The World Bank The District Heating Energy Efficiency Project (P132741) REPORT NO.: RES35687 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE DISTRICT HEATING ENERGY EFFICIENCY PROJECT APPROVED ON MAY 22, 2014 TO UKRAINE ENERGY & EXTRACTIVES GLOBAL PRACTICE EUROPE AND CENTRAL ASIA REGION Regional Vice President: Cyril E Muller Country Director: Satu Kristiina J. Kahkonen Senior Global Practice Director: Riccardo Puliti Practice Manager: Sameer Shukla Task Team Leader: Fabrice Karl Bertholet, Sandu Ghidirim The World Bank The District Heating Energy Efficiency Project (P132741) ABBREVIATIONS AND ACRONYMS CHP Combined Heat and Power Plant CO2 Carbon dioxide CTF Clean Technology Fund DH District Heating EIRR Economic Internal Rate of Return FM Financial Management GHG Greenhouse Gas GWh gigawatt-hour IBRD International Bank for Reconstruction and Development IHS Individual Heat Substation LLC Limited Liability Company m3 cubic meter MJ mega Joules MWh megawatt hour NPV Net Present Value PDO Project Development Objective US$ United States 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 180.00 38.89 141.11 TF-16327 22-May-2014 26-May-2014 21-Nov-2014 30-Oct-2020 50.00 5.10 44.90 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. During the first two years following effectiveness, project implementation has suffered from significant delays compared to the original implementation schedule. As a result, total disbursements for the Project, typically a lagging indicator for infrastructure contracts, are currently at US$ 43.99 million (as of January17, 2019), corresponding to a 19.12 percent disbursement rate. Total Project commitments are at US$ 97.4 million. Since 2016, most participating District Heating (DH) utility companies have improved implementation performance. Unfortunately, for two companies, very limited implementation progress was achieved which led to two restructurings with cancellation of funds which were carried out in May 2017 and June 2018 in order to remove the utility companies for the cities of Vinnytsia and Chernihiv from the Project. B. Since the latest Project restructuring in June 2018, five out of the six remaining participating utilities have continued to make satisfactory implementation progress. These five utilities are: Mykolaivoblteploenerho (Mykolaiv), Miskteplovodenerhia (Kamianets-Podilskyi), Khersonteploenerho (Kherson), Ternopilmiskteplokomunenerho (Ternopil) and Kharkivski Teplovi Merezhi (Kharkiv). Based on the mutually agreed implementation schedules for these cities, the major investments planned under the Project - related to boiler house reconstruction and modernization, installation of mini combined heat and power plants (CHPs), heat network reconstruction, and installation of Individual Heat Substations (IHS) - are on track to be completed by the Closing Date (October 30, 2020). This is however not the case for the activities in the city of Dnipro. The company Dniproteploenerho (owned and controlled by the Dnipropetrovsk Oblast) has not made any implementation progress over the last 10 months and has failed to complete the bid evaluation process for the largest planned investment in Dnipro (reconstruction of boiler houses). In addition, the utility’s management has expressed repeated concerns regarding the financial return on the planned investments because of the prospect of reduction in heat demand resulting from the probable loss of major public-sector clients, as well as demand-side energy efficiency investments. Given the absence of commitment of the Dnipro utility to implement the Project as originally designed, it was agreed, after consultation with the Ministry of Regional Development and with the Dnipropetrovsk Oblast Council, that the preferable way forward for all parties would be for Dniproteploenerho to request its withdrawal from the Project. C. The rationale for the restructuring is to improve project performance and to remove a utility which has failed to implement the Project in accordance with the Project legal agreements and Bank procedures. After the restructuring, the Project Development Objective (PDO) will continue to be achievable for all remaining participating utilities. The World Bank The District Heating Energy Efficiency Project (P132741) D. There is no qualified audit report. Based on the latest Financial Management (FM) review, FM rating for the project continues to be Moderately Satisfactory. II. DESCRIPTION OF PROPOSED CHANGES E. The proposed changes are in line with the Project restructuring request of letter number 19040-15/9-10/35031 from the Ministry of Finance dated December 28, 2018. With regard to the IBRD loan, the restructuring will result in the cancellation of US$20,000,000 corresponding to a reduction of the total IBRD loan amount from US$180,000,000 to US$160,000,000. The restructuring will also entail: (a) the reduction from US$17,410,000 to US$ 767,000 of the loan amount allocated to Dniproteploenerho; (b) the reduction of the allocation to Kharkiv from US$76,545,000 to US$71,645,000, and (c) the increase of the amount of the “Unallocated” category to US$9,642,000 (from US$8,099,000). With regard to the CTF loan, the restructuring entails the following reallocations: (a) the amount allocated to Dniproteploenerho (currently US$4,755,000) will be reduced to zero; (b) the allocation to Kharkiv will be increased to US$35,655,000 (from US$30,755,000); and (c) the amount in the “Unallocated” category will be reduced from US$163,000 to US$18,000. The total amount of funding under the Project will not change for any of the remaining participating utilities. For Kharkiv, the reduction in the IBRD allocation is compensated by an increase in its CTF allocation of an equal amount. This will not impact the investment program in Kharkiv, but only change the funding sources for activities (such as the installation of building-level heat meters) which are eligible expenditures under the CTF loan agreement. F. Furthermore, the restructuring has triggered the following revisions to the Project: a. The PDO Level Results Indicators were revised to reflect the reduction of project investments. As a result, the estimated Projected Lifetime Fuel Savings at the end of the Project are reduced from 1,313,255,000 MJ to 1,091,000,000 MJ. The end target for intermediate Results Indicators related to “Fuel Saved to efficiency gains (MWh)”, Reduction in network heat losses (MWh), and “Reduction in residential heat consumption in building where IHSs were installed (MWh)” were also revised to reflect the removal of investments