Type / : / Announcement
Subject / : / Heads of Agreements with KNM Group Berhad (“KNM”) and Gulf Asian Petroleum Sdn Bhd.

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Announcement Details :
1. Introduction

The Board of Directors of ZECON (“Board”) wishes to announce that the Company had on 25 July 2011 entered into the following Heads of Agreements (“HOAs”) with KNM and Gulf Asian Petroleum Sdn Bhd (“GAP”) towards inter alia the following:-

  1. to undertake the Engineering, Procurement, Construction and Commissioning (“EPC”) Contract of the 150,000/200,000 bpd Petroleum Refinery and 400,000/525,000 mtpa Polypropylene Unit for GAP (“the Refinery Project”); and
  1. to undertake the Engineering, Procurement, Construction and Commissioning (“EPC”) Contract for the Petroleum Product Storage Terminal Facility comprising 4 Terminals with a total storage capacity of 2.328 million cubic meters, complete with supporting infrastructure and auxiliaries including the jetty (“the Storage Project”).

Both the Refinery Project and Storage Project are located at TelukRamunia, Johor.

2. Information on Zecon, KNM and GAP

Zecon, a public listed company in Bursa Securities Malaysia Berhad (“Bursa Securities”) is principally involved in Construction, Infrastructure, Toll Concession and Property Development. ZECON which has expertise in Design & Build and Geotechnical Engineering is one of the leading Construction, Infrastructure and Property players in Malaysia.

KNM is a public listed company listed on the Bursa Securities and is a worldwide process equipment manufacturer and turnkey solutions provider in the oil and gas, petrochemical, power, mineral processing, biofuels, renewable energy and environmental industry. KNM is working with various project developers as Engineering, Procurement, Construction and Commissioning (EPC) contractor with different business strategy on equity ownership, project financing and operating structure.

GAP isowned 50% by Mubadala Capital Sdn Bhd (“MCSB”) and 50% by Mr. Abdul Aziz Hamad Al-Delaimi (“AAHD”). GAP is established to build and operate an Integrated Petroleum Complex that consists of the said Refinery Project and Storage Project located at TelukRamunia, Johor.

AAHD has 18 years of experience at Qatar General Petroleum Corp. (“QGPC”), the Qatar national oil corporation. Before his departure in 1994, AAHD had been the Executive Manager for the integrated body of QGPC’s Onshore & Offshore Operations. He is currently the President of Gulf Petroleum Limited, an integrated oil and gas group based in Doha, Qatar whose shareholders include the Qatar General Insurance and Reinsurance Company, Al-Mana Group, National Petroleum Group and the banking arm of Al-Sari Group.

3. Salient Terms of the HOAs

The Refinery Project:-

  1. GAP agrees to appoint Zecon and KNM to form a Consortium to undertake the Engineering, Procurement, Construction and Commissioning (“EPC”) of the 150,000/200,000 bpd Petroleum Refinery and 400,000/525,000 mtpa Polypropylene Unit for GAP. KNM as part of the Consortium will procure participation of an international Korean and/or Chinese Contractor (“Nominated 3rd Contractor”) in the Consortium.

  1. Zecon and KNM shall in good faith discuss and agree to the split of scope of work maximizing the respective capabilities and resources of each group with the objective to reach a split proportional to the funding capabilities of each Party including the Nominated 3rd Contractor to be defined in the definitive Consortium Agreement.

  1. KNM and the Nominated 3rd Contractor shall undertake to arrange project funding for up to 80% of the EPC contract value through Export Credit Agencies and/or other institutions.

  1. Zecon agrees to take up part of KNM’s expressed interest of 20% of equity in GAP valued at about USD180 million (equivalent to about RM540 million based on the exchange rate of USD1.00 : RM3.00).

  1. Zecon and KNM agree to undertake the Project with target completion within 40 months of financial close.

  1. Zecon and KNM shall negotiate with GAP for an EPC Contract with terms and conditions to be mutually agreed based on international practice within three (3) months of this HOA.

  1. Zecon and KNM shall execute a final definitive Consortium Agreement to regulate the participation and split of scope of work between the Parties for the EPC Contract. Zecon, KNM and the Nominated 3rd Contractor will mutually agree on the terms and conditions and their material obligations and responsibilities under the Consortium Agreement.

