Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD 753 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT PAPER ON A PROPOSED ADDITIONAL LOAN IN THE AMOUNT OF EUR 30 MILLION (US$40.5 MILLION EQUIVALENT) TO THE OFFICE NATIONAL DE L'ELECTRICITE ET DE L'EAU POTABLE (ONEE) FOR THE OFFICE NATIONAL DE L'ELECTRICITE ET DE L'EAU POTABLE (ONEE) SUPPORT PROJECT (FORMERLY, OFFICE NATIONAL DE L'ELECTRICITE (ONE) SUPPORT PROJECT) October 31, 2013 Energy and Environment Unit Sustainable Development Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective September 30, 2013) Currency Unit = Moroccan Dirham (MAD) US$1.00 = MAD 8.30 EUR 1.00 = MAD 11.20 ABBREVIATIONS AND ACRONYMS CFL Compact Fluorescent Lamp DSM Demand Side Management EB Electricity Branch EIRR Economic Internal Rate of Return ESIAF Environmental and Social Impact Assessment Framework EUR Euros GWh Giga Watt per Hour ICB International Competitive Bidding IDA International Development Association IBRD International Bank for Reconstruction and Development IPP Independent Power Producer ONE Office National de l'Electricite ONEE Office National de l'Electriciteet de l'Eau Potable ONEP Office National de I'Eau Potable PAD Project Appraisal Document PDO Project Development Objective PPA Power Purchase Agreement kV Kilovolt M Million MA Morocco MAD Moroccan Dirham NPV Net Present Value MWh Mega Watt per Hour US$ United States Dollars WB World Bank Regional Vice President: Inger Andersen Country Director: Neil Simon M. Gray Sector Director: Junaid Kamal Ahmad Sector Manager: Charles Joseph Cormier Task Team Leader: Daniel Camos Daurella ii KINGDOM OF MOROCCO ADDITIONAL LOAN FOR THE OFFICE NATIONAL DE L'ELECTRICITE ET DE L'EAU POTABLE (ONEE) SUPPORT PROJECT (FORMERLY, OFFICE NATIONAL DE L'ELECTRICITE (ONE) SUPPORT PROJECT) CONTENTS ADDITIONAL LOAN DATA SHEET ...................................................................... iv I. Introduction .................................................................................................................. 1 II. Background and Rationale for Additional Loan of EUR 30 million ...................... 1 III. Proposed Changes .................................................................................................. 4 IV. Appraisal Sum m ary ............................................................................................... 6 Annex 1: Revised Results Framework and Monitoring Indicators........................ 10 Annex 2: Operational Risk Assessment Framework (ORAF)................................ 18 Annex 3: Project Description .................................................................................... 21 Annex 4: Economic Analysis ....................................................................................... 24 Annex 5: Financial Analysis....................................................................................... 29 111 Morocco ONEE Support Project (formerly, ONE Support Project)Additional Financing(P145649) MIDDLE EAST AND NORTHAFRICA MNSEE ADDITIONAL LOAN DATA SHEET Basic Information - Parent Parent Project ID: P104265 Original EA Category: B - Partial Assessment Current Closing Date: 31-Dec-2015 Current EA Category: B - Partial Assessment Basic Information - Additional Loan (AF) Project ID: P145649 Additional loan Type Financing Gap (from AUS): Regional Vice President: Inger Andersen Proposed EA Category: B - Partial Assessment Country Director: Neil Simon M. Gray Expected Effectiveness 24-Jan-2014 Date: Sector Director: Junaid Kamal Ahmad Expected Closing Date: 31-Dec-2015 Sector Manager: Charles Joseph Cormier Report No: PAD753 Team Leader: Daniel Camos Daurella Borrower Organization Name Contact Title Telephone Email Office National de Manager +212 5 22 66 80 l'Electricit6 et de l'Eau Mr. Mohamed Fait Financing 05 fait(onee.ma Potable (ONEE) Division Project Financing Data Parent (MA-Support to ONE (Office National de l'Electricit6) - P104265) Key Dates Revised Project Ln/Cr/TF Status Approval DaeSigning . . Date.. Effectiveness Original Date Date Closing Date Closing Date P104265 IBRD-75640 Effective 10-Jun-2008 23-Jun-2008 17-Sep-2008 31-Mar-2014 31-Dec-2015 Disbursements Project Ln/Cr/TF Status Currency Original Revised Cancelle Disburse Undisbur % d d sed Disbursed P104265 IBRD-75640 Effective US$ 150.00 150.00 0.00 116.74 33.26 77.83 1v Project Financing Data - Additional loan ONEE Support Project (formerly, ONE Support Project) ( P145649) [X] Loan [ ] Grant [ ] Other [ ] Credit [ ] Guarantee Total Project Cost: US$40.5 Total Bank Financing: US$40.5 Financing Gap: 0.00 Financing Source - Additional loan (AF) Amount Borrower 0.00 International Bank for Reconstruction and Development US$40.5 Total US$40.5 Policy Waivers Does the project depart from the CAS in content or in other significant No respects'? Explanation (N/A) Does the project require any policy waiver(s)? No Explanation (N/A) Team Composition Bank Staff Name Title Specialization Unit Hassine Hedda Senior Finance Officer Senior Finance Officer CTRLA Jean-Charles De Senior Counsel Senior Counsel LEGAM Daruvar Fanny Kathinka Senior Energy Economist Senior Energy MNSEE Missfeldt-Ringius Economist Fatou Fall Social Development Social Development MNSSU Specialist Specialist Daniel Camos Daurella Economist Economist MNSSD Taoufiq Bennouna Sr Natural Resources Sr Natural Resources MNSEE Mgmt. Spec. Mgmt. Spec. Abdoulaye Keita Senior Procurement Senior Procurement MNAPC Specialist Specialist Yassine Cherkaoui Consultant Consultant MNSEE Lamyae Hanafi Financial Management MNAFM Benzakour Specialist Bipulendu Narayan Operations Analyst Operations Analyst SEGES Singh V Non Bank Staff Name Title Office Phone City Abdellah El Bitar Financial Management Consultant Institutional Data Parent ( MA-Support to ONE (Office National de I'Electricit6)-P104265) Sector Board Energy and Mining Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co- Co-benefits % benefits % Energy and mining Transmission and 86 Distribution of Electricity Energy and mining Other Renewable 10 Energy Energy and mining General energy sector 4 Total 100 Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Financial and private sector development State-owned enterprise restructuring and 100 privatization Total 100 Additional loan ONEE Support Project (formerly, ONE Support Project) (P145649) Sector Board Energy and Mining Sectors / Climate Change Sector (Maximum 5 and total % must equal 100) Major Sector Sector % Adaptation Mitigation Co- Co-benefits % benefits % Energy and mining Transmission and 90 Distribution of Electricity Energy and mining General energy sector 10 Vi Total 100 []I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. Themes Theme (Maximum 5 and total % must equal 100) Major theme Theme % Financial and private sector development Infrastructure services for private sector 100 development Total 100 Legal Covenants Name Recurrent Due Date Frequency Schedule 2, Section II.A X N/A Yearly Description of Covenant The Borrower shall monitor and evaluate the progress of the Project and prepare Project Reports in accordance with the provisions of Section 5.08 of the General Conditions and on the basis of indicators agreed with the Bank. Each Project Report shall cover the period of one calendar semester, and shall be furnished to the Bank no later than forty five (45) days after the end of the period covered by such report. Name Recurrent Due Date Frequency Schedule 2, Section V X N/A Yearly Description of Covenant Except as the Bank shall otherwise agree, the Borrower shall take, in consultation with the Guarantor, all actions necessary to ensure that its Cumulative Debt to equity shall be lower than 4.5 by closing of each Fiscal Year. Vii I. Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide an Additional loan (Project ID number: P145649) in an amount of EUR 30 million (US$40.5 million equivalent) to the Office National de l'Electricit6 et de l'Eau Potable (ONEE) for the ONEE Support Project (formerly, Office National de l'Electricit6 (ONE) Support Project) (Project ID number: P104265; Loan number: 7564-MA). 