Protocol No 2

on the restructuring ofthe czech steel industry

1. Notwithstanding Articles 87 and 88 of the EC Treaty, State aid granted by the Czech Republic for restructuring purposes to specified parts of the Czech steel industry from 1997 to 2003 shall be deemed to be compatible with the common market provided that:

- the period provided for in Article 8(4) of Protocol 2 on ECSC products to the Europe Agreement establishing an association between the European Communities and their Member States, of the one part, and the Czech Republic, of the other part [1], has been extended until the date of accession,

- the terms set out in the restructuring plan on the basis of which the above mentioned Protocol was extended are adhered to throughout the period 2002-2006,

- the conditions set out in this Protocol are met, and

- no State aid for restructuring is to be paid to the Czech steel industry after the date of accession.

2. Restructuring of the Czech steel sector, as described in the individual business plans of the companies listed in Annex 1, and in line with the conditions set out in this Protocol, shall be completed no later than 31 December 2006 (hereinafter referred to as "the end of the restructuring period").

3. Only companies listed in Annex 1 (hereinafter referred to as "benefiting companies") shall be eligible for State aid in the framework of the Czech steel restructuring programme.

4. A benefiting company may not:

(a) in the case of a merger with a company not included in Annex 1, pass on the benefit of the aid granted to the benefiting company;

(b) take over the assets of any company not included in Annex 1 which is declared bankrupt in the period up to 31 December 2006.

5. Any subsequent privatisation of any of the benefiting companies shall respect the conditions and principles regarding viability, State aids and capacity reduction defined in this Protocol.

6. The total restructuring aid to be granted to the benefiting companies shall be determined by the justifications set out in the approved Czech steel restructuring plan and individual business plans as approved by the Council. But in any case, the aid paid out in the period 1997-2003 is limited to a maximum amount of CZK 14147425201. Of this total figure Nová Huť receives a maximum of CZK 5700075201, Vítkovice Steel receives a maximum of CZK 8155350000 and Válcovny Plechu Frýdek Místek receives a maximum of CZK 292000000 depending on the requirements as set out in the approved restructuring plan. The aid shall only be granted once. No further State aid shall be granted by the Czech Republic for restructuring purposes to the Czech steel industry.

7. The net capacity reduction to be achieved by the Czech Republic for finished products during the period 1997-2006 shall be 590000 tonnes.

Capacity reduction shall be measured only on the basis of permanent closure of production facilities by physical destruction such that the facilities cannot be restored to service. A declaration of bankruptcy of a steel company shall not qualify as capacity reduction.

The above level of net capacity reduction, together with any other capacity reductions identified as necessary in the restructuring programmes, shall be completed in line with the timetable in Annex 2.

8. The Czech Republic shall remove trade barriers in the coal market in accordance with the acquis by accession, enabling Czech steel companies to obtain access to coal at international market prices.

9. The business plan for the benefiting company Nová Huť shall be implemented. In particular:

(a) the Vysoké Pece Ostrava plant shall be brought into the organisational framework of Nová Huť by acquisition of full ownership. A target date shall be set for this merger, including assignation of responsibility for its implementation;

(b) restructuring efforts shall concentrate on the following:

- evolving Nová Huť from being production oriented to being marketing orientated and improving the efficiency and effectiveness of its business management, including greater transparency on costs,

- Nová Huť reviewing its product mix and entry into higher added-value markets,

- Nová Huť making the necessary investments in order to achieve a higher quality of finished products in the short term;

(c) employment restructuring shall be implemented; levels of productivity comparable to those obtained by EU steel industry product groups shall be reached by 31 December 2006, on the basis of the consolidated figures of the benefiting companies concerned;

(d) compliance with the relevant Community acquis in the field of environmental protection shall be achieved by accession including the necessary investments addressed in the business plan. In accordance with the business plan the necessary future IPPC-related investment shall also be made, in order to ensure compliance with Directive 96/61/EC concerning integrated pollution prevention and control [2] by 1 November 2007.

