Annual report 2004

Annual Business Report

Year 2004

Report of the Board of Directors on financial year 2004

The business policy of Ovit ZRt. for year 2004 was adopted by the General Assembly of the Company in its resolution No. 6/2004. (IV.5) with the following complements and requirements:

The results of the activities of Ovit ZRt. in year 2004 show complete fulfilment of the requirements of the owner. Ovit ZRt. maintained its economic position, financial stability and continued improving its profitability.

2004 was the thirteenth year of the operation of Ovit ZRt. Also in year 2004 the Company regarded the fulfilment of the needs of customers as its primary task. Our tasks were executed with realisation of the technical content determined by the Basic Grid Operation Agreement and by individual contracts concluded on investment and maintenance work on the Basic Grid, with adherence to contracted resources and with economical cost utilisation. The availability of the Basic Grid was guaranteed at an unchanged level, the investment and renewal work was accomplished according to the consumers'' demands.

MVM Rt. was the largest customer of our Company also in 2004. Contracts with MVM Rt. provided 78,5% of the revenue; the share of distributing companies and power plants increased to 10,5%, while 11% realised in co-operation with other consumers belonging to electricity industry.

The pre-tax result of the Company exceeded that of the previous year by 6,6% and the result planned for year 2004 by 10%, so the expectations of the owner were completely realised. The Company carried out 8 % increase of average earning, which besides compliance with the resolution of the General Assembly of the Company meant also the adherence to the wage-agreement with the local business federations providing the safeguarding of the peace of labour also in year 2004.

2004 was the thirteenth year of the operation of Ovit ZRt. Also in year 2004 the Company regarded the fulfilment of the needs of customers as its primary task. Our tasks were executed with realisation of the technical content determined by the Basic Grid Operation Agreement and by individual contracts concluded on investment and maintenance work on the Basic Grid, with adherence to contracted resources and with economical cost utilisation. The availability of the Basic Grid was guaranteed at an unchanged level, the investment and renewal work was accomplished according to the consumers'' demands.

The contractual requirements set by the customers were successfully met both in terms of technical content, deadlines and quality. Simultaneously it is a favourable aspect that several existing contracts include works continuing also in year 2005 contributing to the success of the business processes of the present year.

The investment practices of the Company ensured the availability of means and equipment necessary to meet the present and future needs of functioning. By means of developments carried out by considering necessity and economic aspects and financed from own and external resources, the supply with resources of the Company improved, the modernization of the pool of equipment and instruments has been carried out continuously according to approved strategic actions.

The financing of operation of Ovit ZRt. in year 2004 meant a task for its money management the difficulty of which exceeded that of the previous years. In terms of length of expiration period and volume the short term and current account credits exceeded both the previous years and the planned level. As a result of the concluded credit line agreements and the severe liquidity management the credit stock remained at a safely manageable level, but its effect became visible in the negative financial result.

In harmony with our strategic objectives the Environment-Centred Quality Control System operational for several years was extended in year 2004 with the system of health-protection and safety at working place. The external certifying audit performed after the system integration in November 22-26, 2004 was successful.

In the course of the management in 2004 Ovit ZRt. fulfilled the objectives and met the requirements. This can provide solid basis for the Company in the future for meeting the needs of its consumers and the expectations of its owners.

Shareholders of Ovit ZRt.

Officials of Ovit ZRt. (December 31. 2004.)

Members of Board of Directors

Mr. TARI, Gábor	Chairman
Mr. SZALAY, Csaba	Executive Managing Director
Mr. HORVÁTH, Zoltán
Mr. KOVÁCS, György
Mr. CSOM, Gyula Dr.
Mr. TÓTH, József Dr.
Mr. TATÁR, Dénes
Mr. PÓNYA, József
Mr. KACSÓ, András
Members of the Supervisory Board
Mrs. DOBOS, Gáborné Dr.	Chairperson of Supervisory Board
Mr. BÁNFAI, György Dr.
Mr. SIMÁK, Pál Dr.
Mr. NAGY, István Ottó
Ms. NÉMETH, Julianna
Mr. BAKAI, Lehel
Auditor
Ernst&Young Ltd.
Ms. Zsuzsanna Deák

The activity of the Company in 2004

The own performance of the Company similarly to the sales revenue developed in 2004 in a favourable way. It was by 10,2% higher than the corresponding value of year 2003. The composition of significant contributions is given in the following table:

(MHUF)

 

The composition of value added according to branches is given in the following graph:

Operation

One of the most significant activities of the Company is the operation of the Basic Grid carried out according to the agreement concluded for an indefinite time by MVM Rt. and Ovit ZRt.