2. This proposed Additional loan is needed to cover a financing gap and is fully consistent with OP/BP 10.00. Project implementation is satisfactory and the ONEE is in compliance with all loan covenants. There are no new activities. All activities to be covered by the proposed additional loan are therefore consistent with the original Project Development Objective (PDO) which remains unchanged: "to contribute to increase the efficiency and reliability of electricity supply to electricity consumers". The proposed additional loan is expected to close in December 31, 2015, that is on the same date as the original loan. 3. In April 2012, as part of Law 40/09 aiming to improve management and increase cross- sector synergies, ONE and Office National de l'Eau Potable (ONEP) were merged creating ONEE. To reflect this institutional change, a project restructuring entered into effectiveness on October 15, 2013 to: (i) change the borrower from ONE to ONEE; and (ii) change the name of the project. At the same time, the project scope was reduced by removing two components and three sub-components, the closing date was extended and the results framework updated to reflect the reduced scope. II. Background and Rationale for Additional Loan of EUR 30 million The Moroccan Electricity Sector Challenges 4. Morocco's power sector includes public and private operators both in the production and distribution of electricity segments. ONEE is the principal public actor. With the exception of renewable energy produced under the framework of Law 13/09 on renewable energies, ONEE is the single buyer in the sector, manages the transmission system, produces around 40 percent and distributes almost 60 percent of the electricity. The production sector also has a number of independent power producers (IPPs) that account for more than 40 percent of the electricity and hold power purchase agreements (PPAs) with ONEE. The remaining 20 percent of the power is imported from Spain1 . In some important cities concessions for the distribution sector have been established (Rabat, Casablanca, Tanger, and Tetouan), as well as some geographically limited public distribution utilities. The current installed capacity is of 6,910 MW, and ONEE has around 4.5 million clients. 5. While GDP grew about four percent in 2012, electricity demand grew at more than eight percent. Demand forecasts point to a doubled electricity demand by year 2020, and tripled by 2030. Moroccan authorities and the line Ministry of ONEE are acutely aware of the necessity to curb the growth of electricity demand in the country and discussions are focused on demand side energy efficiency measures and the tariff system. There are exchanges with Algeria, but these are purely technical and do not have a commercial character. 1 6. While less than 20 percent of the electricity is imported, Morocco is highly dependent on external resources for energy production. Aside from indigenous hydro and wind resources, more than 90 percent of the electricity in Morocco is generated from the import of fossil fuels (coal, fuel oil, diesel, and gas), and hence vulnerable to price volatility. 7. Ambitious plans, launched in 2009 and 2010, are being implemented in the wind and solar sectors, aiming at reaching a share of 42 percent of installed capacity of renewable origin by the year 2020. Law 13/09 was recently approved to open up the production of electricity from renewable energy sources by guaranteeing access to the transmission network. Therefore, a partially opened market for renewables coexists with a market of conventional production in which ONEE electricity branch (EB) is the single buyer. 8. Under the 2013-2017 ONEE investment plan, an increase of 4,585 MW of generation capacity is envisaged (an increase of 68.5 percent with respect to 2012), complemented by 5,120 km of new transmission lines to reinforce the network and to expand to un-serviced areas (2,520 of 225 kV and 2,600 of 400 kV). These investments are to be financed by ONEE, as well as by private actors. 9. ONEE had a turnover of US$2.9 billion in 2012, which represents a 7.4 percent increase with respect to the previous year. This increase is due to the sustained increase in electricity demand in the country, which can be diminished by adopting energy efficiency measures. The financial situation and solvency of ONEE could be improved by increasing the operational performance (improvements of technical and commercial indicators), the tariff system, recapitalization, recovery of debts from public entities, as well as by fiscal advantages and State guarantees for loans from donors for projects implemented by ONEE. 10. The Government and ONEE are preparing a framework agreement. The Government has already provided an advance payment of 1.5 billion MAD (equivalent to US$180 million) to ONEE late 2012 and early 2013 as part of the future framework agreement. The ONEE Board of Directors has invited ONEE to finalize the framework agreement with the departments concerned and submit it for the approval of the Directors during their next meeting. 11. The activities to be supported through the additional loan are fully consistent with the second and third pillars of the 2009-2013 World Bank Group Country Partnership Strategy for Morocco (Report 50316-MA) (Service delivery to citizens and Sustainable development in a changing climate) and with the proposed third pillar of the new 2014-2017 CPS under preparation (Service delivery to and with the citizen). This project is fully consistent with MNA's Regional Strategy supporting the pillar of growth and will contribute to the World Bank Group's twin goals of reducing poverty and promoting shared prosperity. Objectives and Progress of the Project 12. ONEE's transmission network is overloaded and operating at the limit of its capacity. ONEE is experiencing operational problems such as stability problems, voltage and frequency drops and high transmission losses. As a result, the security and quality of supply are inadequate. 2 With fast growing demand, the situation is expected to deteriorate even further, unless the network is reinforced before the commissioning of several power plants under construction or planned. At project preparation, ONEE estimated the level of investment required at 7567 MDH (equivalent to US$1,023 million) over the period 2008-2013. With this project, the Bank is financing a well-defined part of this program, not dependent on any related components financed by other donors and ONEE. 13. The objective of the project is to contribute to increase the efficiency and reliability of electricity supply to electricity consumers. All of the original project funds have been committed and the disbursement rate stands at 77.83 percent as of October 6, 2013 with E 71.7 million disbursed. The progress toward the achievement of the PDO and the overall implementation progress of the project have been rated moderately satisfactory since November 2011, and have both been upgraded to satisfactory in September 2013 as a result of non-satisfactory activities being dropped through the recent project restructuring. 14. The "Transmission and Distribution Network" component is costed at E 111.2 million. Under this component, a 400 kV transmission line of 120 km has been completed between Mediouna and Ghanem, and a line of 70 km of 225 kV between Chemaia and Tensift II. The construction of a further 286 km of 400 kV transmission lines has just started. Of the new substations under construction, two are complete (Dar Ould Zidouh, Chemaia), and one is nearing completion (Tamansourt). The two substation extensions of Tensift II and Mediouna are completed. In all, good progress has been made in the construction of these lines and substations despite early delays in procurement. The outcome indicator on transmission losses has diminished from the baseline value of 4.7 percent to 4.5 percent, and the unserved energy has diminished from the baseline of 833 MWh to 310 MWh. 15. Under the "Compact Fluorescent Lamps" (CFLs) component, which is costed at E 5.66 million, 5 million light bulbs were procured in 2008. In mid-2013, 4.6 million of these had been installed with the remainder in storage for use in after-sales service. The component is highly satisfactory with the targets under the original project having been fully achieved. 16. Under the "Technical Assistance" component, which is cost at E 0.58 million, a tariff study and a valorization of the rural electrification program are currently underway in a satisfactory way. 17. A restructuring of the project entered into effectiveness in October 2013 dropping the following two components of the original project: "Setting up of a trading desk" and "Wind Database". This restructuring also dropped the construction of the substation of Dar Bouazza, and the studies "Development and Implementation of Contractual Arrangements" and "Upgrade of Procurement Function". 18. Project Compliance with Safeguards and Fiduciary Requirements: The Borrower is in compliance with social and environmental safeguards. ONEE submitted its audit report and management letter and is compliant with Bank fiduciary requirements. 3 19. Project Compliance with the Financial Covenant: A financial covenant included in the legal agreement requires the level of the company's debt to equity ratio to be lower than five by closing of fiscal year 2010 and lower than 4.5 by closing of the following fiscal years. In October 2013, the supervision mission confirmed that the company's debt to equity ratio was 3.2 for 2012. The project execution is thus in compliance with the financial covenant. Justification and Scope of Additional loan 20. The purpose of this additional loan is to cover a financing gap for sub-component (1) of Part I of the project. The original Project Appraisal Document (PAD) provides a detailed costing in its Annex 5, which puts total project costs at US$233 million, equivalent at the exchange of 2008 to EUR 143 million. However, the overall financing for the project was US$150 million, equivalent at the exchange rate of 2008 to EUR 92.1 million, leaving a financing gap of US$83 million or EUR 51 million respectively. 