Richard S. P. Weissbrod, Ph.D.,

    For the growing cogeneration industry, the Sithe station's financing vehicle represented a significant breakthrough, according to Richard Weissbrod, Economics Editor at World Cogeneration.

    Cogenerating facilities often rely on project financing, a strategy which results in financing a single-purpose entity separate from its sponsors. However, bank lending, a traditional source of project finance, has felt the pinch of belt tightening and many banks have demonstrated a reluctance to solo in project finance.

    In summary, Sithe faced the following situation: which institution could step up and take on the largest deal ($717.2 million) ever done by a non-utility-affiliated power project and do it quickly, since construction was about to begin. Because of long term sales contracts secured long term revenue and construction costs were essentially "locked in" the enterprise earned an investment grade rating. This enabled Salomon Brothers with Donaldson Lufkin & Jeanrete and Goldman, Sachs & Co. to bring the deal to market quickly and to institutional buyers.

    Essentially, the investment bankers attracted qualified investment buyers or "QIB'S" through the Rule 144A marketplace. The 144A rule permits after-market trading and therefore provides some liquidity to these sophisticated investors. In this particular case, the Retirement Systems of Alabama and the Wisconsin Investment Board, as well as other pension funds moved quickly in reaching an investment decision. Sithe's General Counsel, said the company would have gone straight to the public markets but time problems due to renegotiation with Consolidated Edison and related construction delays made it imperative to go the Rule 144A route. We were very pleased with the result.

    Maria Richter of Salomon explained that while the deal was sold as a Rule 144A security, the company has the option to register the securities in an effort to reach the public market and create additional liquidity for the QIB's. If the company fails to register the securities within six months, the yields will increase by 50 basis points, 1/2%. Salomon Brothers structured the deal in three branches: $157.8 million of 7.9% 10-year secured notes; $150.8 million of 8.5% 14-year secured notes; and $408.6 million of 9% 20-year secured notes.