Visit the Inc. 500 site, which includes a fully searchable database of winners from 1983 to the present

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.

Cogentrix was not alone in jumping on the cogeneration bandwagon in the early 1980s. Several initial public offerings for cogeneration companies hit the market in that period as cogeneration became a hot item on Wall Street. Many of these were tax-driven deals put together by lawyers and accountants. Many fizzled.

Cogentrix is the antithesis of that. George Lewis is an operations man. He believes that Cogentrix must remain a private company in order to keep the business moving fast in a progressively deregulated marketplace. Because of his standardized approach to plant design, 80% of Cogentrix's employees work in operations, and only 20% work in administration and development. (Other cogenerators, typically, employ less than half their people in operations.) This leads, Lewis believes, to the sky-high availability rate of Cogentrix's plants -- last year its seven plants combined were running 96% of the time, while the industry average is about 78%.

That kind of reliability has broken down barriers. Large utilities, suspicious of upstart cogenerators, willingly do business with Cogentrix. Lewis works closely with utilities in North Carolina and Virginia, determining what part of their grid, or distribution network, Cogentrix can help beef up. The relationship is cooperative, not confrontational. "We enhance their capability," Lewis says.

Standardized design, meanwhile, allows mobility within the organization. "We can take an operator out of one plant on Friday night, and he can walk in the door of another on Monday morning, and it's all the same," says Lewis. Cogentrix can train all its operators on simulators. Employee bonuses are based not on individual merit but on the relative performance of each plant, judged by a standardized set of criteria.

The future looks bright for Cogentrix. Lewis sees an ongoing demand for his product, projecting average growth in electricity demand at 4% a year. Capacity will have to double in the next 18 years to meet that need. He also sees another oil crisis looming in the '90s, assuring coal's future. With the building of each plant Cogentrix signs 20-year contracts for low-sulfur coal that already meets clean-air guidelines for the year 2000.

If imitation is the sincerest form of flattery, then George Lewis must by now have a moderately enlarged ego. Forty utilities have set up unregulated subsidiaries to get into the cogeneration business -- a business they initially resisted, then dismissed as insignificant. Attracting the giants' attention might worry some entrepreneurs, but not Lewis. Cogentrix, he believes, will always be able to do the job cheaper, faster, and better. And besides, life, which began for Lewis again at 55, only keeps renewing itself at Cogentrix. "When I started the company in 1983 I figured there was a six-month window of opportunity," says Lewis. "I still think there's a six-month window of opportunity."


Where are they now?

1988 American Central Gas

Tulsa, Okla.

From $93 million in business one year to $324 million the next. That kind of expansion -- generated by building eight new natural gas well systems and acquiring eight others -- put 1988's #1 company on the list again this year, at #12.

1987 American Photo Group


As the 1987 Inc. 500 was going to press, APG founder Steve Bostic was selling his company to Eastman Kodak (see "Thriving on Order," [Article link]). Kodak went on to merge its processing labs with those of Fuqua Industries' Colorcraft, and they all now operate under the name Qualex.

1986 ABC Supply

Beloit, Wis.

Founder (and 100% owner) Ken Hendricks's goal is to have a billion-dollar building-supply company by 1994. Sales this year will hit $360 million, in large part from continued acquisition of floundering building-supply companies.

1985 Herbalife International

Los Angeles

When the now-public company reigned over the Inc. 500, sales of its health products sat at a fat $423 million -- an astonishing 109,510% ascent over five years. But investigations by the FDA, the state of California, and the U.S. Senate sent revenues crashing a year later. Sales for the first half of 1989 were $68 million.

1984 Pedus Service

Los Angeles

Slow and steady: that's the growth motto for $110-million Pedus, which did $61 million in sales back in 1983. The national firm has added office leasing and food service to its offerings, but the original security and cleaning divisions still account for 90% of revenues.

1983 The Sigal Cos.

Washington, D.C.

Sigal Construction has also continued to grow, with business this year reaching $143 million, up from $96 million last year. Corporate users are increasingly turning to Sigal; recent jobs include Bell Atlantic's regional headquarters and British Aerospace's flight-simulator facility.

1982 Altos Computer Systems

San Jose, Calif.

Bad news at Altos. Sales at the public computer manufacturer fell this year from $176 million to $140 million, and the company had its first loss ever, of $5 million. Founder David Jackson, who remains at the helm, blames "a general slowdown" in the marketplace. -- Leslie Brokaw