21. Over time the financing gap partially closed due to the fact that the substation of Dar Bouaza near Casablanca that was originally to be financed under the project was financed separately by ONEE and that infrastructure bids stayed in the expected range. Moreover, some of the technical assistance components, as well as the trading desk and the wind database are no longer part of the original loan. 22. The original PAD did not address the issue of the financing gap. It noted that the project is part of a larger ONEE investment program and all infrastructure contracts covered in the project would be fully financed by the Bank. A formal request was received on July 22, 2013 for an additional loan of EUR 30 million to cover the remaining financing gap. III. Proposed Changes Project Objective and Scope 23. The PDO of the project is "to contribute to increase the efficiency and reliability of electricity supply to electricity consumers". The PDO and the scope of the project remain unchanged. Disbursement Categories and Procedures 24. Below are the revised allocations of amounts by component to be financed out of the proceeds of both the original and additional IBRD loans. Disbursement of the IBRD loan will be transaction-based and will use the same disbursement methods (reimbursement, direct payment, and special commitment) established under the original loan. The contingences are introduced to be of potential use for investments under Part I. 4 Table 1: Allocations of Components (in million EUR) Component Original IBRD Current Total Allocation amount allocated allocation with Additional loan Part 1: Electricity Transmission and 77.11 81.20 111.20 Distribution Network in project area Part II: Compact Fluorescent Lamps 5.66 5.66 Part III: Energy Trading Desk 4.37 Part IV: Wind Database 0.62 Part V: Technical Assistance 1.56 0.58 0.58 Contingencies 8.21 4.34 4.34 Front-end Fee 0.23 0.24 0.32 TOTAL 92.10 92.10 122.10 25. This additional loan includes a retroactive financing of EUR 6 million for payments undertaken by the borrower after September 1, 2013. This amount is not more than 20 percent of the loan amount and is thus in accordance with OP 10.00. Table 2: Categories of Eligible Expenditures Category Amount of the Loan Allocated Percentage of Expenditures to (expressed in EUR) be financed (exclusive of Taxes) (1) Goods, works and 29,925,000 100% consultants' services for the Project Front-end Fee 75,000 Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07 (b) of the General Conditions (3) Interest Rate Cap or Interest 0 Amount due pursuant to Section Rate Collar premium 2.07 (c) of this Agreement. TOTAL AMOUNT 30,000,000 Changes in Results Framework 26. The results framework of the project has been updated and can be found in Table 3 below and in Annex 1. The total length of transmission lines constructed has been added as it is a core indicator of the World Bank. In addition, an indicator on transmission losses in South of Chichaoua has been added as a proxy for the efficiency of the transmission line Agadir- Chichaoua to be financed under this loan. Two indicators linked to the completion of the two studies under this project have also been added. These changes complement the updates made as part of the month, year project restructuring. 5 Table 3: Proposed Changes to Project Outcome Indicators Indicator Original target (from Changes with AF Revised target 2008 PAD) Electric transmission losses 3 % +1.3% 4.3% Reduction of Unserved 400 0 400 energy (in MWh) Direct project beneficiaries (of which% females) Electricity savings due to 300 0 300 CFLs deployment (in GWh) Peak power savings due to 200 0 200 CFLs deployment Electric transmission losses 8.5 South of Chichaoua IV. Appraisal Summary Financial Management 27. Budget. The budget of ONEE is based on valid assumptions and developed by knowledgeable individuals. The budgets are prepared for all significant activities in sufficient detail to provide a meaningful tool with which to monitor subsequent performance. 28. Accounting. ONEE has adopted acceptable national accounting standards and has written procedures covering accounting routines and related administrative activities. 29. Staffing. ONEE is adequately staffed and tasks are well segregated between the team members. 30. Accounting system. ONEE has a computerized accounting system. However, there were limitations on extracting the financial information from the system. Hence, the financial information was prepared manually. The information delivered was complete and accurate. 31. Internalcontrols. ONEE has clear procedures on internal control and has an internal audit department which insures the implementation of the internal control function. 32. Fund flow and financial reporting. ONEE is familiar with World Bank disbursement procedures and financial reporting. 33. External audit. No significant issues have been raised in audit reports received covering the project managed by ONEE for the year 2012. ONEE is compliant in terms of submission of the audit reports and management letter. 6 34. The financial management arrangements of the parent project have proven to be sound and the same arrangements will be in place for this additional loan. Procurement 35. The same implementing unit in the electricity branch of ONEE remains in place. Over time this unit has acquired good capacity and knowledge of World Bank procedures in conducting procurement processes for the Project, which are all International Competitive Bidding (ICB). Moreover, at this stage, all procurement processes are complete. The following two last contracts for the construction of transmission lines were awarded in July 2012: the 400 kV transmission line between Saf II and Chemaia; and the 400 kV line between Chichaoua and Agadir. Environmental and Social Safeguards 36. This additional loan does not entail any changes from the parent loan in design, construction, and/or operation of physical works. There are no additional environmental and social impacts or risks associated with the extension of the closing date. If, in the extension period, there are any changes in transmission line routing, this will require new public consultation, validation of a supplemental environmental and social impact assessment, and its proper publication and dissemination. Since there have been no significant changes in the considered areas, no new safeguard issues arise as a result of the provision of this additional loan, and the ESIAF, adopted by the Borrower on March 18, 2008 remains valid. The Borrower's institutional and organizational settings for the supervision and implementation of the project's environmental and social safeguards will not be affected by the merger between ONE and ONEP, i.e. the capacity of the newly created ONEE to follow applicable World Bank environmental and social guidelines will remain unchanged. The Project Information Document and the Integrated Safeguards Datasheet for the Additional Loan were disclosed on the Bank's website on October 4, 2013 and October 3, 2013 respectively. 37. The counterpart is implementing the Resettlement Policy Framework which was prepared under the parent project, adopted by the Borrower on February 2, 2008. Subsequent resettlement action plans (RAP) have been prepared, with compensations being fully disbursed in many cases. The counterpart is following with due diligence ongoing processes of compensations which pend upon the affected persons being able to gather relevant administrative paperwork or who sometimes live abroad. Moving forward, the counterpart has estimated that the remaining yet ongoing compensation processes should be completed within the next four months provided all affected persons are able to provide relevant paperwork. Economic and Financial Analysis Economic analysis 38. No formal cost-benefit analysis was conducted during the preparation of the parent project. This was justified by the fact that electricity prices were still bundled and that consumers' willingness to pay for transmission services could not be assessed from available 7 data. The economic analysis of the parent project argued that the transmission lines to be financed under this project would help improve a transmission system that was already operating very close to its load capacity. The economic justification was based on a two-step cost effectiveness approach: (i) the first stage consisted of carrying out a least cost study using established models in order to determine the optimal generation mix to meet future demand within accepted reliability criteria; (ii) the second stage focused on the justification of the need and timing of the reinforcement of the transmission system using load flow and stability models. 