OFFICIAL fH DOCUMENTS Supplemental Letter No. 2 (IBRD) UKRAINE Date May 26, 2014 International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Re: Loan No. 8387- UA (Ukraine District Heating Energy Efficiency Project) Performance Monitoring Indicators Dear Sirs and Mesdames: This refers to paragraph A. 1 of Section II of Schedule 2 to the Loan Agreement of even date herewith between Ukraine (the Borrower) and the International Bank for Reconstruction and Development (the Bank). The Borrower hereby confirms to the Bank that the indicators set out in the attachment to this letter shall serve as a basis for the Borrower to monitor and evaluate the progress of the Project and the achievement of the objectives Very truly yours, UKRAINE Authorized Representative Attachment Attachment to the Supplemental Letter No. 2 (IBRD) District Heating Energy Efficiency Project Performance Monitoring Indicators Project Development Objective (PDO): To improve the energy efficiency and quality of service of selected Ukrainian DH companies, improve their financial viability and decrease their CO2 emissions. PDO Level Results E Unit of Baselin Cumulative Target Values** Data Source/ Responsibility Description e Frequency for Data (indicator Indicators , Measure e YRI YR2 VR3 YR 4 YR5 YR6 Methodology Collection definition etc.) Indicator One: Project lifetime fuel savings, The indicator calculated as decreased gas X reports gas savings needs of participating generat by the utilities for heat production* prictin tH State Municipal Utility paii Da "Ivano- 350 950 1,550 2,150 2,750 3,400 savings are Frankivskteplokomunenerho" estimated as (Ivano-Frankivsk) Public Utility "Miskteplovodenerhia" of t (i)aiove Kamianets-Podilskyi City 550 1,550 2,550 3,600 4,600 5,600 Semi-annual SThousandPiti efficiency of heat (Kamanets-Podolsky) cubic 0 Annually reports of DH companies, generation, (ii) PublicUtlity"Kharkvski - meters participating decreased network Public Utility "Kharkivski(tmlos; an (i) Teplovi Merezhi" 1,250 3,500 5,750 8,000 10,200 12,500 DH companies Minregion (hri)and Minregion decreased (Kharkiv) rsdnil ha Municipal Public Utility consumtion For "Khersonteploenerho" 150 500 800 1,150 1,450 1,800 eahscmpany gas (Kherson) eccopn,g Oblast' Public Utility savings are "Mykolaivoblteploenerho" 650 1,800 3,000 4,150 5,350 6,550 of as aving (Mykolaiv) ga byveach Public Utility of Vinnytsia City Council component of their l750 2,150 3,500 4,900 6,300 7,650investment "Vinnytsiamiskteploenerho" programs. (Vinnytsia) * Indicators for the remaining four participating DH companies will be determined soon after Board approval, after their feasibility studies are completed. Preparation ofthe remaining feasibility studies is expected to commence in January 2014. geertd2y-h Cumulative Target Values** Responsibility Description PDO Level Results Unit of Baselin Data Source/ Indicators C.) Measure e YR I YR 2 YR3 YR 4 YR 5 YR 6 Methodology Collection definition etc.) The indicator reports energy savingsE reduction Of CO2 emissions generated by the Indicator Two: Project in the Energy savings/ avoided participating DH C02 emissions of companies. Energy participating DH savings and avoided companies * CO2 emissions of the companies are estimated as avoided gas-based heat generation (due ____________________to improved State Municipal Utility 10/ 15/ 25/ 30/ 35 efficiency of heat "lvano- 5 generation, Frankivskteplokomunenerho" 850 2,350 3,900 5,400 6,700 8,500 Se n decreased network (lvano-Frankivsk) GWh/ Participating losses and decreased Public Utility Tons of 0 15reports of DH companies, residential heat "Miktploodneria ofCO ~ 1 / 5 35/ 0 / 60 Anualy participating Minregion consumption) as "Miskteplovodenerbia" of CO2 5H /opne Kamianets-Podilskyi City well as Council 1,600 4,400 7,250 10,100 12,950 15,750 and Minregion decreased/avoided (Kamyanets-Podolsky) electricity use. The Public Utility "Kharkivski 13 / 37 / 61 / 85 / 109 / 133/ avoided electricity Teplovi Merezhi" 18,900 52,900 86,900 121,000 155,000 189,000 use is assumed to be (Kharkiv) coal-based base- Municipal Public Utility 2/ 5/ 10/ 12/ 15/ 20/ load electricity. For "Khersonteploenerho" 450 1,350 2,250 3,100 4,000 4,850 each company, (Kherson) energy savings and Oblast' Public Utility 5/ 20/ 30/ 45/ 55/ 70/ reduction Of CO2 "Mykolaivoblteploenerho" 1,n3,000 5,000 6,950 8,900 10,800are (Mykolaiv) estimated as a sum Public Utility of Vinnytsia 5 / 20/ 35 / 50 / 65 / 80/ of energy savings City Council and reductions in "Vinnytsiamiskteploenerho" emissions generated (Vinnytsia) 1,750 5,000 8,200 11,450 14,650 17,900 by each component of their investment __________________________________ _____ _____ _____ ______ _____________________ ______prograromass * Indicators for the remaining four participating DH companies will be determined soon after Board approval, after their feasibility studies are completed. Preparation ofthe remaining feasibility studies is expected to commence in January 2014. -3- , Unit of Cumulative Target Values** Data Source/ Responsibility Description PDO Level Results Indicators a Baseline Frequency for Data (indicator YR) Measure R1 YR 2 YR3 YR 4 YR 5 YR 6 Methodology Collection definition etc.) Indicator Three: Percentage of households that reported improved quality of service This indicator in buildings where IHSs were installedreports how State Municipal Utility "Ivano- Frankivskteplokomunenerho" (Ivano- a percev b Frankivsk) Public Utility "Miskteplovodenerhia" of households that live Kamianets-Podilskyi City Council (Kamyanets-Podolsky) HEATING Public Utility "Kharkivski Teplovi Merezhi"buildings where (Kharkiv) IHSs are installed as Municipal Public Utility "Khersonteploenerho" (Kherson) Usually after one Each year, at least 80 percent of all respondents in Annual quality heating season with Oblast' Public Utility each participating DH company reports better of service an IHS, households "Mykolaivoblteploenerho" (Mykolaiv) 0 t *c e Annually survey Minregion notice better, more Public Utility of Vinnytsia City Council comfortable temperatures in their apartments Minrintemperaco resr withi "Vinnytsiamiskteploenerho" (Vinnytsia) their apartments as Public Power-generating Utility de s hotter "Chernihivska Teploelektrotcentral" of Limited Liability Company Firm qualite mese "TehNova" Public Commercial Utility will be assessed "Donetskmiskteplomerezha" thnualy sureys Public Utility "Dniproteploenerho" of included in the Dnipropetrovsk Oblast' Council Technical Subsidiary Enterprise compone "Kirovohradteplo" of Limited Liability poet Company "Center of Scientific and Technical Innovations of Ukrainian Oil and Gas Academy"__________________________ _______________________________ Anua4qalt Baseline Cumulative Target Values** Responsibility Description PDO Level Results Unit of (2013 Data Source/ oFrequency for Data (indicator definition Indicators U Measure forecast) YR I YR 2 YR3 YR 4 YR 5 YR 6 Methodology Collection etc.) This indicator evaluates financial Indicator Four: viability of Ratio of total revenues to participating DH total operating costs companies. It is (including debt service estimated as a ratio of requirements)* total revenues of a company to its total operating costs, State Municipal Utility including debt "Ivano- 08 service requirements. Frankivskteplokomunenerho" Total revenues are (lvano-Frankivsk) defined as the sum of Public Utility total operating "Miskteplovodenerhia" of revenues and net Kamianets-Podilskyi City 0.8 > 1 > I > I Semi-annual non-operating Council progress Participating income. Net non- (Kamyanets-Podolsky) Number -_Annually reports of DH DH companies, operating income is Public Utility "Kharkivski companies Minregion the difference Teplovi Merezhi" 0.8 > I > I > I and between revenues (Kharkiv) Minregion from all sources other Municipal Public Utility than those related to "Khersonteploenerho" 0.7 > 1 > 1 1 operations, and (Kherson) expenses, including Oblast' Public Utility taxes. Total operating "Mykolaivoblteploenerho" 0.8 > 1 > I > I expenses are defined (Mykolaiv) as all expenses Public Utility of Vinnytsia related to operations City Council and provision for "Vinnytsiamiskteploenerho" depreciation. Debt (Vinnytsia) service requirements 0.8 > 1 >1 1 are defined as the aggregate amount of repayments of debt, including interest and other charges. * Indicators for the remaining four participating DH companies will be determined soon after Board approval, after their feasibility studies are completed. Preparation of the remaining feasibility studies is expected to commence in January 2014. ** Any possible compensations of difference between residential tariffs and incurred costs are not taken into account in the forecasts -5- Cumulative Target Values** Data Source/ Responsibility Description PDO Level Results Unit ofFrnfoDaa(ditr aBaseline Frequency for Data (indicator- Indicators t Measure YR I YR2 YR3 YR4 YR5 YR6 Methodology Collection definition etc.) This indicator reports the number of people who gain access to more energy efficient Indicator Five: boiler houses. For Number of people