?Financing has never been a constraint on our growth rate and we don't expect it to be,? claims Scott Helm, Orion Power's CFO. The success of the past year's energetic shopping spree ? in which Orion smoothly sourced some $1.7 billion in project debt ? bears witness to this. And now, despite a well-entrenched operating platform, the company is still ferociously pursing growth, spurred on by sizeable returns from capitalizing on a restructuring (albeit gradually) power industry.

Helm carves out Orion's particular growth strategy thus: ?We formed because we had a view that deregulation would create opportunities to grow a sizeable pure play power generation company with meaningful value for shareholders. But our growth strategy has not been predicated on simply growing to be big ? we care about economies of scale that come with size.?

That growth has also been based on a carefully formulated ?locational approach? ? the principle that asset location is the most important aspect in the electricity generation business. ?The first thing you have to do is to look at the location you're in and the constraints you face; you really have to figure out the fundamentals of each market.?

He adds, ?Just like real estate, not all megawatts are created equal. The bottom line is we like to own plants near end use customers.? This, he argues, is Orion's locational advantage.

And it has played out primarily through picking up facilities strategically situated in and around major cities, such as New York, Pittsburgh and Cleveland ? facilities which, based on their location, are critical to the stability and reliability of the electric transmission grids.

The company's strategy has also tended to fit well with banker bias: it has focused on domestic generation acquisitions that guarantee ample and swift revenue streams.

Indeed, Orion has taken sharp aim at the deregulated power sector in the north -eastern US. With a generating capacity of 5,400MW, almost half of it coal, the company owns and operates more than 80 power plants in New York, Ohio and Pennsylvania.

Conspicuously, Orion more than doubled its size in 2000, completing its original five-year business plan three years ahead of schedule. As significantly, it secured 18 turbine generator packages with an equivalent capacity addition of over 4000MW, beyond the 5400MW currently in operation and an additional 1200MW in construction. Says Jack Fusco, company CEO, ?we transformed Orion from a startup company based on acquisitions to a mature power generation company with a recognized presence in the wholesale power generation sector.?

To cultivate this growth, Orion successfully closed three major transactions last year: its acquisition of generation assets from Duquesne Light, a further acquisition of Columbia Electric Power company, and a public flotation issuing $450 million to back future advances.

That IPO, says Orion, ?further helped lay the groundwork for where we want to go ? we will continue to grow.?

But the ease with which Orion has secured its financings can be put down to its history of market successes ? most notably its original Orion Power New York deal. And the enthusiasm of lead arrangers on that deal, Bank of America and BNP Paribas, has since carried over to ensuing financings.

Orion built up its New York State presence with a portfolio of 2613MW of capacity acquired through purchases from Niagara Mohawk Power (NiMo), Consolidated Edison (ConEd) and US Generating (USGen). That deal was backed by a $730 million facility.

There, financing included a $700 million three and a half year loan and $30 million in working capital. Pricing was at 137.5 bp for each of the first two years, extending to 175bp for the final year-and-a-half.

Additionally, Orion chipped in $367 million of equity to the mix.

The New York assets include 72 hydroelectric plants upstate, which muster a total capacity of 655MW, purchased from NiMo for $425 million. The oil and gas-fired ConEd assets consist of the 1090MW Astoria, the 494MW Gowanus and the 271MW Narrow, all purchased for $550 million. Also included in the deal is the 105MW Carr Street plant.

Subsequently, Orion managed to attract over-subscription on a loan to finance last summer's hefty Duquesne acquisition in the mid-west. General syndication of a $1.2 billion loan to fund Orion Power MidWest's purchase of 2614 MW of generating assets from Duquesne Light was wrapped up by a primary banking syndicate consisting of Bank of America, Goldman Sachs, Deutsche Bank and BNP Paribas.

Orion picked up the assets for $1.7 billion, with the balance paid down in part by equity, financed through a $400 million high yield issue. Moody's assigned a Ba3 rating to the 10-year Orion notes.

The loan incorporated a two-and-a-half year $1.1 billion loan, fully funded at financial close, and a $90 million revolving facility.

Co-arranger commitments notched in at $125 million while senior managing commitments were pegged at $75 million in primary syndication.

The debt was priced at 137.5bp over Libor for the first year, rising to 150bp over Libor for the second year and subsequently reaching 200bp above Libor for the first half of the third year.