39. A cost benefit analysis has been developed as part of this Project Paper for the first component on transmission lines and substations investments, and for the second component on CFLs deployment. Details and assumptions on this analysis are provided in Annex 4. 40. The economic rate of return of the investments in transmission lines and substations is estimated at 62 percent. The costs considered are the capital investments, operation and maintenance costs, and the cost of procuring electricity from IPPs. As for the benefits, given the diversity of types of investments as well as of their geographic location, the only benefit taken into consideration is the value from the incremental power sales from the evacuation of power from the Safi and Jorf Lasfar Independent Power Producer plants. This approach was chosen as at least two of the transmission lines financed under this project will be used to evacuate part of the electricity from these two power plants. A sensitivity analysis was performed following variations in the amount of electricity evacuated as well as in the average number of hours used per day, and the economic rate of return showed to be robust to these variations. 41. The estimated economic rate of return for the CFL component is of 276 percent. The principal cost used is of US$7.5 million for the replacement of 4.6 million CFLs. Two types of benefits are considered: those attributable to the electricity savings that result from substituting more efficient CFLs for the incandescent bulbs currently in use, and those emanating from GHG emissions reductions. The high rate of return obtained is robust to sensitivity analysis performed for variations in energy savings associated and for variations on the average number of hours used per day. Financial analysis 42. This financial analysis refers to the utility ONEE as a whole, as a stand-alone financial analysis of this project would not be meaningful. Following the merger of ONE and ONEP into ONEE, the solvency ratio of the Borrower included in the legal agreement as a covenant has improved: the debt to equity ratio indeed goes from 4.4 to 3.24 between 2011 and 2012, below the maximum level of 4.5 required by the legal covenant. The utility's total net debt amounts to US$8 billion, the envisaged additional loan of US$40.5 million (equivalent) will therefore have a marginal impact on the level of the debt to equity ratio. 43. ONEE's financial situation however remains delicate, with a debt service coverage ratio remaining below one after the merger (0.7 in 2011 and 2012). This financial fragility of ONEE results mainly from a combination of the following factors: 8 * Electricity demand growth: due to the increase in electricity consumption and the lack of energy efficiency measures and tariff reform, electricity demand has continued to grow at about 8 percent in 2012, which is almost twice as fast as the growth of GDP. * Operatingcosts growth: operating costs of the electricity branch increased by 28 percent in 2011 and by 13 percent in 2012 due to the strong increase in electricity demand, the higher usage of thermal production capacities (resulting from a bad annual runoff that reduced hydroelectricity generation), the significant increase in fuel costs, and the higher prices of electricity bought from third parties and imported from Spain. As electricity tariffs remained stable, the increase in operating costs could not be counterbalanced and ONEE electricity branch as the utility in charge of the public service of electricity incurred heavy losses. 44. As detailed in Annex 5, ONEE cannot independently adjust its tariffs to match its operational needs, thus strongly exposing its results to annual runoff and fuel costs. In order to remedy this situation, and as envisaged by the framework agreement between ONEE and the Government of Morocco under finalization (see section II above for further details), ONEE has to improve its operations and its financial health through (i) the implementation of measures aiming at slowing down electricity demand growth; (ii) the optimization of its fuel and electricity purchases; and (iii) the securing of a state recapitalization. Project Risks 45. This additional loan does not entail other risks than those of the original project. Based on the satisfactory capacity and governance of ONEE and moderate risks associated with design, social and environmental risks as well as sustainability, the overall risk rating is Moderate. The Operational Risk Assessment Framework (ORAF) can be found in Annex 2 of this document. Risk Category Rating Stakeholder Risk Low Implementing Agency Risks - Capacity Low - Governance Low Project Risk -Design Moderate -Social and Environmental Moderate -Program and Donor Moderate -Delivery Monitoring and Sustainability Moderate Overall Implementation Risk Moderate 9 Annex 1: Revised Results Framework and Monitoring Indicators Results Framework PDO Project Outcome Indicators Use of Project Outcome Information To contribute to increase the efficiency Input to assess achievement of the PDO and reliability of electricity supply to en electricity consumers. Monitoring by ONEE-EB of the Electric transmission losses 2 performance (efficiency and reliability) of the transmission and distribution Electric transmission losses in South of system. Chichaoua Annual Report and other ONEE-EB statistical documents Electricity savings due to CFLs deployment Input to the Implementation Completion Report Peak power savings due to CFLs deployment Reliability 3 Reduction of un-served energy Direct Project Beneficiaries (number), of which female (percent) Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring Progress in marketing CFLs Number of CFLs distributed Assessment of progress towards achievement of PDO and formulation of corrective actions if needed Transmission lines constructed under the Infrastructure completed Assessment of progress towards project achievement of PDO and formulation of corrective actions if needed Construction of one 400 KV line (double Infrastructure completed Assessment of progress towards circuit) between Chichaoua & Agadir achievement of PDO and formulation of corrective actions if needed Construction of Chamaia 400/225 kV Infrastructure completed Assessment of progress towards substation & extension of Mediouna & achievement of PDO and formulation of Tensif II substations corrective actions if needed One line 400 kV (double circuit) Infrastructure completed Assessment of progress towards Mediouna-Ghanem (120 km) achievement of PDO and formulation of corrective actions if needed Two lines (single circuit) Safi - Infrastructure completed Assessment of progress towards Essaouira - Chemaia ( 2x55 km) and achievement of PDO and formulation of connection of 400 kV line (double corrective actions if needed circuit) Ghanem-Chichaouato substation Chamaia One line 225 kV (double circuit) Infrastructure completed Assessment of progress towards Chemaia-Tensift 11 (1*70 km) and achievement of PDO and formulation of connection of lines 225 kV (single corrective actions if needed 2 This indicator refers to all lines going from 400 kV to 60 kV. This indicator is measured based on the technical interruptions. 10 circuit) Chichaoua - Jorf Lasar and Chichaoua - Bougedra to substation Chemaia Substation 60 / 22 kV in Dar Ouled Infrastructure completed Assessment of progress towards Zidouh achievement of PDO and formulation of corrective actions if needed Substation 60 / 22 kV in Tamansourt Infrastructure completed Assessment of progress towards achievement of PDO and formulation of corrective actions if needed Progress in VER study VER study completed Assessment of progress towards achievement of PDO and formulation of corrective actions if needed Progress in tariff study Tariff study completed Assessment of progress towards achievement of PDO and formulation of corrective actions if needed 11 Project Development Objective Indicators Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target Revised Electric transmission losses Percentage Value 4.7% 4.5% 4.3% Date 31 -Dec-2007 30-May-2012 31-Dec-2015 This indicator Official Data Comn is meant to Publication is This assess the Yearly. indicator 'efficiency' refers to all from the PDO. lines going from 400 kV to 60 kV. The end target value has been revised based on the latest information provided by ONEE. New Electric transmission losses Percentage Value 11.00 8.50 South of Chichaoua Date 08-Oct-2013 31-Dec-2015 Comment This indicator has been added as a proxy for the efficiency of the transmission 12 line Agadir- Chichaoua