who gain Kherson, the exact access to more energy- X number of people- efficient heat-generating beneficiaries has facilities* been provided by the company. For Ivano-Frankivsk, Kamyanets- Podilsky and Vinnytsia, the number of State Municipal Utility be r wa "lvno-beneficiaries was Frankivskteplokomunenerho" 3,350 9,350 15,400 21,450 27,450 33,500 estimated as the (Ivano-Frankivsk) Semi-annual .useh t w Public Utility progress Participating be served by "Miskteplovodenerhia" of Number 0 Annually reports of DH DH companies, rehabilitated boiler Kamianets-Podilskyi City 1,100 3,000 5,000 7,000 8,900 10,850 companies and Minregion hs(ided by Counil inreionhouses (provided by Council Mmnregion the companies) (Kamyanets-Podolsky) mtied bym e Public Utility "Kharkivski multiplied by the Teplovi Merezhi" 35,550 99,550 163,550 227,550 291,550 355,550 size in a city. For (Kharkiv) Mykolayv and Municipal Public Utility Kharkiv, the "Khersonteploenerho" 4,950 13,900 22,850 31,800 40,750 49,700 number of (Kherson) beneficiaries was Oblast' Public Utility estimated as a share "Mykolaivoblteploenerho" 8,900 24,900 40,950 57,000 73,000 89,050 of the total (Mykolaiv) consumers served Public Utility of Vinnytsia by the rehabilitated City Council boiler houses, "Vinnytsiamiskteploenerho" determined by the (Vinnytsia) 2,550 7,250 11,900 16,600 21,250 25,950 share of the connected heat load served by the rehabilitated facilities. -6- PDO Level Results . Unit of Cumulative Target Values** Data Source/ Responsibility Description D Baseline Frequency for Data (indicator Indicators u Measure YRI YR2 YR3 YR4 YR5 YR6 Methodology Collection definition etc.) Indicator Six: Direct Project beneficiaries X Number 1,960,700 All residential consumers of participating DH companies are direct (for 6 appraised project beneficiaries. Hence, this indicator is estimated as the total companies)* number of residential consumers served by all participating DH of which female X % 50 companies. * Indicators for the remaining four participating DH companies will be determined soon after Board approval, after their feasibility studies are completed. Preparation of the remaining feasibility studies is expected to commence in January 2014. -7- INTERMEDIATE RESULTS Unit of Cumulative Target Values** Data Source Responsibility Description e Baseline Frequency for Data (indicator definition 0 Measure YR 1 YR 2 YR3 YR 4 YR 5 YR 6 Methodology Collection etc.) Effiienc of eatThis indicator reports Efficiency of heat ipoeet i generation/ fuel saved due to X efficiency gains*efienyo efficiency of rehabilitated boiler houses in participating DH companies and State Municipal Utility 0 0.5%! 1.0%! 1.5%/ 2.0%! 2.3%/ consequent gas energy "Ivano- savings. The change in Frankivskteplokomunenerho" 0 850 1,650 2,500 3,350 3,850 efficiency is estimated (Ivano-Frankivsk) as the average Public Utility "Kharkivski 0/ 0.1%/ 0.2% / 0.3%! 0.4%/ 0.5% Semi-annual efficiency gains of all Public Utility Patiiatn boiler houses "Miskteplovodenerhia" of % reports oi Kamianets-Podilskyi City Gcal 0 0 5 10 15 25 30 Annually participating DH companies, participating DH Council utilities and Minregion company in a (Kamyanets-Podolsky) Minregion particular year as a Public Utility "Kharkivski 0 1.0%! 3.0%! 5.0%! 7.0%! 8.0%! part of the project. Gas Teplovi Merezhi" energy savings are (Kharkiv) 850 2,500 4,200 5,900 6,750 estimated as a Municipal Public Utility 0 1.0%! 2.5%! 4.0%! 5.5%! 6.4%! reduction in heat "Khersonteploenerho" Heat losses are (Khersonte) enro 0 1,450 3,600 5,750 7,900 9,200 estimated as the (Kherson) Oblast' Public Utility 0 0.5%! 1.0%! 2.0%! 3.0%! 4.0%! difference between gas "Mykolaivoblteploenerho" energy use of a (Mykolaiv) 1,300 2,600 5,200 7,800 10,400 participating company Public Utility of Vinnytsia 0 0.2%! 0.4%! 0.6%! 0.8%! 1.0%! in/ a al ear. City Council Vinnytsiamiskteploenerho" 0 850 1,750 2,650 3,550 4,400 (Vinnytsia)_____ _____ _____ ________ _________________________________ * Indicators for the remaining four participating DH companies will be determined soon after Board approval, after their feasibility studies are completed. Preparation of the remaining feasibility studies is expected to commence in January 2014. -8-/15%/ 20 / 23 Cumulative Target Values** Responsibility Description U Baseline Frequency Me for Data (indicator definition C Measure YR I YR 2 YR3 YR 4 YR 5 YR 6 Methodology Collection etc.) Reduction in network heat losses * This indicator traces reduction of heat State Municipal Utility losses due to network "Ivano- 