The loan also flaunted a cash-sharing mechanism whereby, instead of scheduled amortization payments, a performance-derived percentage of the profits are shared with the lenders.

Aside from the overall levels of lender interest, both deals are noteworthy for their mini-perm structures. Explains Helm, ?We opted for three year financings on both Orion Power NY and Orion Power Midwest, as opposed to going for a one year financing like some of our competitors did. This provided us with more flexibility.?

The mini-perm structures exhibited on these Orion Power Holdings deals offered, as the banks confirm, good flexibility for operating in a merchant market and the possibility of a capital markets takeout. But a probable underlying reason for their popularity is more mundane ? the 3-5-year tenor is as far as the lending community was, and is currently, willing to go. In fact, bank liquidity is still not strong, particularly beyond seven years.

But in the wake of this palpable liquidity crunch, the advantages of the mini-perm structure are now than ever more apparent: the ability to refinance when necessary.

And refinancing is precisely what is next on Orion's agenda. The company is currently in the process of evaluating alternatives to refinance its two major credit facilities ? MidWest and New York. Collectively, they total $1.9 billion. Since they mature between October 2002-December 2002, there is no near term maturity pressure, although, according to Helm, ?the opportunity exists to refinance those facilities, to significantly extend maturities to lower our overall cost of funding, and most importantly, to increase our flexibility to use our cashflow to continue to grow and develop our business.?

As for refinancing options themselves, Helm says, ?we've reviewed most of our competitor's financings and we wouldn't pick out any as providing a template.? But, more generally, he adds, ?we believe philosophically that all of our major assets ought to be financed together, cross collateralized and that we ought to finance on a corporate basis.?

Reaping money on a corporate, as opposed to project, basis, argues Helm, will allow for more agile financing terms. And a belief in financing major assets together means that Orion will most likely take out its refinancing at a combined operating company level. Says Helm, ?Because the original financings were done as two separate facilities, we can't move money from the MidWest business to pay for our New York projects, and vice versa.? Accordingly, Orion could merge Orion Power New York and Orion Power MidWest, as well as future operating companies, into a single entity that would serve as a primary financing vehicle.

Orion hopes to complete refinancing by the third quarter of this year. Says Helm, ?I think that's achievable from where we are now.

We've received an awful lot of interesting proposals and we're just trying to make sure we optimize the financing package to create the lowest cost and the most flexibility for Orion while leaving us with a very strong credit at the Orion Gen Co level.?

The climate, bankers say, is good for refinancing the MidWest and NewYork deals before the loans mature. With Orion having now gone public, the hope is that the original debt will be repackaged so as to diminish the bulk of the refinancing.

The age of some of Orion's assets is one of the factors Moody's cites as keeping the company's credit rating, at Ba3, just shy of investment grade. For example, the Midwest assets, seven power generating facilities located in Western Pennsylvania and Ohio, are all 30 to 50 year-old base load coal-fired plants, with the exception of one oil-fired peaking facility.

But Helm remains buoyant, arguing that age should not be confused with quality. ?The age of our assets is not a concern. You have to be careful and to look at the quality of the assets in question ? in all cases, they had to be well maintained; they had to have received their fair share of dollars and they had to have a long remaining useful life.? Even the environmental risks associated with older coal assets are minimal, suggests Orion. And the company is, after all, fine tuning where necessary.

Nevertheless, the fact remains that Orion, with its still nascent company infrastructure, currently lacks an investment grade rating.

The question that arises is to what extent this may affect the company's growth mantra ? and whether shoring up its rating should become a primary pursuit instead. But Helm is unambiguous in dissolving what he takes to be an unnecessary dichotomy: ?growth and an investment grade rating are not inconsistent with each other ? in our case I'm confident that they can and will coexist.?

Growth, but how much?
And growth continues expeditiously. In fact, Orion has enough turbine generators on order to double the generating size of the company: ?we could take it from 5,400MW, which is what we have today, to 11,000MW. We see a secondary market developing for turbine generators and we've been pretty active in negotiating for them.?

This new potential capacity will encourage two behaviors. One, repowering existing assets; the other, greenfield construction. But further acquisition plans are also still very much alive.

The Mid-Atlantic region (the Pennsylvania-New Jersey-Maryland, or PJM area) has seen a glut of acquisition activity over the last year.

And Orion was one of the major spending players. Its most recent acquisition was Columbia Electric, at the end of last year, for a price tag of $200 million. The purchase promises to provide another fulcrum for regional growth, with facilities in West Virginia, Pennsylvania, Maryland and Kentucky.

