Full Steam Ahead
How Cogentrix rode the energy crisis all the way to the top of the list
Dressed in a dark gray suit, seated in his well-appointed office, George T. Lewis Jr. looks every bit the sober, reliable utility executive. Scratch the surface, though, and you'll find in this plainspoken man a bit of the cowboy.
In 1983, at age 55, Lewis quit his job and a comfortable 34-year career in engineering and the utilities industry, paid off his mortgage, and sank everything else he owned into an idea that soon became a very big company. In the next six years Cogentrix Inc., based in Charlotte, N.C., would borrow $520 million and build seven cogeneration plants. It would generate megabucks as well as megawatts. Sales last year totaled $130 million, a five-year compound annual growth rate of 458%. That in turn translates into the #1 spot on this year's Inc. 500.
Cogentrix is really more than a company. It is an expression of one man's insight into complex economic times, evidence of the maxim that every crisis produces opportunity. For electric utilities the crisis arrived in the mid-1970s when the price of oil and the cost of building power plants went through the roof. Demand for power, meanwhile, leveled off. Deregulation of what had always been a plodding, predictable, quasi-monopolistic industry loomed. Then, in 1978, Congress passed the Public Utilities Regulatory Policy Act. The legislation mandated that the large regulated utilities buy power from smaller independent producers, which opened the business to entrepreneurs.
Lewis, who had started his career at Consolidated Edison Co. of New York, and who by the early 1980s was working at Chas. T. Main Inc., a Boston-based engineering consultant to electric utilities, sensed a chance to make the big score. For two years he urged his fellow managers at Main to get into the cogeneration business. They hemmed and hawed. "There was a consensus that the utilities would fight this," Lewis recalls. "So the bigger engineering firms that served the industry were reluctant to go in and assume what they saw as an adversarial position to the utilities."
That's what gave Lewis his opportunity. He knew there was money to be made building small power plants of simple, standard design. Sell the electricity to utilities, he reasoned, and pipe the steam to nearby manufacturers.
Traditionally, architecture and engineering firms designed and built power plants. They did not run them. That was the utilities' domain. This division of labor created disincentives to watching the bottom line. Construction was on a cost-plus basis, and utilities could pass cost overruns on to the consumer. Engineers could let their imaginations roam. The result, claims Lewis, was design overkill. Every large plant became a customized job.
With Cogentrix, Lewis would challenge the status quo and bring some free-market discipline to an industry he knew inside and out. He knew where he wanted to take the company.
Cogentrix, to begin with, would violate the existing order. It would be a hybrid. It would design, build, and operate its plants.
Cogentrix would build coal-fired plants. The supply and price of coal was predictable and long term. The supply of oil was not. Many utilities had gotten hooked on oil when it was cheap and imported. Lewis would avoid this trap.
Cogentrix would standardize the design of its plants. So far, they come in only two sizes, 35- and 55-megawatt capacity. Plants built by large utilities generally range from 500 to 1,000 megawatts. They also take from 6 to 12 years to license and construct. Keeping its plants small, simple, and standardized means Cogentrix can build them in the relative blink of an eye -- 14 months. As a result, engineering costs on a Cogentrix plant amount to about 2% of the total cost versus an industry average of 8%. Cogentrix's construction costs total less than $1,000 per kilowatt; the industry average is $1,500.
Although Lewis set out to build small, he nonetheless was thinking big. When Cogentrix ordered 22 boilers from Foster Wheeler, an architecture and engineering firm, it was the largest industrial order since World War II. Cogentrix's very first order -- for 10 turbines -- went to General Electric. That transaction earned Lewis an introduction to General Electric Capital, which over the past five years has loaned Cogentrix $220 million. The company's other lenders include The CIT Group, a subsidiary of Manufacturers Hanover; Prudential Capital; The Fuji Bank; and a consortium of European banks headed by Compangie Financiere de Paribas. Cogentrix has been able to borrow huge sums because it borrows not on its balance sheet, but on the steady cash flow guaranteed by the 10- to 20-year contracts it writes with utilities and industrial customers.
Cogentrix targeted familiar terrain when it went out looking for a place to do business. At Chas. T. Main, the South had been Lewis's territory; he knew it well. So Cogentrix set up in Charlotte.
Within the region Cogentrix first targeted the textile industry, hard hit by foreign competition, as a customer for its steam. "I knew they'd be interested in anything that would save them money," Lewis says. Textile companies were generating their own steam, using $28-a-barrel oil. When Lewis came along he offered them not only lower steam costs but a chance to exit the power business, which was little more than a drain on their dwindling assets. Four of Cogentrix's plants now serve major textile producers. Two serve chemical companies, and another serves a drug manufacturer that has discovered Cogentrix's steam is purer than that it was producing and using to make its pharmaceuticals.
