Calpine Corporation and Aquila Energy recently closed the $270 million financing for the Aries greenfield power project - the first time Aquila has taken a sponsor role - in a deal that could set the precedent for the series of sponsor-granted tolling agreements set to come to market next year.

The financing combines a construction loan and US leveraged lease. Union Bank of California (UBOC), Deutsche Genossenschafts Bank (DG Bank) and Credit Lyonnais, acted as lead arrangers, with UBOC also arranging and underwriting the lease.

Aries was in front of credit committees at roughly the same time as the SG-arranged RS Cogen deal, one with which it shares several superficial similarities. Opinions differ as to which tolling agreement came first, although sources close to Aries have suggested that the RS Cogen deal may have benefited from some fine-tuning after examining the Aries reception.

And whilst SG celebrates the tenor on RS Cogen, the speed of delivery by UBOC on Aries - as well as believed tax efficiencies - should leave Calpine happy in the knowledge that it has found yet another weapon in its diverse financing armoury.

Calpine has recently been the recipient of $400 million of leveraged lease financing for the expansion of the Pasadena plant. That deal backed an existing facility with lending in place from ING Barings. This venture with Aquila, however, involves a greenfield project, the Aries plant, located in Cass County, Missouri. The combined-cycle gas-fired plant has a capacity of 600MW and is located close to the border with Kansas and within the Southern Power Pool.

Calpine has bought a 50% stake in the venture from Aquila, a subsidiary of energy major Utilicorp. Aquila does not normally act as a project sponsor, and the investment has been made through Merchant Energy Partners. The sponsors also have in place a 50/50 tolling agreement, so that both corporations' marketing arms can take up positions around the asset. For the first four years of operation, however, the UtiliCorp subsidiary Misssouri Public Service will purchase the bulk of the plant's output.

The partners are well matched, since Calpine has been able to bring its in-house project and construction management capabilities to bear, even though Black & Veatch are the EPC contractor. Fuel supply is Aquila's responsibility, since if there is a chink in the Calpine armour it is in sourcing gas, and as a pure trader (at least until now) the former is better placed.

Leveraged leases tend to be harder to structure around greenfield assets, although Aries has been under construction since October 1999. The sponsors had carried out a little of the work on-balance sheet, but the plan has always been to examine some sort of asset-based financing. Details of the treatment of the lease are sketchy, but there are believed to be Chapter 100 tax benefits, as well as sympathetic accounting treatment.

Calpine and Aquila did not issue a formal invitation to submit financing proposals, but UBOC's turnkey package, which involved full underwriting backed up by the knowledge of the other institutions that could be brought in later, was attractive. UBOC took the title of syndication agent, DG administrative agent, and Credit Lyonnais documentation agent for the debt.

The deal features a short bank piece and a longer institutional tranche, with UBOC arranging the lease structure.

The 17-year bank piece, a year shy of RS Cogen, amounts to $215 million and its tenor includes construction. It received commitments for managing agent titles from National Australia, the Export Development Corporation (on the back of Siemens Westinghouse turbines) and Landesbank Hessen-Thuringen. The second $55 million tranche is of 21.5 years, including construction, and was placed with Trust Company of the West and New York Life. The equity construction loan was placed with Bank Hapoalim, which tends only to involve itself in construction risk and is thus an infrequent US power participant. Pricing is believed to start at 137.5bp over Libor.

The deal is a complex one to present to the bank market, especially to banks unfamiliar with Aquila's pedigree. But Calpine's pull on both banks and institutions will have been considerable and the Merchant Energy Partners (MEP) group at Aquila does have experience through its responsibility for some of UtiliCorp's older assets. These are for the most part old Qualifying Facility assets locked into solid PPAs, however.

Whether Aquila will go down the same route as its partner into generating is debatable, especially in giving a commitment as deep as Calpine. MEP was formed two years ago expressly to examine ways of building up a physical asset presence around which to trade. It is a strategy long pursued by Enron, although whether Aquila will also take the route of selective divestment later on is harder to say.

Aries has served its purpose as a way of familiarising the market with the Aquila merchant credit, in much the same way as Entergy did with RS Cogen and InterGen plans to do with its forthcoming mandates. Maintaining the trust of the institutions and keeping a lean balance sheet whilst funding physical assets is a challenge that will pre-occupy Aquila over the next few years. What is certain is that it is currently examining a series of greenfield and acquisition prospects, although none at an advanced stage.