  1. This HOA shall be valid for a term of six (6) months from the date of this HOA unless extended by the Parties hereto or sooner terminated by mutual consent of the Parties. This HOA shall terminate if
a.any Party is declared insolvent or bankrupt, under receivership, or liquidation proceeding have been instituted by or against it, or
b.upon the expiry of 14 days written notice by either Party in the event the Parties cannot agree, after proper consultation and negotiation, on the terms and conditions regarding the Consortium Agreement, or
c.upon signature of the Consortium Agreement.
  1. This HOA shall not be construed to create a legal relation between the Parties hereto. Neither Party shall be liable for any loss of profit, loss of contract, loss of use, loss in downtime facilities or any failure to meet any other commitment, loss of opportunity, business or reputation of goodwill or any consequential, indirect, special, punitive or exemplary damage or loss howsoever arising in the performance of this HOA.

The Storage Project:-

  1. Zecon will form a consortium with KNM to undertake the EPC Contract of about RM2.0 billion.
  1. The Parties agreed to form a Special Purpose Vehicle (“SPV”) Company to undertake the Storage Project, whereby, KNM intends to subscribe for up to 30% of the equity structure of the SPV Company. The balance shall be held by GAP and/or its nominated parties. The estimated equity value for the SPV Company is RM200 million.
  1. The Parties agreed to co-operate with the common objective of bringing Project to a financial close in the expeditious manner as possible.
  1. The Parties shall execute a Shareholders’ Agreement to regulate the relationship of the shareholders of GAP inter se.
  1. GAP shall arrange for key agreements on Product Off-Take, Land Allocation and Feedstock Supply as part of the financing requirement and as condition precedent to any equity first drawdown from cornerstone investor.
  1. The Parties agreed to commence preliminary works for the Project development immediately upon this Agreement with the target to achieve financial close within three (3) months and completion of total Project 18 months after financial close.
  1. This Agreement shall come into force and shall be binding upon its signature by the Parties. This Agreement shall terminate if :-

a.any Party is declared insolvent or bankrupt, under receivership, or liquidation proceeding have been instituted by or against it, or

b.the Project failed to reach financial close, or

c.upon signature of a definitive Shareholders’ Agreement.

  1. In no event shall either Party be liable to the other Party for any loss of profit, loss of contract, loss of use, loss in downtime facilities or any failure to meet any other commitment, loss of opportunity, business or reputation of goodwill or any consequential, indirect, special, punitive or exemplary damage or loss howsoever arising in the performance of this Agreement.

Further announcements will be made by Zecon once the EPC Contract, the final definitive Consortium Agreement and the Shareholders Agreement are executed.

4. Directors' and major shareholders' interest

Save as disclosed below, none of the Directors and/or major shareholders of ZECON and/or persons connected with them have any interest, direct or indirect, in the HOAs:-

(i) Datuk Haji Zainal Abidin Bin Haji Ahmad (“Datuk Haji Zainal Abidin”) is the Group Managing Director of ZECON. He holds 3.07% direct interest and 55.15% indirect interest in ZECON through Dawla Capital Sdn Bhd.

He is also a Director of GAP and holding 50% indirect interest in GAP through MCSB.

(ii) Haji Zainurin Bin Haji Ahmad (“Haji Zainurin”) is a Director of ZECON. He holds 0.44% direct interest in ZECON.

He also holds 50% indirect interest in GAP through MCSB.

(iii) Further, both of them are also the Directors of MCSB and holding 50% direct interest each in MCSB.

Accordingly, the interested Directors of ZECON, namely Datuk Haji Zainal Abidin and Haji Zainurin have abstained and will continue to abstain from all deliberations and voting at Board meetings of the Company on the HOAs

5. Approvals Required

Approval from the shareholders of Zecon will be required for the EPC Contract and its proposed investments in the equity of GAP and the SPV Company as it is a related party transaction.

Approval from theshareholders of KNM may be required for the proposed investment of up to 20% equity stake in GAP.

6. Effect of the Projects

The Projects are expected to contribute positively to Zecon Group's earnings for the financial years ending 31 December 2012, 31 December 2013, 31 December 2014 and 31 December 2015.

7. Risk Factors

The Projects are subject to certain risks mainly in the oil, gas, petrochemical, and energy industries. These include changes in general economic conditions such as, but not limited to inflation, taxation, foreign exchanges, interest rates, labour and material supply, changes in business and operating conditions such as, but not limited to government and statutory regulations and deterioration in prevailing market conditions.

This announcement is dated 25 July 2011.