to be financed under this loan. Unchanged Electricity savings due to CFLs Text Value 0 473 GWh 300 GWh deployment (in GWh) Date 31 -Dec-2007 30-May-2012 31-Dec-2015 Comment Official Data The target of Publication is 300 GWh Yearly. has been met. Unchanged Peak power savings due to Gigawatt Value 0.00 0.20 0.20 CFLs deployment Date 30-Dec-2007 08-Oct-2013 31-Dec-2015 Comment The target of 200 MW (equivalent to 0.2 GW) has been met. Unchanged Reduction of Unserved energy Text Value 832.7 MWh 310 MWh 400 MWh (in MWh) Date 31 -Dec-2007 08-Oct-2013 31-Dec-2015 Comment Official Data This Publication is indicator is Yearly. meant to assess the 'reliability' from the PDO. as it is 13 measured based on the technical interruptions Unchanged Direct project beneficiaries (of X Number Value 30000000 31000000 (50%) 31000000 which % females) (50%) (50%) Date 31 -Dec-2007 08-Oct-2013 31-Dec-2015 Comment Since the access to electricity in Morocco is close to 100%, the beneficiaries are the whole population of Morocco. Intermediate Results Indicators Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target Unchanged Number of CFLs placed Text Value 40,000 4,566,000 5,000,000 Date 31 -Dec-2007 08-Oct-2013 31-Dec-2015 Official Data Publication is Yearly. New Transmission lines constructed X Kilometers Value 0.00 190.00 476.00 under the project SbTp Sub Type Date 31 -Dec-2007 08-Oct-2013 31-Dec-2015 Breakdown Comment 120 km Mediouna - Ghanem. 70 14 km Chemaia - Tensift II, 110 km (2x55) Safi - Chemaia, 176 Agadir - Chichaoua Unchanged Construction of one 400 KV Text Value No No Yes line (double circuit) between 31-Dec-2007 08-Oct-2013 Chichaoua & Agadir (160 km) Date 3 1-Dec-2015 Contract awarded. Unchanged Construction of Chamaia Text Value No 100% of 100 % of 400/225 kV substation & procurement feasibility study substations extension of Mediouna & or works completed, 87% completed Tensif II substations started of civil work (delivery, completed, 50% controls, essays, of set up and reception completed. completed) Date 31 -Dec-2007 08-Oct-2013 31-Dec-2015 Comment Unchanged One line 400 kV (double Yes/No Value No Yes Yes circuit) Mediouna-Ghanem (120 km) Date 31 -Dec-2007 08-Oct-2013 31-Dec-2015 Comment Unchanged Two lines 400 kV (single Yes/No Value No No Yes circuit) Safi-Essaouira- 31-Dec-2007 08-Oct-2013 Chemaia ( 2x55 km) and Date 31-Dec-2015 connection of 400 kV line (double circuit) Ghanem- Comment Chichaouato substation The 'double' 15 Chamaia line provides reliability to the system, as if one line defaults, the other alone would be able to evacuate all the electricity from Safi power plant functioning at full capacity Unchanged One line 225 kV (double Yes/No Value No Yes Yes circuit) Chemaia-Tensift II 31-Dec-2007 08-Oct-2013 (1*70 km) and connection of Date 31-Dec-2015 lines 225 kV (single circuit) Chichaoua - Jorf Lasar and Comment Chichaoua - Bougedra to substation Chemaia Unchanged Substation 60 / 22 kV in Dar Yes/No Value No Yes Yes Ouled Zidouh Date 3 1-Dec-2007 08-Oct-2013 31-Dec-2015 Comment Unchanged Substation 60 / 22 kV in Yes/No Value No Yes Yes Tamansourt Date 31 -Dec-2007 08-Oct-2013 31-Dec-2015 Comment 16 Unchanged Progress compared to the Yes/No Value No Yes Yes procurement plan of the different studies Date 31-Dec-2015 Comment The target of awarding the VER and tariff studies has been met. New VER Study completed Yes/No Value No Yes Date 3 1-Dec-2007 08-Oct-2013 31-Dec-2015 Comment New Tariff study completed Yes/No Value No No Yes Date 31 -Dec-2007 08-Oct-2013 31-Dec-2015 Comment 17 Annex 2: Operational Risk Assessment Framework (ORAF) Morocco: ONEE Support Project Additional Financing (formerly, ONE Support Project) (P145649) Stakeholder Risk Rating Low Risk Description: Risk Management: The contractor could withdraw if delays in payments In order to ensure that ONEE payments to the contractor do not depend on the from ONEE were to happen. processing time of this additional loan, ONEE will continue following Bank guidelines that could allow their payments to the contractor to be part of this AF retroactively. The fact that the procurement of all contracts that are part of this additional loan was undertaken following Bank guidelines and that the key documents were reviewed by the Bank ensures that these expenses are eligible. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Both X 31-Dec-2015 Capacity Rating Low Risk Description: Risk Management: ONEE fmancial management (FM) capacity dimmaishes.lra eenci Resp: Status: Stage: Recurrent: Due Date: Frequency: ONEE's procurement and contract management capacity Client In Progress Both X 31-Dec-2015 has improved, but contract execution may still cause delays. Risk Management: As all contracts have already been awarded, procurement activities will be mainly related to contract execution. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Implementation X 3 1-Dec-2015 18 Governance Rating Low Risk Description: Risk Management: No significant risk has been identified for ONEE as the The line Ministry and Ministry of Finance oversee ONEE. parent project has not experienced any type of Resp: Status: Stage: Recurrent: Due Date: Frequency: governance difficulties. Client In Progress Both X 3 1-Dec-2015 Design Rating Moderate Risk Description: Risk Management: All of the investments' detailed designs have been The Bank will continue to monitor closely the project and provide needed support to completed. the Borrower. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both X 31-Dec-2015 Social and Environmental Rating Moderate Risk Description: Risk Management: The original project as well as the additional loan fall The Bank will continue to work with ONEE to ensure that pending activities and into environmental category B, as no adverse long-term documentation are fully completed. impacts are anticipated. This AF does not have any scale Resp: Status: Stage: Recurrent: Due Date: Frequency: up activities. All activities to be conducted using these additional funds are covered by the existing ESIAs Both In Progress Both X 31-Dec-2015 which were duly disclosed in 2008. Environmental risk overall is low, and can be effectively managed using the existing ESIAs and ESMPs. As far as the social safeguard related risk, it can be considered moderate as due diligence and follow up remain necessary on pending procedures (and documentation) initiated by the client. Program and Donor Rating Moderate Risk Description: Risk Management: ExchanLe rate fluctuations could negatively (or The fact that the remainina contracts of both the original nroiect and of this additional 19 positively) affect overall funding in local currency. loan have already been procured and awarded diminishes this risk. Resp: Status: Stage: Recurrent: Due Date: Frequency: Client In Progress Implementation X 31-Dec-2015 Delivery Monitoring and Sustainability Rating Moderate Risk Description: Risk Management: The transmission lines constructed under this additional ONEE will ensure the proper maintenance of the new transmission lines. loan will be part of ONEE's assets and inventory once Resp: Status: Stage: Recurrent: Due Date: Frequency: finished. Despite being minor, there is a potential risk Client Not Yet Due Implementation X 31-Dec-2015 that ONEE does not provide the necessary resources to ensure an adequate operation and maintenance of the Risk Management: transmission lines financed under this additional loan. Close project supervision has taken place during the parent project, and this will continue to happen during supervision of this additional loan to ensure that delays in Delays in the implementation of the project activities due . o aimplementation are minimized. Taking into consideration that based on previous to compensation issues related to transmission lines or experiences some delays could be related to oppositions by land owners to give their lack of capacity could occur. land even if compensated, a buffer period between the planned end of contract and the end of the project has been considered by fixing the closing date of the project at December 31, 2015. Resp: Status: Stage: Recurrent: Due Date: Frequency: Both In Progress Both X 31-Dec-2015 Overall Implementation Risk: Rating Moderate Risk Description: The overall implementation risk is rated Moderate given that this is the rating of all project risks, and considering that the remaining risks (project stakeholder and implementing agency ones) are low. 20 Annex 3: Project Description 1. The original project and additional financing encompass the following parts 4 1) Strengthening the electricity transmission network to reduce bottlenecks and improve system's reliability, and construction of three high to medium voltage stations; 2) Acquisition of CFLs for distribution to support ONEE's demand side management (DSM) program; 3) Technical assistance. Part 1. Electricity Transmission and Distribution Network in the project area 1.1 Construction of 406 km of 400 kV lines and 70 km of 225 kV lines 2. The project includes the construction of the following transmission lines: * Two 400 kV simple circuit lines: Safi/Essouira - Chemaia ( 2 x 55 km) * One double circuit 400 kV Mediouna - Ghanem (1 x 120 km) * One double circuit 400 kV line Chichaoua - Agadir (1 x 160km) * One double circuit 225 kV line Chemaia - Tensift 11 (70 km) * Connection of 400 and 225 kV lines to the 400/225 kV substation in Chemaia 3. The transmission lines will use two-bundle conductors per phase and an earth wire with fiber cable for protection and communication. For all lines 570 mm aluminum conductors will be used at the maximum operating temperature of 70 degrees Celsius, at which there is no risk of loss of strength due to annealing of the steel core. Each circuit will have thermal rating of about 1300 MVA. All towers are in galvanized steel (E24 and E36). Composite and glass insulators will be used - the former especially in polluted areas. 