The World Bank The District Heating Energy Efficiency Project (P132741) REPORT NO.: RES31263 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE DISTRICT HEATING ENERGY EFFICIENCY PROJECT APPROVED ON MAY 22, 2014 TO UKRAINE ENERGY & EXTRACTIVES EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Satu Kristiina J. Kahkonen Senior Global Practice Director: Riccardo Puliti Practice Manager/Manager: Sameer Shukla Task Team Leader: Fabrice Karl Bertholet, Pedzisayi Makumbe The World Bank The District Heating Energy Efficiency Project (P132741) ABBREVIATIONS AND ACRONYMS CO2 Carbon dioxide CTF Clean Technology Fund DH district heating FM financial management GHG greenhouse gas GWh gigawatt-hour IBRD International Bank for Reconstruction and Development LLC Limited Liability Company m3 cubic meter MJ mega Joules MWh megawatt hour PDO Project Development Objectives SLA Subsidiary Loan Agreements US$ US dollar The World Bank The District Heating Energy Efficiency Project (P132741) BASIC DATA Product Information Project ID Financing Instrument P132741 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 22-May-2014 30-Oct-2020 Organizations Borrower Responsible Agency Ministry of Regional Development, Building and Ukraine Communal Services of Ukraine Project Development Objective (PDO) Original PDO The project development objective is to improve the energy efficiency and quality of service of selected Ukrainian district heating(DH) companies, improve their financial viability and decrease their CO2 emissions. The global objective is to reduce greenhouse gas (GHG) emissions through avoided heat generation by improving heat generation efficiency, reducing heat losses in DH transmission and distribution systems, and reducing residential heat consumption. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-83870 22-May-2014 26-May-2014 21-Nov-2014 30-Oct-2020 222.05 24.49 197.56 TF-16327 22-May-2014 26-May-2014 21-Nov-2014 30-Oct-2020 50.00 2.88 47.12 The World Bank The District Heating Energy Efficiency Project (P132741) Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Overall project implementation has improved since the first few years of implementation. The Project Development Objective (PDO) continues to be achievable, and US$65,820,218 had been committed as of April 30, 2018. Disbursements were US$ 25.4mln as of the same date, largely because of the lag between design and construction in large infrastructure projects. Six out of the seven participating utilities: "Mykolaivoblteploenerho" (Mykolaiv); “Miskteplovodenerhia” (Kamianets-Podilskyi); "Khersonteploenerho" (Kherson); Ternopilmiskteplokomunenerho" (Ternopil); “Dniproteploenerho” (Dnipropetrovsk) and "Kharkivski Teplovi Merezhi" (Kharkiv) are making progress either tendering investment packages, or preparing bidding documents to be tendered. Kamianets-Podilskyi has made the most progress with 88 percent of the funds fully committed. Construction of its biomass co-generation plant is complete, and its planned to be commissioned in the summer of 2018. However, “Tehnova LLC (Chernihivska Teploelektrotcentral)” (IBRD: US$30.150mln and CTF: US$4.755mln), has not been able to make progress due to its failure to finalize its Subsidiary Loan Agreement (SLA) with the Ministry of Finance because of its lack of collateral for the sub loan. In September 2017, the Ukrainian authorities and the Bank, therefore, agreed to remove Tehnova LLC from the Project scope. B. The rationale for the restructuring is to improve project performance by enabling the investment in critical distributed control technology, and cancel or reallocate unallocated funds. The loan amount to be cancelled correspond to the funds previously allocated to Tehnova LLC and a reduction of the ‘Unallocated’ category. At this point in the life of the Project, no major cost overrun is expected and partial reallocation of loan amount from ‘Unallocated’ to relevant utilities is adequate on the basis of both awarded contracts and envisaged contracts to be awarded. C. There is no qualified audit report and the 2017 audit reports are expected to be delivered before June 2018. Based on the Financial Management(FM) monitoring visit in July 2017, desk review and a series of meetings conducted in February 2018, FM rating for the project continues to be Moderately Satisfactory. II. DESCRIPTION OF PROPOSED CHANGES D. The proposed changes are in line with the Project restructuring request of letter number 12060-03-P5/9910 from the Ministry of