10. The business plan for the benefiting company Vítkovice Steel shall be implemented. In particular:

(a) the Duo Mill shall be permanently closed no later than 31 December 2006. In the event of purchase of the company by a strategic investor, the purchase contract shall be made conditional on this closure by this date;

(b) restructuring efforts shall concentrate on the following:

- an increase in direct sales and a greater focus on cost reduction, this being essential for more efficient business management,

- adapting to market demand and shifting towards higher value-added products,

- bringing forward the proposed investment in the secondary steel making process from 2004 to 2003, in order to allow the company to compete on quality rather than on price;

(c) compliance with the relevant Community acquis in the field of environmental protection shall be achieved by accession including the necessary investments addressed in the business plan, which include the need for future IPPC-related investment.

11. The business plan for the benefiting company Válcovny Plechu Frýdek Místek (VPFM) shall be implemented. In particular:

(a) the Hot Rolling Mills Nos 1 and 2 shall be permanently closed by the end of 2004;

(b) restructuring efforts shall concentrate on the following:

- making the necessary investment in order to reach a higher quality of finished product in the short term,

- giving priority to the implementation of key identified profit improvement opportunities (including employment restructuring, cost reductions, yield improvements and distribution reorientation).

12. Any subsequent changes in the overall restructuring plan and the individual plans must be agreed by the Commission and, where appropriate, by the Council.

13. The implementation of the restructuring shall take place under conditions of full transparency and on the basis of sound market economy principles.

14. The Commission and the Council shall closely monitor the implementation of the restructuring and the fulfilment of the conditions set out in this Protocol concerning viability, State aid and capacity reductions before and after accession until the end of the restructuring period, in accordance with paragraphs 15 to 18. For this purpose the Commission shall report to the Council.

15. The Commission and the Council shall monitor the restructuring benchmarks set out in Annex 3.

16. Monitoring shall include an independent evaluation to be carried out in 2003, 2004, 2005 and 2006. The Commission's viability test shall be an important element in ensuring that viability is achieved.

17. The Czech Republic shall cooperate fully with all the arrangements for monitoring. In particular:

- the Czech Republic shall supply the Commission with 6-monthly reports concerning the restructuring of the benefiting companies, no later than 15 March and 15 September of each year until the end of the restructuring period,

- the first report shall reach the Commission by 15 March 2003 and the last report by 15 March 2007, unless the Commission decides otherwise,

- the reports shall contain all the information necessary to monitor the restructuring process and the reduction and use of capacity and shall provide sufficient financial data to allow an assessment to be made of whether the conditions and requirements contained in this Protocol have been fulfilled. The reports shall at the least contain the information set out in Annex 4, which the Commission reserves the right to modify in line with its experiences during the monitoring process. In addition to the individual business reports of the companies listed in Annex 1, there shall also be a report on the overall situation of the Czech steel sector, including recent macroeconomic developments,

- the Czech Republic shall oblige the benefiting companies to disclose all relevant data which might, under other circumstances, be considered as confidential. In its reporting to the Council, the Commission shall ensure that company-specific confidential information is not disclosed.

18. The Commission may at any time decide to mandate an independent consultant to evaluate the monitoring results, undertake any research necessary and report to the Commission and the Council.

19. If the Commission establishes, on the basis of the reports referred to in paragraph 16, that substantial deviations from the financial data on which the viability assessment has been made have occurred, it may require the Czech Republic to take appropriate measures to reinforce the restructuring measures of the benefiting companies concerned.

20. Should the monitoring show that:

(a) the conditions for the transitional arrangements contained in this Protocol have not been fulfilled, or that

(b) the commitments made in the framework of the extension of the period during which the Czech Republic may exceptionally grant State support for the restructuring of its steel industry under the Europe Agreement [3] have not been fulfilled, or that

(c) the Czech Republic in the course of the restructuring period has granted additional incompatible State aid to the steel industry and to the benefiting companies in particular,

the transitional arrangements contained in this Protocol shall not have effect.

The Commission shall take appropriate steps requiring any company concerned to reimburse any aid granted in breach of the conditions laid down in this Protocol.

[1] OJ L 360, 31.12.1994, p. 2.

[2] OJ L 257, 10.10.1996, p. 26.

[3] OJ L 360, 31.12.1994, p. 2.

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ANNEX 1

COMPANIES BENEFITING FROM STATE AID UNDER THE STEEL RESTRUCTURING PROGRAMME OF THE CZECH REPUBLIC

NOVÁ HUŤ, a.s.

