger had recently completed a restructuring of a Texas utility, and he proposed a similar plan for Niagara Mohawk. This involved the company raising money by issuing $3.45 billion in bonds. The cash would then go to buy out the IPPs’ contracts. The deal was completed in June 1998. About half the IPPs terminated their contracts altogether, and the rest rewrote their contracts based on current market prices.

As part of the complex deal, Niagara Mohawk agreed to sell off its power generating plants. It would become primarily an electricity transmitter and distributor. In late 2000 the company announced that it had sold its nuclear plant, Nine Mile Point Unit No. 1, to Constellation Energy Group Inc. of Baltimore. Constellation also acquired 82 percent of Nine Mile Point Unit No. 2, which Niagara owned with a consortium of other local utilities. Niagara was on its way to becoming a much slimmer company, unfettered by its burdensome IPP contracts and troublesome nuclear plants. Its new, improved status apparently made it a takeover target. In 2000 the firm announced that it was being acquired by a British company, National Grid PLC, for approximately $3 billion. National Grid had already bought up two other New England power companies, and its takeover of Niagara Mohawk was its biggest acquisition yet. The deal moved slowly through various regulatory channels, with consummation expected in late 2001. Niagara Mohawk was to retain its name and Syracuse headquarters. It would now be part of the ninth largest electric utility in the United States.