And with the company came two additional power plants under construction, expected to become commercially available soon. To manage Orion's PJM assets, Orion Power Mid-Atlantic was formed last December.

The company's beachhead investment in the PJM market is the Liberty Plant, a 568MW combined cycle plant just outside Philadelphia. Orion is also pressing ahead with a duel-fuel modification at its Brunot Island facility in Pittsburgh in order to deliver clean burning natural gas by this summer. Its other key initiatives include completion of construction of the 500MW Sereto facility in West Virginia, commercial operation of which is expected to begin this summer.

Helm is confident about prospects for growth in the region: ?we find it an attractive market with much liquidity and we're hopeful we'll move further west.?

Indeed, its liquidity is readily contrasted with the MidWest market. There, investments need to be made, but, cautions Helm, investments of the right sort. ?From a strategy standpoint, we want to continue steady growth in this market. But its difficult to justify new investment in greenfield cogeneration plants, since they're at a severe cost disadvantage. We like coal as a fuel source.? And with good reason. The price of gas has risen considerably over the last year, and with Orion's preference for coal (its assets in this market are 80% coal), its variable costs of production are lower, granting the company a commendable edge.

Orion is currently around 70% sold forward in its MidWest business ? last December it entered into a four year fixed rate power supply agreement with Duquesne Light. It is also evaluating potential to participate with ?another very reputable coal operator? in expansion or greenfield development in this business.

Financing, as Helm has maintained from the outset, is not considered a constraint for any future Orion developments. ?We'll continue to earn higher margins and our expectation is that our coverage number will continue to grow as our balance sheet continues to strengthen.

We don't view ourselves as limited by capital or capital access, in terms of achieving growth.? And, it seems, lenders are broadly in agreement. Contends a banker familiar with Orion, ?the company has highly creditworthy generating subsidiaries which have performed phenomenally well. Moreover, Orion has demonstrated that it can bring optimal operating performance to the market ? I'm extremely confident about their ability to access the right kind of finance as and when necessary.?

Enhancing the value, reliability and competitiveness of its current asset base and exploiting opportunities to internally grow its business is a key part of Orion's strategy. This is perhaps most apparent within its New York operations ? specifically, repowering and modernizing the vital Astoria Generating Station asset. But beyond profitability, that scheme is also motivated by a more pressing concern ? supply shortage.

And given the highly regulated nature of the New York market, greenfield development is notoriously difficult. In such a situation, then, ?what's important is finding the right answer within the existing assets.? The Astoria repowering ? intended to bring an additional 600MW on line ? is arguably the quickest and most efficient way of adding increased generation capacity, and the company is anxious to move forward with it.

So, too, in theory, is New York City, for which an extremely tight supply/demand balance is expected this summer. ?We do hope that supply will be adequate, but for that to happen everyone has to work together ? transmission lines must also be available.?

Orion is also unearthing an extra 44MW at its Gowanas plant ? ?every little bit helps.?

Orion is one of the largest power generators in New York. There, its business (mostly dual-fuel fired facilities) has benefited substantially from low oil prices. But, given the expected surge in demand, the margin available to Orion for the summer period is vast. Orion also entered into its second recent long term contract through its agreement with Nimo, extending its sales contract by three years, through September 2004. The assets in question are precisely those Orion bought from Nimo as part of its intial New York acquisition. Says Helm, ?we feel very good about that from a contracting and operating standpoint. We like that business a lot.?

The California crisis, some have projected, could play out again in markets such as New York and Pennsylvania, where supply is strained. Not so, says Orion: ?given the market structures in those regions, there is little chance of a California situation. The supply/demand imbalance is not that severe, and the utilities have entered into bilateral contracts with generators.? Moreover, ?the NY ISO has assumed a leadership role in ensuring that market rules prevent abuse of market power while also ensuring that normal market dynamics are allowed to operate.?

Ultimately, the effect of the California energy crisis is likely to be highly beneficial for generators like Orion, while also warding off its replication ? it will probably expedite development projects and encourage further bilateral contracts.

Beyond its current markets, it is still not clear where Orion will go next. The regional location of its assets are highly correlated with weather patterns. Accordingly, the generator is currently looking at acquiring positions in the southeast or the desert southwest, to diversify its weather risk portfolio. But wherever it goes, it knows its prospects are shining brighter now than ever before in its three-year history.