Finance dated April 11, 2018. With regards to the IBRD loan, the restructuring will result in the cancellation of US$42,051,000 corresponding to a reduction of the total IBRD loan amount from US$222,051,000 to The World Bank The District Heating Energy Efficiency Project (P132741) US$180,000,000. This cancellation will entail: (a) the cancellation of the US$30,150,000 allocated to Tehnova LLC; (b) the reduction of the loan allocated to Kharkivski Teplovi Merezhi by US$20,000,000; (c) the increase of the loan allocated to Kamianets-Podilskyi by US$2,500,000; and (d) the increase of the amount of the “Unallocated” category to US$8,099,000. E. The project description in the Loan Agreement Schedule 1, Part 1, (b) is adjusted to include the “installation of a consumer-driven distribution control system for heat supply” This addition is critical in the case of Kharkiv where IBRD is investing US$76,545,000, and the city itself has invested US$10,000,000 from its own sources. With such significant investments, there is need to use the intelligent software to optimize different district heating components in order to maximize energy savings and GHG emission reductions. The system will provide real-time information on the hydraulic condition, temperature, and pressure regime of the district heating network. This will allow to optimize different heat sources (using automated feedback from the consumer-end systems), identify leaks in real time, minimize the interruption in heat supply, identify the bottlenecks of the system and heat losses, ensure the needed temperature, pressure and heat flow to the consumers. The system will improve energy savings and GHG emission reductions, which are PDO performance indicators. Without such a system, the PDO benefits from the district heating network will be suboptimal. F. With regards to CTF loan, the restructuring will and consist of: (a) a reallocation of the US$4,755,000 allocated to Tehnova LLC; (b) an increase of the loan amount to Kharkiv by US$20,000,000 to finance the installation of the consumer-driven distributed control system; and (c) the reduction of the loan in “Unallocated” category to US$163,000. CTF financing is needed for the investment in the consumer-driven distributed control system because the technology is disruptive and new to Ukraine, and there is need for concessional funds to enable the local authorities to make the investment. Success in Kharkiv will help to spread the adoption of the technology in Ukraine as the DH system in Kharkiv is one of the largest in the country. G. Furthermore, the above changes have also triggered the following revisions to the Project: a. The PDO Level Results Indicators are revised as follows to reflect the removal of Tehnova LLC: the “Projected lifetime fuel savings” decreased from a total cumulative amount of 2,200,000,000 MJ to 1,313,254,913 MJ; the “Avoided CO2 emissions of participating district heating companies” decreased from 330,000 tonnes/year to 278,812 tonnes/year; and the number of “People that gained access to more energy-efficient cooking and/or heating facilities” decreased from 622,000 to 497,600. b. The disbursement estimates and disbursement arrangements were also changed to reflect the removal of Tehnova LLC and the cancellation of loan allocated to Tehnova LLC. As a result of restructuring, the total IBRD Loan amount will be reduced to US$180,000,000. Category 1 (I) in the table specifying the categories of Eligible Expenditures “Limited Liability Company Firm “TEHNOVA” (Chernihivska Teploelektrotcentral)” will be reduced to US$0. c. The economic and financial analysis were adjusted to reflect the reduction in the scope of investments. Removal of planned investments in Tehnova LLC would reduce the estimated Project NPV from US$209.2mln to US$131.2mln and also slightly reduce the estimated EIRR from 25.0% to 24.7%. The World Bank The District Heating Energy Efficiency Project (P132741) III. SUMMARY OF CHANGES Changed Not Changed Change in Results Framework ✔ Change in Components and Cost ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Change in Disbursements Arrangements ✔ Change in Disbursement Estimates ✔ Change in Economic and Financial Analysis ✔ Change in Implementing Agency ✔ Change in DDO Status ✔ Change in Project's Development Objectives ✔ Change in Loan Closing Date(s) ✔ Change in Overall Risk Rating ✔ Change in Safeguard Policies Triggered ✔ Change of EA category ✔ Change in Legal Covenants ✔ Change in Institutional