1,250rehabilitation as Frankivskteplokomunenerho" envisioned within the (Ivano-Frankivsk) project. It is estimated Public Utility as the difference "Miskteplovodenerhia" of between losses in old Kamianets-Podilskyi City 300 850 1,400 1,950 2,500 3,050 Semi-annual pipes (defined by old Council progress technical (Kamyanets-Podolsky) reprt_o Participating Public Utility "Kharkivski Gcal 0 participating Teplovi Merezhi" 250 750 1,250 1,750 2,200 2,700 utilities and (Kharkiv) Minregion (defined by new Municipal Public Utility technical "Khersonteploenerho" 200 550 900 1,200 1,600 1,950 characteristics). The (Kherson) indicator reports losses Oblast' Public Utility only on replaced "Mykolaivoblteploenerho" 300 850 1,400 1,950 2,500 3,050 segments of the (Mykolaiv) network, but not on Public Utility of Vinnytsia the entire network run City Council 4,100 11,500a company. "Vinnytsiamiskteploenerho" (Vinnytsia) .. ___ _____ I__________________________ ______ _______ _______ * Indicators for the remaining four participating DH companies will be determined soon after Board approval, after their feasibility studies are completed. Preparation ofthe remaining feasibility studies is expected to commence in January 2014. 5,5 -,00 1,50-,0 Cumulative Target Values** Responsibility Description Unit of Baseline Frequency Data Source/ for Data (indicator definition . Measure YR I YR 2 YR3 YR 4 YR5 YR6 Methodology Collection etc.) Reduction in residential heat consumption in Gcal buildings where IHSs were installed * State Municipal Utility "Ivano- 1,000 2,850 4,700 6,550 8,400 10,250 Frankivskteplokomunenerho Ti niao eot (Ivano-Frankivsk) _____This indicator reports " (lvan-Fraiv) the reduction in heat Public Utility consumption of "Miskteplovodenerhia" of residential buildings Kamianets-Podilskyi City 350 1,050 1,750 2,450 3,150 3,850 Semi-annual where IHSs are Council progress wee IS r (Kamyanets-Podolsky) reports of Participating installed as a part of (Kamyanets-Podolsky) ___ -0 Annually reot f utilities, the project. It is Public Utility "Kharkivski participating Mintegion estimated as the Teplovi Merezhi" 5,100 14,350 23,550 32,800 42,000 51,200 utilities and difference between (Kharkiv) Minregion billed consumption in Municipal Public Utility ye andsyeari(t+1) "Khersonteploenerho" 60 150 250 350 500 600 year t and year (t+), (Kheson)adjusted by degree (Kherson) dy Oblast' Public Utility "Mykolaivoblteploenerho" 750 2,100 3,500 4,850 6,250 7,600 (Mykolaiv) Public Utility of Vinnytsia City Council 1,250 3,550 5,850 8,200 10,500 12,800 "Vinnytsiamiskteploenerho" (Vinnytsia) * Indicators for the remaining four participating DH companies will be determined soon after Board approval, after their feasibility studies are completed. Preparation of the remaining feasibility studies is expected to commence in January 2014. - 10 - CmltvTagtValues** Description Unit of Data Soure/ Responsibility (indicator definition a Y V V Frequency for Data etc.) UMeasure VRI R VR3 R R R Methodology 2 4__ _ 45 6 Adoption of the new Methodologies Methodologies, Methodologies, Annually Semi-annual Utilities transitional (from "cost not developed/ regulatory regulatory progress Regulator plus" to "incentive- applied accounting forms accounting forms reports of the based") methodologies and auditing and auditing Utilities These indicators trace by the Utilities principles principles Regulator implementation of the Regulator developed approved and used SIDA-World Bank Methodologies Selection criteria Methodologies, Annually Semi-annual Utilities technical assistance to Applications of the new not developed/ for pilot regulatory progress Regulator the Utilities Regulator. transitional applied municipalities accounting forms reports of the Successful methodologies in pilot finalized; and auditing Utilities implementation of the municipalities by the potential pilot principles are Regulator technical assistance Utilities Regulator municipalities are applied in selected will contribute to the _________identified pilot municipalities sustainability of Benchmarking Standardized Country-wide Annually Semi-annual Utilities investments, financed Sector-wide has not been performance benchmarking progress Regulator by the project. benchmarking exercise done template exercise completed reports of the completed by the developed Utilities Utilities Regulator Responsibility (indicdRegulator *Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators) **Target values should be entered for the years data will be available, not necessarily annually - 11 -