in Dnipro from the Project scope. b. The disbursement estimates were revised to (i) reflect the removal of Dnipro, and (ii) align the forecast with the updated implementation schedule for the remaining participating utilities. c. The economic analysis of the Project was revised to reflect the reduction in the scope of investments. Due to the lower estimated return of investments in Dnipro compared to other utilities, the removal of Dnipro will only marginally reduce the estimated Project Net Present Value (NPV) from US$131.2 million to US$131.0 million, and slightly increase the estimated Economic Internal Rate of Return (EIRR) from 25.0% to 26.4%. The World Bank The District Heating Energy Efficiency Project (P132741) III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Economic and Financial Analysis ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Loan Closing Date(s) ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) The World Bank The District Heating Energy Efficiency Project (P132741) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Component 1: Energy Efficiency Component 1: Energy 224.50 Revised 204.50 Investments Efficiency Investments Component 2: Technical Component 2: Technical 5.50 No Change Assistance and Capacity 5.50 Assistance and Capacity Building Building TOTAL 230.00 210.00 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation BORROWER' S REQUEST IBRD- Disburs 180,000,000.0 160,000,000.0 USD 20,000,000.00 03-Jan-2019 FOR 83870-001 ing 0 0 COUNTRY REASONS BORROWER' S REQUEST TF-16327- Disburs USD 50,000,000.00 0.00 03-Jan-2019 50,000,000.00 FOR 001 ing COUNTRY REASONS OPS_DETAILEDCHANGES_REALLOCATION _TABLE 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 0.00 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 The World Bank The District Heating Energy Efficiency Project (P132741) 17,410,000.00 374,025.32 767,000.00 100.00 100.00 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 1,825,894.34 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 76,545,000.00 6,628,495.88 71,645,000.00 100.00 100.00 iLap Category Sequence No: 1-VI Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kherson 19,955,000.00 1,431,428.16 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 iLap Category Sequence No: 1-VIII Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Kamyanets-P 15,830,000.00 11,467,345.77 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 16,491,000.00 699,722.85 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 The World Bank The District Heating Energy Efficiency Project (P132741) 5,500,000.00 1,600,181.35 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 8,099,000.00 0.00 9,642,000.00 Total 179,170,000.00 24,027,093.67 159,170,000.00 TF-16327-001 | Currency: USD iLap Category Sequence No: 1-I Current Expenditure Category: GD,CW,Non-CS,CS,IOC for Chernihiv 0.00 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 0.00 100.00 100.00 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 2,370,000.00 1,170,993.53 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 30,755,000.00 1,279,852.53 35,655,000.00 100.00 100.00 The World Bank The District Heating Energy Efficiency Project (P132741) 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 90,125.78 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 8,102,000.00 771,042.81 8,102,000.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: UNALLOCATED 163,000.00 0.00 18,000.00 Total 49,775,000.00 3,312,014.65 49,775,000.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2014 0.00 0.00 2015 0.00 0.00 2016 1,831,800.00 1,840,000.00 2017 8,835,531.50 9,500,000.00 2018 30,000,000.00 15,100,000.00 The World Bank The District Heating Energy Efficiency Project (P132741) 2019 75,000,000.00 40,000,000.00 2020 80,000,000.00 100,000,000.00 2021 34,332,668.50 42,000,000.00 . The World Bank The District Heating Energy Efficiency Project (P132741) . Results framework COUNTRY: Ukraine The District Heating Energy Efficiency Project Project Development Objectives(s) 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. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline End Target Improve the energy efficiency and decrease CO2 emissions (Action: This Objective has been Revised) Projected lifetime fuel savings (Mega Joules (MJ)) 0.00 1,091,000,000.00 Rationale: Action: This indicator has been Revised Recalculation to reflect removal of Dnipro and revised work implementation schedule. Project lifetime fuel savings, calculated as decreased gas needs of participating utilities for heat production (Cubic 0.00 32,200,000.00 Meter(m3)) Rationale: Action: This indicator has been Revised Removal of Dnipro Energy savings of participating DH companies (Gigawatt-hour 0.00 380.00 (GWh)) Action: This indicator has been Revised The World Bank The District Heating Energy Efficiency Project (P132741) RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline End Target Avoided CO2 emissions of participating DH companies 0.00 115,840.00 (Tones/year) Action: This indicator has been Revised Improve quality of service of selected Ukrainian DH companies and improve their financial viability (Action: This Objective has been Revised) People that gained access to more energy-efficient cooking 0.00 497,600.00 and/or heating facilities (Number) Percentage of households that reported improved quality of 0.00 80.00 service in buildings where IHSs were installed (Percentage) Action: This indicator has been Revised Ratio of total revenues to total operating costs (including debt 0.80 1.00 service requirements) (Percentage) Action: This indicator has been Revised PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name DLI Baseline End Target Component 1: Energy Efficiency Investments Improved efficiency of heat generation (Percentage) 0.00 2.90 Action: This indicator has been Revised Fuel saved due to efficiency gains (Megawatt hour(MWh)) 0.00 216,000.00 Action: This indicator has been Revised Reduction in network heat losses (Megawatt hour(MWh)) 0.00 49,000.00 The World Bank The District Heating Energy Efficiency Project (P132741) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline End Target Action: This indicator has been Revised Reduction in residential heat consumption in buildings where 0.00 114,000.00 IHSs were installed (Megawatt hour(MWh)) Action: This indicator has been Revised IO Table SPACE The World Bank The District Heating Energy Efficiency Project (P132741) Note to Task Teams: End of system generated content, document is editable from here. 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