1.2 Construction and expansion of high voltage substations 4. The project includes the construction or expansion of the following substations 5 * Construction of a 400/225 kV substation at Chamaia ( 6 outgoing lines, 2x450 MVA transformers, 2x125 WAR reactances) * Expansion of the 4001225 kV substation at Mediouna (2 outgoing lines) * Expansion of the 225/60 kV substation at Tensift II (2 outgoing lines) 4 A restructuring of the original project was processed in October 2013. This project description incorporates the changes due to this restructuring, i.e. dropping 2 components and 3 sub-components of the original project. The main transformers are three-phase units. The project also includes installation of all associated protection and communication equipment. 21 1.3. Construction of two substations to improve supply in the regions of Casablanca and Marrakech 5. The project includes expansion or construction of the following substations in Casablanca: * 60/22 kV substation at Dar Ouled Zidouh (2x2OMVA) * 60/22 kV substation at Tamansourt (2x20 MVA) Part 2. Compact Fluorescent Lamps (CFL) 6. As part of its DSM program, ONEE has launched the INARA initiative to introduce CFL use. The program started with a small scale pilot and was successful. The lamps acquired by ONEE under the proposed project have been distributed to customers (through small local marketing enterprises) with a one year guarantee from ONEE. The marketers have been paid a fee per CFL installed. The customers have paid a fixed fee during twelve months deducted from their electricity monthly bills. Part 3. Technical Assistance Component The technical assistance (TA) includes the following activities: 3.1 Tariff study 7. The current tariff system was put in place in 1997. The last tariff study was initiated out under a Bank project in 1988 and finalized in 1992. Since then, tariffs have been adjusted on a piecemeal basis and have not been comprehensively reviewed despite the major changes in the sector during the last decade. The current tariff structure has two major shortcomings: (a) inadequate level to cover supply costs; and (b) a structure that fails to provide the right incentives for effective use of the installed capacity, electricity savings and load management. A revision in tariffs is advisable to ensure the financial viability of the company ONEE and adapt the tariff system to the prevailing cost and demand structure. An inter-ministerial committee led by Ministry of General Affairs and Governance (MAGG) has supervised the study since its beginning. The study is expected to result in specific recommendations on both the levels and the structure of the tariff system. 3.2 Valorization of the rural electrification program 8. Access to electricity for rural population is already very high in Morocco, with an estimated 100 percent of the population having access to electricity at the onset of the parent project in 2007. However, the extension of the network is mostly for residential use and is a burden for ONEE finances, as the cost of connecting rural populations is high while tariffs are not kept in line with costs. The objective of this technical assistance has been to develop new uses which have a higher value added. Several activities have already been identified by ONEE, 22 such as participation in regional and local development initiatives or using the network to provide telecommunication services. 9. The table below provides an action plan of the project's activities from now until project closure: Action Plan: 2013-2015 2013 2014 2015 Activity Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1 TKO2- Line 400 kV 1 T Safi II - Chemaia 2 TKO3- Lines 225 kV 2 T Chemaia - Tensift II 3 TKO5- Line 400 kV 2 T Chichaoua - Agadir 4 TKO7- Substation HT/MT Dar Ouled Zidouh 5 TKO8- Substation HT/MT Tramansourt 6 C02- Tariff Study C04- Valorization of the rural 7 electrification program ('Plan VER') 23 Annex 4: Economic Analysis 1. This section carries out the economic analysis using a cost-benefit approach for: (A) the transmission lines and substations component; and (B) the CFL component. The capital investments used correspond to the aggregation of both the original 2008 loan and the new one from 2013 corresponding to this additional loan. A. Transmission and Distribution Component 2. The two loans are financing the construction of 406 km of 400 kV lines and 70 km of 225 kV lines, and the construction of three substations and expansion of two substations. The economic analysis for this component is carried out using two scenarios: 'with' the project and 'without' the project. The 'with' the project scenario means that the proposed investment involving the construction of the transmission lines and associated substations takes place. Assumptions on Costs 3. The following assumptions were made: (i) all costs are expressed in constant 2008 prices; (ii) capital investment costs are considered over the 2008-2015 period; (iii) operation and maintenance costs are assumed to be 2 percent of investment cost for transmission line and substation project; (iv) the cost of procuring electricity from IPPs is estimated at US$0.0 6; and (v) the average system costs of the remainder of the transmission and distribution system to the end users is estimated to US$ cents 1.5 per kWh. (vi) the operating life of the transmission line was assumed to be 40 years; (vii) the 'without' project scenario is taken to mean if the individual investment would not take place but that otherwise system expansion would continue unhindered. Assumptions on Benefits 4. Based on the nature of the proposed project components, the 'with' project scenario would give the following possible benefits to the system: (i) increased power sales; (ii) reduction of transmission or distribution losses; and (iii) increased reliability from reduced interruptions of the power supply caused through faults. 5. In order to simplify the analysis, the only benefit taken into consideration is the value from the incremental power sales from the evacuation of power from the Safi and Jorf Lasfar Independent Power Producer plants. Since the project accounts for only one of the five transmission lines evacuating power from Jorf Lasfar, only a fifth of the electricity generated by Jorf Lasfar is considered. Since the electricity from Safi is expected to be evacuated entirely by transmission lines developed under this project, the entire electricity generation of Safi is taken into consideration. Electricity sales of the electricity generated at Safi and Jorf Lasfar are valued 24 at the estimated economic price of electricity in Morocco which is estimated to be US$0.14 cents. This is used as a proxy for the economic benefit and is a conservative estimate, as they ignore the consumer surplus. Additional Assumptions 6. Additional assumptions used for the economic analysis include: (i) 10 percent discount rate for the base case; (ii) 80 percent capacity factor for the coal plants; and (iii) 15 percent transmission and distribution losses. Project Economic Returns 7. Based on the constructions' costs of the transmission lines and substations, the purchasing power from the IPPs, and the benefits from the value of the electricity evacuated using the transmission and distribution infrastructures, the economic rate of return of the transmission and distribution component is estimated at 62 percent, which is clearly above the cost of capital. The table below provides the values of each category to compute the economic rate of return. Table 1- NPV and EIRR of the Transmission and Distribution Component Item NPV US$ Million (2008-2048) Total Costs 3278 Investment Costs 89 O&M Costs 13 Power Purchase and System Costs 3175 Total Benefit 5867 Economic Value of Electricity Evacuated from Safi and Jorf 5867 Net Benefit 2589 EIRR 62% Sensitivity Analysis 8. A sensitivity analysis was performed on the component by developing alternate scenarios for a variation in the amount of electricity evacuated (see Table 2 below), and a variation in the average number of hours used per day (see Table 3 below). 