Cogentrix Energy, Inc. History

Company History:

One of the largest independent producers of energy in the United States, Cogentrix Energy, Inc. develops, owns, and operates independent electric power generation facilities. Like other 'cogeneration' companies, Cogentrix utilizes a power generation process that produces two or more useful forms of energy, such as electricity and steam, from a single primary fuel source, such as coal or natural gas. Cogentrix operates ten cogeneration facilities across the United States, providing electricity to utility companies and selling thermal energy-&shy′imarily steam-&shyø heavy industries and other users.

Cogentrix, was founded and incorporated by George T. Lewis, Jr., in Charlotte, North Carolina, in 1983. Lewis was one of the early participants in the independent power industry, the market for which was established when Congress passed the Public Utility Regulatory Policies Act of 1978, commonly known as PURPA.

Prior to the enactment of PURPA, the demand for power in the United States had traditionally been met by utilities constructing large, electric generating plants under cost-of-service-based regulation. PURPA removed most of the regulatory constraints relating to the sale of electric energy by nonutilities, and required electric utilities to purchase electricity from qualifying facilities. Therefore, nonutilities were encouraged to enter the electric power production market throughout the early 1980s. At the same time, the United States was undergoing a decline in the construction of new generating plants by electrical utilities, due mainly to regulations prohibiting the high costs of many large utility construction projects. Cogentrix and other cogeneration companies presented a cost-effective method for meeting the energy demands of the public and of large industrial users. As a result, a significant market developed for independent power producers throughout the United States since the enactment of PURPA.

According to statistics compiled by the Edison Electric Institute, independent power producers were responsible for approximately 55,000 megawatts, or seven percent, of the nation's installed generating capacity in 1992. Between 1990 and 1992, independent power generation facilities accounted for 54 percent of total additions to electric generating capacity, with a ten percent increase during 1992. The Edison Institute reported that the generating capacity owned by electric utilities increased by less than one-half of one percent during the same year.

Construction of the Cogentrix's first generation facility began in September 1984. By 1994, Cogentrix had developed and constructed a total of ten generation facilities, all located in the United States. Nine of the ten were wholly owned subsidiaries, and the tenth--in Hopewell, Virginia--was owned equally by Cogentrix and another independent power producer. Each facility was located on a site which was owned or leased on a long-term basis by a project subsidiary. Unlike most of its competitors, which hired third-party contractors to run their plants, Cogentrix operated and managed each of its facilities, hiring its general plant managers early in the construction phases, investing in the hiring and training of operating personnel, and structuring its plant bonus program to reward efficient and cost-effective operation of the plants. The company's executive management group also established a policy of meeting several times a year with each plant manager to discuss individual facility issues and conduct on-site plant performance reviews.

Cogentrix became known for its efficient and reliable operations; its facilities averaged 95.71 percent 'availability' in fiscal 1993 and 96.87 percent in fiscal 1992. The utility industry's measurement of availability is defined as the percentage of time a plant is available for operation in a given period, usually a year. For an independent power producer like Cogentrix, full capacity is defined as contracted-for electric generating capacity in megawatts. Cogentrix's availability statistics were regarded as high for the industry, and the company attributed this performance to several factors, including its utilization of standard design coal-fired technology, extensive employee training programs, the elimination of redundant practices at its facilities, and its comprehensive programs of preventative maintenance.

In September 1993, Cogentrix announced its intention to develop an eleventh facility in Michigan. The coal-fired Michigan plant was expected to be brought online in late 1996 and would generate enough electricity to light up a city of 35,000. Cogentrix expected the steam from the plant to be sold to James River Corporation's Parchment, Michigan-based paper mill. This new facility would mark Cogentrix's first experience with the new circulating fluidized-bed, a technology that combines pulverized coal with limestone particles in a hot bed. Calcium in the limestone combines with sulfur in the coal, reducing toxic sulfur dioxide emissions by as much as 90 percent, helping facilitate the company's compliance with regulations of the Clean Air Act of the early 1990s.

Since its founding in 1983, the company's competitive advantage has relied on its ability to construct coal-fired facilities at a lower total cost per kilowatt than most of its competitors. For example, the company's 240 megawatt facility in Richmond, Virginia, was completed within 17 months of groundbreaking at a total installed cost of less than $1,000 per kilowatt. Cogentrix has been able to achieve time and costs savings primarily by using standardized plant designs that incorporate proven technology and modular, as opposed to custom, construction. As a result, the construction and start-up of such facilities generally proceeded more quickly than for larger generating facilities.

While joint partnerships have been a part of only one out of ten of its past ventures, Cogentrix expected this arrangement to become a much larger part of future endeavors. By forming joint ventures with other independent power producers, equipment manufacturers, and fuel suppliers, Cogentrix hoped to gain technical expertise, greater knowledge of political and social conditions of the new region, and the ability to leverage the company's human and financial resources. Moreover, joint ventures would allow Cogentrix the luxury of sharing the risks associated with power generation projects.

In the mid-1990s, all of Cogentrix's generation facilities sold electricity to utilities under long-term sales agreements. A plant's revenues from such an agreement usually consisted of two components: energy payments and capacity payments. The energy payments generally covered the cost of electric generation--which varied according to current fuel and maintenance costs--and are based on a facility's net electrical output measured in kilowatt hours. Capacity payments, on the other hand, were intended to compensate for the plant's fixed costs--including debt service on the project's financing--and are calculated based on the declared capacity of a facility, that is, the amount in megawatts that the company's project subsidiary agreed to make available to a client in a sales agreement. In most cases, capacity payment rates varied over the term of a power sales agreement according to various schedules. Capacity payments comprised the majority of Cogentrix's sales revenues from power sales agreements.

