Hungary's Eu53.3 million ($54 million) TVK Eromu, inside-the-fence, industrial steam/power project reached financial closed on 19 September. Lead sponsored by RWE-owned EMASZ, with 74% of TVK Eromu, and with the offtaker TVK (one of the largest central European petrochemicals players) as 26% shareholder, the steam/electricity cogen deal is a private industrial contract ? the second in Hungary to date and almost a carbon copy of the first, the BorsodChem deal which was also RWE-sponsored.

It is a small deal and, according to observers of the Hungarian power market, unlikely to be repeated if power liberalisation in Hungary goes ahead on schedule next year. However, the project sets a standard for future private cogen deals should liberalisation go off the rails for a second time: state energy monopoly MVM's inability to liberalise contributed to both AES and Tractebel taking Hungary's privatisation holding company APV to court for damages last year.

Hungarian power liberalisation is scheduled to begin on 1 January 2003 in a bid to comply with EU requirements. RWE looks set to use its project experience to make the most of opportunities spawned by liberalisation. According to Carl-Ernst Geisting, chairman, EMASZ: ?We as RWE define ourselves as a multi-utility. If TVK has huge steam demands, then why not supply the steam, and the electricity too? We support the opening of the market as any competition is good. Based on the Hungarian situation we are the market leaders. Two projects have been done ? both by us.?

The output of this cogen plant is essential for TVK following a decision earlier this year to shut down the TVK Tiszapalkonya power plant in December 2003. This closure is on the back of a change in Hungary's environmental regulations.

The new TVK project is primarily about steam and heat production, and is due to come online in November next year. Electricity production is secondary, coming online in March 2004. MOL is supplying the gas for the plant.

To date MVM has been monopoly wholesaler and main offtaker of non-industrial power plants in Hungary. But as Geisting points out, under the new system ?all customers with an energy consumption of more than 6.5GWh per year can opt to stay in the old system or go out to the free market.? RWE avoided signing with MVM ? which is in dire need of restructuring ? and producing just steam in the belief that it would have added to the risk: with the project as it stands, the only risk inherent in the deal is TVK risk.

Regional player OTP Bank came in as lead arranger on TVK project and raised debt of Eu40 million on the back of such strong sponsors, and an additional Eu1 million revolving working capital facility. Ft2 billion ($8.4 million) formed a VAT facility which is priced off the Hungarian bank base rate. The Eu40 million term loan and Eu1 million working capital are priced off Euribor or Bubor, depending on the currency. The debt to equity ratio is 75/25 and the debt has a 15-year maturity which is fairly typical for Hungary.

Debt will be serviced on a quarterly basis following a construction period of just under two years ? completion is scheduled for March 2003 ? and a grace period of nine months. It is being carried out on a turnkey construction contract. Lenders found comfort in the strength of contractors, a consortium comprising Alstom Power (Sweden) and Transelektro. Dividends will be forthcoming almost immediately after the TVK plant is made operational, and in part is because it replicates a handover in current production.

The combined-cycle gas-fired power plant will be based in Tiszaujvaros, Northern Hungary and have a capacity of 34MW electric and 250 t/month steam/ heat. TVK, as both minority sponsor and offtaker, is guaranteeing this revenue. The plant is being built alongside the country's Eu430 million domestic Petrochemical Development Project, a refit.

In addition, the water treatment plant needed to provide the water for the TVK plant is being separately project financed. The water aspect of the deal will take less time to construct. TVK may seek other banks to fund this but OTP is tipped to arrange again.

Although very similar to RWE's BorsodChem deal ? a 47MW steam/electricity cogen project financed by Dresdner ? TVK Eromu shows more maturity. EIB was involved in BorsodChem but not in TVK. John Markland, a partner at law firm Weil Gotshal & Manges, who advised the sponsors, says: ?Some aspects of the documentation laid out for Hungary's first industrial power plant were similar in many respects. And several upper management personnel moved over from BorsodChem to TVK in the last year, which played a significant part in the documentation for TVK.? The CFO moved from BorsodChem to TVK just before TVK Eromu was launched.

OTP Bank's mandate as lead arranger was clearly driven by its relationship with TVK. For BorsodChem, RWE sought a bank that could supply funding in Euros for pricing reasons. At the time, OTP was unable to do this. But for TVK the bank stepped up with benchmark pricing, said to be below 100bp over Euribor (about 105-110bp over Libor). As one market player says: ?OTP could offer a more competitive package, which is why a regional bank was chosen.?

Whether the TVK project will be the last industrial project of this kind depends heavily on MVM. Timea Reho, head of project finance at OTP Bank, says: ?Once the market is liberalised, most new power plants will be built by power plant operators who will in turn supply generators and not for the industrial market. I don't really see in the future that this will happen again?. But to date MVM's capacity to modernise and adjust to a free market has been negligible at best.

TVK Eromu:

Status: Closed 19 September 2002

Size: Eu53.3 million

Location: Tiszaujvaros, Hungary

Description: 34MW electric and 250 t/month steam/heat cogen plant

Sponsors: TVK (74%) and EMASZ (26%)

Debt: Eu40 million with Eu1 million working capital and a HUF2 billion VAT facility

Lead arranger: OTP Bank

Lawyers to sponsors:

Weil, Gotshal & Manges (WGM)

Lawyers to lenders:

Koves Clifford Chance Punder

Technical advisers: Ereb