25 Table 2 - Sensitivity Analysis on amount of electricity evacuated Half the Twice the estimated estimated electricity is electricity is Item evacuated Base Case evacuated NPV ($ Million) 1242 2589 5280 EIRR 47% 62% 78% Table 3 - Sensitivity Analysis on the power purchase cost and system cost Power Purchase and Power Purchase and Power Purchase and System Cost of US $ 10 System Cost of US $ 7.5 System Cost of US $ 5 Item Cents per Kwh Cents per KwH Cents per Kwh NPV $1,530 $2,589 $3,647 EIRR 47% 62% 69% B. CFL Component 9. This baseline economic analysis estimates the available costs and benefits for the adoption of CFL lighting. Costs 10. Costs include the purchase and distribution costs of CFLs. The costs used for the economic analysis are as follows: US$7.5 million for the replacement of 4.6 million CFLs. The replacement of all CFLs is assumed to take place during 2009. Benefits 11. The following approach was taken in calculating the economic benefits: * they are attributable primarily to the electricity savings that result from substituting more efficient CFLs for the incandescent bulbs currently in use, valued at the prevailing electricity tariff rate. * the benefits from GHG emissions reductions. A country-specific coefficient for Morocco that reflects the carbon-intensity of electricity generation is used and is then multiplied by the price of carbon. For the base case, the market price of carbon is assumed to be US$10/ton of CO 2e. 12. Given data limitations, the following benefits were not included, meaning that the rate of return obtained represents a conservative estimate: * benefit attributable the delay in building new power generating capacity; * health effects associated with reduced local air pollutants; and 26 * reduced electricity subsidy payments and the energy security benefits of reducing overall electricity consumption. Assumptions 13. The calculation for CFLs assumes a conservative estimated average usage of 2 hours per day and an average life of 5 years. The baseline incandescent bulbs to be replaced were assumed to consume an average of 80 W of power. The CFL bulbs to be supplied under the project, with the same level of luminescence as the incandescent bulbs, are rated at 20 W. Each replaced light bulb therefore provides 60 W of savings. These per bulb savings were multiplied by the number of hours per use per day, times the number of days in the year, times the number of CFL bulbs deployed, to arrive at the total kWh savings. 14. To calculate the benefits for both the CFLs and the appliances, the energy savings were valued using a prevailing electricity tariff for low tension in Morocco of US$0.097 per kilowatt- hour. The climate mitigation benefits were calculated by multiplying the amount of energy savings (GWh) by the estimated emission factor for Morocco, i.e., 677 tons CO 2 e/GWh (see Table 9.2). These GHG reductions were multiplied by the market price of C0 2 , using a value of US$10 per ton of CO 2. 15. Based on the costs of the purchasing and installing the equipment versus the energy saving benefits over the lifetime of the equipment, the economic rate of return calculated for residential efficiency programs is high. The bulk of the benefits come from electricity savings, with the CFLs consuming only about one-fourth as much electricity as an incandescent bulb for the same amount of light. Table 4 - NPV and EIRR of CFL Component Item NPV ($ Million) (2008-2014) Total Costs 6.3 CFL Purchase and Distribution Costs 6.3 Total Benefits 65.5 Value of Reduced Electricity Consumption 61.2 Value of Reduced Co2 Emissions 4.3 Net Benefits 59.2 EIRR 276% Sensitivity Analysis 16. A sensitivity analysis was performed on the component by developing alternate scenarios for a variation in energy savings associated with the substitutions (see Table 5 below), and a variation on the average number of hours used per day (see Table 6 below). 27 Table 5 - Sensitivity Analysis on variation in energy savings associated with substitutions Average wattage of Average wattage of Average wattage of replaced bulbs of replaced bulbs of replaced bulbs of Item 60W 80W 100W NPV 37 59 81 EIRR 183% 276% 368% Table 6 - Sensitivity Analysis on variation in average number of hours of use per day of CFL Average 1 hour per Average 2 hour per Average 4 hour per Item day use day use day use NPV Million) 26 59 125 EIRR 136% 276% 552% 28 Annex 5: Financial Analysis 1. This Annex provides details of the financial situation of the Borrower prior and after the merger of the electricity utility ONE and the water utility ONEP into ONEE, which took place in April 2012. The financial statements from 2009 to 2011 are those of the electricity utility ONE, while those of 2012 Q2 to Q4 are the first financial statements of the new entity ONEE and result from the consolidation of the accounts of the utilities ONE and ONEP. While ONEE did not exist prior to 2012 Q2, the client has provided unaudited and unofficial consolidated accounts for 2012 QI that are presented in a separate column in Table 1 below. The analysis looks at the financial situation of ONEE, with a focus on its Electricity Branch (ONEE EB). When possible, the impact of the Water Branch (ONEE WB) on the overall financial health of the Borrower is underlined. 2. In the following section, the (A) profit and losses statements, (B) Balance Sheet, and (C) Cash flows of the Borrower are analyzed. A. Profit and Losses Statement Analysis Table 1. P&L Statements of ONE (2009-2011) and of ONEE (2012 Q1 and Q2-Q4) In M MAD 2009 2010 2011 201 Q2- M = (M USD*) REVENUES 19530.79 20988.53 22 608.74 8533.71 19486.58 2311.27 PURCHASES 13 820.74 13 300.41 17 084.30 6 285.96 13 940.67 1 653.48 MARGIN 5710.06 7688.11 5524.44 2 247.75 5545.91 657.79 Other external expenses 588.74 592.54 816.02 450.12 1 118.25 132.63 VALUE ADDED 5 121.32 7095.57 4708.42 1 797.63 4427.66 525.16 Personnel Costs 1 844.77 1 922.08 2087.66 1 156.90 2 190.10 259.76 Other operating revenues and expenses 0.41 1.67 1.87 0.84 0.94 0.11 EBITDA 3 236.98 5 117.68 2549.10 615.47 3 088.00 366.26 Net depreciation and amortization 3 117.19 4088.17 4580.95 2249.64 5410.92 641.78 EBIT 119.78 1 029.51 (2 031.86) (1 634.18) (2322.92) (275.52) Financial expenses 1 186.50 1193.41 1 246.46 543.36 1 379.64 163.64 Financial income 265.51 251.15 247.55 75.83 236.88 28.10 Net charges to financial provisions 24.12 55.70 87.45 (236.21) (282.35) (33.49) FINANCIAL INCOME / LOSS (945.10) (997.96) (1 086.36) (231.33) (860.41) (102.05) EBT (825.32) 31.55 (3 118.22) (1 865.50) (3 183.33) (377.57) EXTRAORDINARY INCOME / LOSS (279.97) (422.08) (533.41) 1 056.54 (209.23) (24.82) Net income tax 59.06 61.19 66.77 89.04 61.02 7.24 NET INCOME (1164.35) (451.73) (3 718.39) (898.00) (3 453.58) (409.62) *Exchange Rate on 12/31/2012 : 1 USD= 8.431 MAD 29 Table 2. Main ratios, 2008-2011 (ONE) and 2012 Q1 and Q2-Q4 (ONEE) RATIOS 2008 2009 2010 2011 Annual growth of revenues 12% 6% 7% 8% - - Annual growth of expenses +51% -15% -4% +28% - - Annual growth of EBITDA n.a. n.a. +58% -50% - - EBITDA / Revenues -1% 17% 24% 11% 7% 16% EBIT / Revenues -23% 1% 5% -9% -19% -12% Net Income / Revenues -28% -6% -2% -17% -11% -18% Revenues: 3. The revenues of ONEE amount to US$2.3 billion in 2012 (Q2 to Q4). The revenues of ONEE EB represent 87 percent of this total, which is equivalent to US$2 billion. In 2012 (QI to Q4), the total revenues of ONEE EB (US$2.9 billion) have grown by 7.4 percent over 2011. As tariffs remained stable in Morocco, the primary driver of this growth is a sustained increase in electricity demand in the country, reaching 31,056 GWh in 2012, 8 percent higher than in 2011. The Compound Annual Growth Rate (CAGR) of electricity generation in Morocco between 2007 and 2012 is 6.46 percent, higher than the annual growth rate of the gross domestic product estimated at 4.5 percent over the same period. Moroccan authorities and the line Ministry of ONEE are acutely aware of the necessity to curb the growth of electricity demand in the country, and discussions on demand side energy efficiency measures and tariff changes are currently central to the negotiation of the Framework Agreement between the Government and ONEE. Operational costs: 4. ONEE EB's purchases increased by 28 percent in 2011 and by 13 percent in 2012 to reach US$2.4 billion. Two factors explain this large yearly increase: larger fuel expenses and increased purchases of electricity from third parties. Indeed, ONEE EB had to compensate in 2011 and 2012 for lower annual runoffs that reduced its capacity to generate hydroelectricity and forced it to increase the use of its thermal power plants. To keep up with the demand in 2012, the electricity utility had to increase its purchase of energy inputs (+29 percent) and electricity purchases from third parties (+6 percent), thus leading to a marked increase of its operational costs. The table below shows that most of the increase is attributed to larger volumes purchased rather than higher prices, which indeed explain only 16 percent of the growth in purchases. Natural Gas has become the primary energy input in ONEE EB's production mix, ahead of Heavy Fuel Oil. This is the result of an increase in the electricity production of the combined cycle power plant of Ain Beni Mathar following the signature of a natural gas purchasing contract with the Algerian company Sonelgaz. 