Arrangements ✔ Change in Financial Management ✔ Change in Procurement ✔ Change in Implementation Schedule ✔ Other Change(s) ✔ Change in Technical Analysis ✔ Change in Social Analysis ✔ Change in Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_RESULTS_TABLE RESULTS FRAMEWORK The World Bank The District Heating Energy Efficiency Project (P132741) Project Development Objective Indicators PDO_IND_TABLE Projected lifetime fuel savings Unit of Measure: Mega Joules (MJ) Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 1313254913.00 Revised Date 01-Jul-2014 22-Dec-2017 01-Jul-2020 Project lifetime fuel savings, calculated as decreased gas needs of participating utilities for heat production Unit of Measure: Cubic Meter(m3) Indicator Type: Custom Supplement Baseline Actual (Current) End Target Action Value 0.00 0.00 35493.00 Revised Energy savings of participating DH companies Unit of Measure: Gigawatt-hour (GWh) Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 360.00 Revised Date 01-Jul-2014 22-Dec-2017 01-Jul-2020 Avoided CO2 emissions of participating DH companies Unit of Measure: Tones/year Indicator Type: Custom Supplement Baseline Actual (Current) End Target Action Value 0.00 0.00 278812.00 Revised Percentage of households that reported improved quality of service in buildings where IHSs were installed Unit of Measure: Percentage Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 80.00 No Change The World Bank The District Heating Energy Efficiency Project (P132741) Date 01-Jul-2014 22-Dec-2017 01-Jul-2020 Ratio of total revenues to total operating costs (including debt service requirements) Unit of Measure: Percentage Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.80 0.00 1.00 No Change Date 01-Jul-2014 22-Dec-2017 31-Dec-2018 People that gained access to more energy-efficient cooking and/or heating facilities Unit of Measure: Number Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 497600.00 Revised Date 01-Jul-2014 22-Dec-2017 01-Jul-2020 People that gained access only through switching of cooking and/or heating systems Unit of Measure: Number Indicator Type: Custom Breakdown Baseline Actual (Current) End Target Action Value 0.00 0.00 497600.00 Revised Date 01-Jul-2014 22-Dec-2017 01-Jul-2020 Intermediate Indicators IO_IND_TABLE Improved efficiency of heat generation Unit of Measure: Percentage Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 2.90 No Change Date 01-Jul-2014 31-Dec-2016 01-Jul-2020 Fuel saved due to efficiency gains Unit of Measure: Megawatt hour(MWh) Indicator Type: Custom Supplement The World Bank The District Heating Energy Efficiency Project (P132741) Baseline Actual (Current) End Target Action Value 0.00 0.00 144000.00 Revised Reduction in network heat losses Unit of Measure: Megawatt hour(MWh) Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 32000.00 Revised Date 01-Jul-2014 31-Dec-2016 01-Jul-2020 Reduction in residential heat consumption in buildings where IHSs were installed Unit of Measure: Megawatt hour(MWh) Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 76000.00 Revised Date 01-Jul-2014 31-Dec-2016 01-Jul-2021 Adoption of the new transitional (from “cost plus” to “incentive-based”) methodologies by the Utilities Regulator Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Methodologies, regulatory accounting Methodologies not methodologies under Value forms and auditing No Change developed/ applied developpment principles approved and used Date 01-Jul-2014 31-Dec-2016 31-Dec-2018 Applications of the new transitional methodologies in pilot municipalities by the Utilities Regulator Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Value Methodologies not asset reevaluation work Methodologies, No Change developed/ applied in preparation for pilot regulatory accounting cities forms and auditing principles are applied The World Bank The District Heating Energy Efficiency Project (P132741) in selected pilot municipalities Date 01-Jul-2014 31-Dec-2016 31-Dec-2018 Sector-wide benchmarking exercise completed by the Utilities Regulator Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Country-wide Benchmarking has not benchmarking initiated Value benchmarking No Change been done but not completed exercise completed Date 01-Jul-2014 31-Dec-2016 31-Oct-2017 OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Component 1: Energy Efficiency Component 1: Energy 266.55 Revised 224.50 Investments Efficiency Investments Component 2: Technical Component 2: Technical 5.50 No Change Assistance