With the exception of one facility, which produced thermal energy in the form of hot water for use by a commercial greenhouse, all of Cogentrix's plants produced 'process steam' for use by industrial clients. These clients, or 'hosts,' include textile manufacturing companies, chemical producers, and synthetic fiber plants, all of whom use the process steam in their manufacturing operations. Cogentrix's steam sales contracts with these industrial hosts were generally long-term contracts that provided payment on a per-thousand-pound basis for steam delivered, in addition to a minimum annual payment in the event that the industrial host's plant is shut down.

Cogentrix's ten facilities also purchased fuel under long-term agreements. Nine of the company's projects in the mid-1990s were fueled with low-sulphur coal, while the other utilized natural gas. Under Congentrix's long-term supply agreements, coal-fueled plants were required to purchase all of their fuel for a particular plant from one coal sales company specified in each agreement. In turn, fuel suppliers were provided with a list of approved mines as part of the agreement. All ten of the company's facilities maintained fuel inventories that varied from a 15- to 20-day supply. Under normal circumstances, this level of inventory proved sufficient, and Cogentrix developed detailed contingency plans to deal with fuel shortages due to coal or rail strikes. Costs incurred under the fuel supply agreements and transportation agreements accounted for approximately 60 percent of Cogentrix's operating expenses in 1994.

In order to deal with the ash created by Cogentrix's coal-burning facilities, seven of Cogentrix's subsidiary facilities maintained contracts with ReUse, a wholly owned subsidiary of Cogentrix that handled the removal of coal ash. The company's other facilities employed a third party to remove coal ash. As an environmentally-conscious alternative to disposing of ash in landfills, ReUse developed a process in which coal ash could be used as structural fill material in the manufacturing and production of various products for resale. Most of the coal ash removed from the plants by ReUse was hauled to land located in nearby industrial/commercial areas, where it helped raise the existing grade of the land to a higher level, making the site more suitable for future development. The remaining coal ash was incorporated into such products as concrete blocks, concrete pavers, land plaster for peanut crops, and potting soil. At one site where coal ash was deposited as structural fill material for several years, ReUse established a composting operation to mix coal ash with wood byproducts and cotton gin waste to make potting soil. ReUse sold this potting soil in bulk to nurseries and other end users.

Experts in the energy field predicted that the future growth of Cogentrix's market would occur in the world's developing countries. According to several studies, the need for base-load generating capacity additions in developing countries between 1994 and 2004 would significantly exceed that of the United States. Many foreign markets, including Mexico, China, India, and Southeast Asia, adopted policies during the early 1990s that supported independent power producers. Those policies, as well as very high economic growth rates, ensured climates that would be ripe for the entry of companies like Cogentrix.

A dominant force in the United States, Cogentrix moved quickly to expand the company's presence worldwide. Management believed that by establishing relationships with large U.S. multinational companies, Cogentrix could develop reliable inroads to new project developments. In May 1993, the government of India approved a Cogentrix proposal to develop a 1,000 megawatt coal-fired electric generating plant in the state of Karnstaka. The company expected to begin the first phase of construction in 1995, depending upon whether it could reach a long-term power sales agreement and obtain construction financing. The project would mark Cogentrix's first foray into the international arena.

Moreover, Cogentrix's management team considered Latin America as a great opportunity for development, following the enactment of the North American Free Trade Agreement (NAFTA), a comprehensive free-trade accord among the United States, Canada, and Mexico. In early 1994, Cogentrix was also actively investigating possible development opportunities in Mexico. However, such international projects have proven more difficult and expensive than domestic projects, since many foreign competitors had greater capital resources and local market expertise than Cogentrix.

The future market for Cogentrix and other U.S. independent power producers in the mid-1990s remained uncertain. Although many published forecasts reflected the need for continued growth among these companies, competition from regulated electric utilities was considered a threat. These utilities were making increasingly efficient use of their existing resources by improving plant availability, extending plant lives, repowering older facilities, and taking advantage of attractive bulk power purchases. Moreover, many regulated utilities have also initiated demand side management programs designed to reduce the need for new electric generating capacity.

In addition, obtaining a power sales agreement with a domestic utility has become progressively more difficult, expensive, and competitive throughout the late 1980s and early 1990s. As a result of this trend and other factors, consolidation of companies involved in the independent power industry has accelerated. Many state regulatory commissions now require or have policies in place that encourage power sales agreements to be awarded by competitive bidding. This process increases the costs and decreases the chances of obtaining such agreements. Cogentrix's strategy is to avoid competitive bidding whenever possible and instead use negotiated power sales agreements.

In the future, Cogentrix intends to capitalize on the reputation it has established as a result of its high plant availability record and remain among the leaders in the rapidly-growing independent power industry. The company plans to accomplish this by developing and constructing or acquiring power generation facilities throughout the United States and selected foreign markets where the political climate is good for foreign development.

Principal Subsidiaries: Cogentrix Eastern Carolina Corporation; ReUse; Cogentrix of North Carolina Holdings, Inc.; Cogentrix of Pennsylvania, Inc.; Cogentrix of Richmond, Inc.

Further Reading:

Fralix, David, 'Cogentrix Closer to Deal for Michigan Plant,' Business Journal, May 16, 1994, p. 4.

Source: International Directory of Company Histories, Vol. 10. St. James Press, 1995.

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