Vratimovská 689

707 02 Ostrava-Kunčice

Czech Republic

VÍTKOVICE STEEL, a.s.

Ruská 2887/101

706 02 Ostrava — Vítkovice

Czech Republic

VÁLCOVNY PLECHU, a.s.

Křižíkova 1377

Frýdek — Místek

Czech Republic

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ANNEX 2

TIMETABLE FOR CAPACITY CHANGES (REDUCTIONS AND INCREASES) [1]

Company | Facility | Capacity change (tpy) | Date of production change | Date of permanent closure |

Poldi Hütte | Rolling mills V1-V8 | −120000 | 1.8.1999 | 31.5.2000 |

VPFM | Hot rolling mills No 1 & 2 | −70000 | 31.12.2004 | 31.12.2005 |

Vítkovice Steel | Duo rolling mill | −130000 | 30.6.2006 | 31.12.2006 |

Nová Huť | Heavy section mill – HCC | −600000 | 31.8.2006 | 31.12.2006 |

Nová Huť | Section mill | +330000 | 1.1.2007 | — |

| Net capacity change | −590000 | | |

[1] Capacity reductions should be permanent as defined in Commission Decision No 3010/91/ECSC (OJ L 286, 16.10.1991, p. 20).

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ANNEX 3

RESTRUCTURING BENCHMARKS AND MONITORING

1. Viability

Taking into account the special accounting rules applied by the Commission, each benefiting company shall achieve a minimum annual gross operating result of turnover (10 % for non-integrated steel undertakings, 13,5 % for integrated steel mills) and a minimum return of 1,5 % of turnover on own capital no later than 31 December 2006. This shall be verified in the independent evaluation carried out annually between 2003 and 2006, as provided for in paragraph 16 of the Protocol.

2. Productivity

An overall productivity comparable with the one attained by the EU steel industry shall be achieved gradually by 31 December 2006. This shall be verified in the independent evaluation carried out annually between 2003 and 2006, as set out in paragraph 16 of the Protocol.

3. Cost reductions

Particular importance shall be attached to cost reductions as one of the key elements of viability. These shall be fully implemented, in accordance with the business plans of the benefiting companies.

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ANNEX 4

INDICATIVE LIST OF INFORMATION REQUIREMENTS

1. Production and market effects

- monthly production of crude steel, semi-finished and finished products by category as well as by product range,

- products sold, including volumes, prices and markets; breakdown by product range.

2. Investments

- details of investments realised,

- date of completion,

- the costs of the investment, the sources of finance and the sum of any related aid involved,

- the date of aid payment if any.

3. Workforce reductions

- number and timing of job losses,

- evolution in employment at beneficiary companies (distinguishing between direct and indirect employment).

4. Capacity (with regard to the entire steel sector in the Czech Republic)

- date or expected date of cessation of production of capacities expressed in MPP (MPP being the maximum possible annual production that can be obtained in ordinary working conditions) to be closed, and description of these,

- date (or expected date) of dismantling, as defined in Commission Decision No 3010/91/ECSC on the information to be furnished by steel undertakings about their investments [1], of the installation concerned and details of the dismantling,

- date (or expected date) of introduction of new capacities and description of these,

- evolution in total capacity in the Czech Republic of crude steel and finished products per category.

5. Cost

- breakdown of costs and their respective evolution in the past and in the future, in particular for workforce cost saving, energy consumption, raw material cost saving, accessories and external services reduction.

6. Financial performance

- evolution of selected key financial ratios to ensure progress is being made towards viability (the financial results and ratios must be provided in a way which allows comparisons with the company's financial restructuring plan and must include the Commission's viability test),

- level of financial charges,

- details and timing of aid granted,

- details and timing of the paying out of aid already granted,

- terms and conditions of any new loans (irrespective of source).

7. Privatisation

- selling price and treatment of existing liabilities,

- disposal of proceeds of sale,

- date of sale,

- financial position of company at the time of sale,

- value of the company/assets at the time of sale and method used for valuation.

8. Creation of a new company or new plants incorporating capacity extensions

- identity of each private and public sector participant,

- sources of their financing for the creation of the new company or new plants,

- terms and conditions of the private and the public shareholders' participation,

- management structure of the new company.

[1] OJ L 286, 16.10.1991, p. 20.

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