and Capacity 5.50 Assistance and Capacity Building Building TOTAL 272.05 230.00 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation NON- COMPLIANCE IBRD- Disburs 222,051,000.0 180,000,000.0 WITH USD 42,051,000.00 14-Mar-2018 83870-001 ing 0 0 PROJECT COND- OTHER TF-16327- Disburs USD 50,000,000.00 0.00 50,000,000.00 001 ing OPS_DETAILEDCHANGES_REALLOCATION _TABLE The World Bank The District Heating Energy Efficiency Project (P132741) REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-83870-001 | Currency: USD iLap Category Sequence No: 1-I Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Chernihiv 30,150,000.00 0.00 0.00 100.00 100 iLap Category Sequence No: 1-II Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Dnipropetro 17,410,000.00 361,547.40 17,410,000.00 100.00 100.00 iLap Category Sequence No: 1-III Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Donetsk 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 1-IV Current Expenditure Category: GD,CW,Non-CS,CS,IOC for IvanoFrank 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 1-IX Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Mykolaiv 19,340,000.00 1,355,164.56 19,340,000.00 100.00 100.00 iLap Category Sequence No: 1-V Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kharkiv 96,545,000.00 5,871,049.52 76,545,000.00 100.00 100.00 iLap Category Sequence No: 1-VI Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kherson 19,955,000.00 656,961.52 19,955,000.00 100.00 100.00 iLap Category Sequence No: 1-VII Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kirovograd 0.00 0.00 0.00 100.00 100.00 The World Bank The District Heating Energy Efficiency Project (P132741) iLap Category Sequence No: 1-VIII Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kamyanets-P 13,330,000.00 9,270,498.35 15,830,000.00 100.00 100.00 iLap Category Sequence No: 1-X Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Vinnytsia 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 1-XI Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Ternopil 16,491,000.00 117,125.11 16,491,000.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: GD,CW,Non-CS,CS,TRNG,AUD,IOC for P2 5,500,000.00 1,022,323.18 5,500,000.00 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: Interest Rate Cap & Collar Premium 0.00 0.00 0.00 iLap Category Sequence No: 5 Current Expenditure Category: UNALLOCATED 2,500,000.00 0.00 8,099,000.00 Total 221,221,000.00 18,654,669.64 179,170,000.00 TF-16327-001 | Currency: USD iLap Category Sequence No: 1-I Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Chernihiv 4,755,000.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 1-II Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Dnipropetro 4,755,000.00 0.00 4,755,000.00 100.00 100.00 iLap Category Sequence No: 1-III Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Donetsk The World Bank The District Heating Energy Efficiency Project (P132741) 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 1-IV Current Expenditure Category: GD,CW,Non-CS,CS,IOC for IvanoFrank 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 1-IX Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Mykolaiv 2,370,000.00 132,946.75 2,370,000.00 100.00 100.00 iLap Category Sequence No: 1-V Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kharkiv 10,755,000.00 1,095,669.54 30,755,000.00 100.00 100.00 iLap Category Sequence No: 1-VI Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kherson 1,640,000.00 0.00 1,640,000.00 100.00 100.00 iLap Category Sequence No: 1-VII Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kirovograd 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 1-VIII Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kamyanets-P 1,990,000.00 0.00 1,990,000.00 100.00 100.00 iLap Category Sequence No: 1-X Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Vinnytsia 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 1-XI Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Ternopil 8,102,000.00 0.00 8,102,000.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: UNALLOCATED 15,408,000.00 0.00 163,000.00 Total 49,775,000.00 1,228,616.29 49,775,000.00 The World Bank The District Heating Energy Efficiency Project (P132741) OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2014 0.00 0.00 2015 1,000,000.00 0.00 2016 5,000,000.00 1,831,800.00 2017 20,000,000.00 8,835,531.50 2018 87,000,000.00 30,000,000.00 2019 80,000,000.00 75,000,000.00 2020 59,000,000.00 80,000,000.00 2021 5,500,000.00 34,332,668.50