30 Table 3. ONEE EB's purchases of fuel and electricity from third parties, 2010-2012 M MAD 2010 2011 2012 Growth 2011/12 Price differential Volume differential Purchases of energy input 4 939 7 074 9 141 2 067 (+29%) 999 1 067 Coal 513 921 924 +4 (+ 0.3%) -60 +64 Heavy Fuel Oil 2 787 3 590 3 610 +19 (+ 0.6%) -4 23 Natural Gas 1 370 2297 4426 +2 129 (+ 92.7%) 1 044 1 084 Diesel 270 266 181 -85 (-32%) +19 -104 Purchases of electricity from third parties 7 833 9444 9995 +551 (+5.8%) -571 1 122 Spain 2 150 3 077 3 211 +134 (+4.4%) -142 +276 Other third parties 5 682 6 367 6 784 +417 (+ 6.5%) -429 +846 Total 12 772 16 518 19 136 +2 618 (+15.8%) +428 (16%) +2 189 (84%) Earnings Before Interests, Taxes, Depreciation and Amortization (EBITDA): 5. ONEE EB's EBITDA decreased by 50 percent in 2011 and by another 20 percent in 2012 to reach US$242 million, with an EBITDA margin that melted from 25 percent in 2010 to 8 percent in 2012. This is primarily the result of scissors effect that took place during this period: revenues of the electricity branch grew by 8 percent per year on average between 2010 and 2012 while operational costs increased by around 20 percent per year over that period. Contrary to 2008 however, ONEE EB benefited from a tariff increase in 2009 that led to the EBITDA margin remaining positive in spite of the scissors effect in 2011 and 2012. Nonetheless, the rigidity of tariffs is a recurrent issue that negatively impacts ONEE EB's results and deprives it from the means to lessen the impact of exogenous factors on its operational results and its financial health. 6. As shown in the consolidated accounts, ONEE's EBITDA amounts to US $366 million and represents 16 percent of total revenues. The EBITDA margin of ONEE is thus higher than that of ONEE EB, showing that the operational results of ONEE EB improve the overall operational results of ONEE. Net income: 7. The combination of stable revenues and increased operating costs led to a net loss for ONEE EB of US $542 million in 2012, which is 10 times larger than in 2010 and 23 percent higher than in 2011. ONEE EB has been incurring net losses since 2007, with a maximum loss of US$597 million in 2008. 8. The net loss of ONEE in 2012 (Q2 to Q4) amounts to US$410 million, while that of ONEE EB is US$428 million. The positive net results of the Water Branch of US$18 million thus contribute to reducing, albeit only marginally, the overall losses of ONEE. 31 B. Balance sheet analysis Table 4. Balance sheet of ONE (2009-2011) and ONEE (2012 Q1 and Q2 to Q4) -World Bank restatement IN M MAD 2009 2010 2011 202Q2Q Mm (M USD*) Intangible assets 281.88 195.79 166.76 1113.33 1 029.46 122.10 Tangible fixed assets 53 260.62 51 966.99 51 957.80 76 957.95 77417.33 9 182.35 Financial fixed assets 838.70 895.12 990.80 3 931.83 4 177.13 495.44 FIXED ASSETS 54381.19 53057.89 53 115.37 82003.12 82623.91 9799.90 Inventories 1 174.30 978.34 1 124.63 1 301.38 1 341.21 159.08 Client receivables 12 184.37 11 358.51 12 199.72 15777.60 15327.54 1 817.98 Currency translation (current asset) 15.48 10.08 22.44 16.58 20.06 2.38 CURRENT ASSETS (Emplois du cycle d'exploitation) 13 374.16 12 346.93 13 346.78 17095.56 16688.81 1 979.43 Outstanding trade payables 5536.73 4949.82 5413.35 5650.27 5997.37 711.34 (i) Tax and social security liabilities 112.36 88.62 94.62 471.53 277.85 32.96 (ii) Deferred income 237.55 165.67 140.59 732.16 257.79 30.58 (iii) Other current liabilities 4 512.68 4 028.91 4405.35 6770.59 9466.76 1 122.84 Other current liabilities = (i) + (ii) + (iii) 4 862.59 4 283.20 4 640.56 7 974.27 10 002.40 1 186.37 Currency translation (current liability) 4.86 4.72 6.34 17.27 13.27 1.57 - CURRENT LIABILITIES (Ressources du cycle d'exploitation) 10404.18 9237.74 10 060.25 13 641.81 16013.05 1 899.28 - Other provisions for liabilities and charges 15.48 10.08 22.44 16.58 24.16 2.87 WORKING CAPITAL 2 954.49 3 099.12 3 264.10 3 437.17 651.60 77.29 Equity 19076.09 19298.03 19481.62 18227.71 18727.71 2221.26 Reserves, retained earnings and net income/loss (14 040.89) (14 492.61) (18211.01) (17 977.95) (21 431.53) (2541.96) Revaluation and consolidation surplus 135.42 135.42 16.06 Provisions equivalent to reserves 2 153.06 2011.41 1 869.76 9211.71 9073.66 1 076.21 Investment subsidies 6 805.03 6 528.65 6 515.86 13 955.78 14369.59 1 704.36 - Nil value assets 5540.10 5861.47 5856.42 5860.57 9210.82 1092.48 + Currency translation (noncurrent liability) 283.04 131.74 155.22 171.77 167.70 19.89 - Currency translation (noncurrent asset) 629.71 690.81 759.07 1 536.22 1 250.39 148.31 TOTAL EQUITY 8 106.52 6 924.94 3 195.95 16327.63 10 581.34 1 255.04 PROVISIONS FOR RISKS AND CHARGES 14464.77 15 771.73 16 832.18 17833.80 18 129.89 2 150.36 Financial debt (short, medium and long term) 31 354.62 30911.84 32410.75 47521.68 51 621.74 6 122.78 Bank account overdrafts 6 921.85 3 837.28 5 159.64 7830.79 8 329.97 988.01 - Cash 3 512.08 1 288.77 1 219.06 4073.61 5 387.43 638.99 NET DEBT 34 764.39 33460.35 36 351.33 51 278.86 54564.29 6471.79 *Exchange Rate on 12/31/2012 : 1 USD = 8.431 MAD 32 Debt to Equity Ratio - Financial Covenant 9. The Loan Agreement includes a financial covenant that requires that the debt to equity ratio, which is a solvency ratio, to be lower than 5 in 2010 and lower than 4.5 by closing of each fiscal year thereafter. As seen in the table below, this ratio has been deteriorating since 2007, reflecting both the increasingly difficult financial situation of ONEE and its large investment policy that is primarily financed through debts. The ratio however remains below 4.5 over the period and the financial covenant is therefore respected. The improvement shown in 2012 (Q2 to Q4) reflects the positive impact of the merger of ONE and ONEP into ONEE on the balance sheet of the Borrower, in particular on its quasi-equity (investment subsidies and provisions equivalent to reserves) which more than doubles after the merger. Table 5. Debt to Equity Ratio - Loan Alreement definition 2012 2012 M MAD 2007 2008 2009 2010 2011 Q1 Q2 to Q4 Long Term Debt 19,593 25,930 31,355 30,912 32,411 47,522 51,622 Short Term Debt 11,317 13,486 10,399 9,233 10,054 13,625 16,000 Total Debt (A) 30,910 39,416 41,754 40,145 42,465 61,147 67,622 Equity 7,857 4,356 5,035 4,805 1,271 385 -2,568 Quasi-Equity 9,746 9,417 8,958 8,540 8,386 23,167 23,443 Total Equity (B) 17,604 13,773 13,993 13,345 9,656 23,552 20,875 Debts / Equity (C) = (A)/(B) 1.76 2.86 2.98 3.01 4.40 2.6 3.24 Debt Service Coverage 10. The Borrower's debt coverage capacity deteriorated in 2011 and 2012, with a Debt Service Coverage Ratio (DSCR) that goes from 1.4 in 2010 to 0.7 in 2011 and 2012. While the EBITDA of the borrower improved after the merger, debt service increased markedly more over the same period. Table 6. Debt Service Coverage Ratio, ONE 2007-2011, and ONEE 2012 Q2-Q4 2012 M MAD 2007 2008 2009 2010 2011 Q2 to Q4 EBITDA (D) 3473 -211 3237 5 118 2549 3,088 Interests payment 729 843 1 081 1 111 1 095 1 279 Principal repayment 751 745 1 820 2 998 2 702 3 219 Total debt service (E) 1 480 1 588 2 901 3 586 3 797 4 498 DSCR (F) = (D)/(E) 2.3 -0.1 1.1 1.4 0.7 0.7 33 C. Cash-flows analysis Table 7. Free Cash-Flows of ONE (2008-2011) and ONEE (2012 Q1 and Q2 to Q4) IN M MAD 2008 2009 2010 2011 21 Q1 Q2to Q4 Q2 to Q4 (M USD*) EBIT (4209.52) 119.78 1 029.51 (2031.86) (1 634.18) (2322.92) (275.52) - Corporate Tax on 55.52 59.06 61.19 66.77 89.04 61.02 7.24 Operating Profit + Depreciation and 3 998.99 3 117.19 4088.17 4580.95 2249.64 5 410.92 641.78 Amortization - Change in Working (2 715.42) 4044.65 144.63 164.98 173.07 (2 785.57) (330.39) Capital - Capital Expenditures 9922.82 5 909.50 2 523.62 4313.91 1 187.7 4987.58 591.45 (CAPEX) Free Cash Flows (7 473.46) (6 776.24) 2 388.24 (1 996.56) (834.34) 825.97 97.97 *Exchange Rate 12/31/2012 :1 USD = 8.431 MAD Free Cash Flows (FCF) 11. The Borrower's FCF amount to US $98 million in 2012, compared to US $233 million in 2011. The improvement in FCF results primarily from increased depreciation and amortization following the merger as well as a decrease in working capital requirements: current liabilities increased by 36 percent between 2011 and 2012 Q1 and by 17 percent between 2012 Q1 and 2012 Q2 to Q4. 34