Adoption of the Action Plan of the Group, supporting the restructuring of the pipeline construction services

The Board of STALPROFIL S.A. informs that on July 5, 2016, the Supervisory Board adopted a resolution on approval of the "Action plan of the STALPROFIL S.A. Group, supporting the restructuring of the pipeline construction services" (the "Action Plan"). This activity within the Group is carried out by the subsidiary ZRUG Zabrze S.A., whose shareholders are STALPROFIL S.A. (62.89% of the share capital) and IZOSTAL S.A. (37.11% of share capital). Action Plan provided for the second half of 2016 and 2017, consists of two stages:
Stage 1 - Operational restructuring of ZRUG Zabrze S.A. aiming to: (a) adaptation of capacity of the company to the current market size and (b) costs flexibility of the company. This will be achieved mainly through a reduction in general and administrative costs and reduction of the unused production capacity, including staff reductions and liquidation of the unused equipment. The company will change its business model, ie. reduce its capacities (which relaxes the costs), but retain the ability to raise and oversee the implementation of tasks. If necessary, the company will replenish the missing executive potential by engaging contractors and equipment rental. ZRUG Zabrze will remain competent for the gas pipelines of large diameters DN700, which will be the basis for the organization to realize the potential of the next investment program of Gaz-System S.A. in diameters DN700 and DN1000.
The Group intends to focus on the execution of pipelines with a diameter of ≥400mm on the following markets requiring special competencies:
- construction of transmission pipelines (supported mainly by Gaz-System S.A.)
- construction of gas distribution (managed mainly by Operator Systemu Dystrybucyjnego Polska Spółka Gazownictwa sp. z o.o. of PGNiG Group)
- services of reconstruction and installation of media along expressways,
- construction of heating networks.
Stage 2 - Incorporation of ZRUG Zabrze S.A. to STALPROFIL S.A. For the use of the simplified procedure call, in accordance with art. 516 of the Code of Commercial Companies, a prerequisite is that STALPROFIL has 100% of the share capital of ZRUG Zabrze S.A., therefore STALPROFIL S.A. will buy from IZOSTAL S.A. a package of 37.11% of the shares in ZRUG Zabrze S.A.
The Supervisory Board of STALPROFIL S.A. at its meeting on 5 July 2016 approved the acquisition of IZOSTAL S.A. 5 000 000 shares of ZRUG Zabrze SA, at a unit price equal to their nominal value of 2 PLN per share, authorizing at the same time the Management Board of the Issuer to arrange details for transactions, including the date of its conclusion.
The result of the merger of Stalprofil and ZRUG Zabrze S.A. will be more efficient use of the potential of the two companies and achieving economic effects of direct and indirect synergies, including reduced operating costs.
After the merger, ZRUG will get in the organizational structure STALPROFIL S.A. at self-balancing branch status, registered in the National Court Register, conducting business on the construction of pipelines market.
Comment: After the completion of two large contracts (construction of the Szczecin-Gdańsk and Gałów-Kiełczów pipelines) with high losses, there has been expected in 2016 stabilization of ZRUG Zabrze S.A. business. The scope of the current restructuring activities in the company and a financial plan for 2016 resulted from the anticipated positive outcome of tenders in which ZRUG Zabrze S.A. participated, and announced the launch of new tendering procedures by OGP Gaz-System S.A. and PSG sp. z o.o. However, delays in the implementation of the assumed tender proceedings, and thus the lack of sufficient portfolio of work for ZRUG Zabrze S.A. makes this company bear excessive costs of unused production potential, and thus continues to bear the losses, charging the results of the entire STALPROFIL S.A. Group.
ZRUG Zabrze S.A. has competence and resources necessary to compete successfully in the construction of gas pipelines, but the scale of previous corrective actions taken in the company in relation to the current market conditions is not sufficient and ZRUG Zabrze S.A. should undergo indepth restructuring.
According to knowledge of the Board of STALPROFIL S.A. owned at the date of this Action Plan, there is a real chance that after the completion of the Action Plan, the Group in 2017 will regain ability to generate a positive financial result in this business.
The taken action is necessary, but may prove to be inadequate, if not start the implementation of these large investment programs.
According to the Board of STALPROFIL S.A., to filfill the goles it is crucial that these conditions are met: (a) return of good market conditions for pipelines, and (b) return to the right balance between supply and demand. Currently, the existing excess production potential causes appearing on the market a few tenders are settled at a low price, not guaranteeing profitability.