According to the Basic Grid Operation Agreement actualized for year 2004 the annual inclusive operation rate was 4.165,2 MHUF, which exceeded the allocation for year 2003 by 14,1%. The increment beyond inflation covered the costs of carrying out surplus tasks caused by the increase of number of substations and power lines.

The breakdown of allocation of annual inclusive operation rate according to the structure defined in the business plan in the accounting period was the following:

Fixed costs of handling and availability	3.524,8 MHUF
Costs of condition assessment and maintenance	621,9 MHUF
Costs of removal of break-downs	51,1 MHUF
Total:	4.197,8 MHUF

 

The operation costs exceeded the allocation ensured by MVM Rt. by 0,8%, fundamentally as a consequence of the resource consumption over planned of handling and availability, which was ensured by the Company to the debit of its own resources.

In year 2004 the following changes took place in the management tasks of operation:

The global data on the more important breakdowns of the last two years are summarized in the following table:

The number of breakdowns to be reported decreased in comparison to the past year data. In year 2004 the number of breakdowns to be reported immediately increased significantly in comparison to the last two years data, although in comparison to data for year 2001 (61) it is significantly fewer.

At breakdowns of substations the number of failures of switch gears was high, where most of the breakdowns was caused by unserviceable interrupter switch. Extraordinary weather conditions did not cause serious breakdowns.

The energy loss to consumers increased to threefold of the figure of the year 2003. The main reason for this is that two bus short-circuit occurred at substation Debrecen at 120 kV voltage level one bus operation mode, causing 45716 kWh energy loss. Beyond this, energy losses were caused by failures of medium voltage equipment.

In comparison to the previous year the number of breakdowns due to direct or indirect personal faults decreased.

Operation activity in addition to that performed for MVM Rt.

Certain equipment at 4 substations (in general medium voltage parts and in some places completely or partly the 120 kV switch gear) is not owned by MVM Rt. Their operation is carried out by Ovit ZRt. on the basis of customer contract with the owners.

The substations operated on the basis of customer contract and the sales revenues are shown in the following table:

Main parameters of the equipment operated

The quantity of the network elements operated by the Company as of December 31, 2004 is the following:

Number of substation sites

Number and output of transformers

Power lines track and system length

Non-operation activities

The revenue of Ovit ZRt. from non-operation activities was 82,9 %, 20,6 Billion HUF of the total revenue of the Company, the structural composition according to branches of business is shown in the following figure:

 

In the two years under consideration the biggest change, 49,3% increase of sales revenue occurred in technological mounting. 69,6% of the sales revenue of this activity was realized in the following projects:

The sales revenue realised in services, transport and other activities increased in total by 38,6%, while the sales revenue from power line mounting as well as industrial and building investment decreased with respect to corresponding data of year 2003 by 29,6% and 36,8%, respectively.

The sales revenue of non-operation activities broken down according to customers is the following

The breakdown by customers of sales revenue of non-operation activities changed in comparison to the previous year. The revenue resulted from the order MVM Rt. increased in comparison to the previous year, so its share increased to 74,4%. The share of revenue realised at distributing companies decreased, while the share of power plants increased slightly. As resultant of the changes the share of the revenue realised in other electric power industry sectors decreased by 28,6%. The revenue resulted from orders of other customers outside the electric power industry sector decreased by 4,1%.

The important construction projects, worth more than 100 MHUF, amounting 80,9% of the sales revenue from non-operation activities, are listed according to the customer:

Description	Value (M HUF)
Construction-mounting on Paks - Pécs dual-system 400 kV power line	1.771,8
Reconstruction of 220 kV Dunamenti substation	1.654,6
Realisation of 400/120 kV Pécs substation	1.229,8
Maintenance of Sajószöged - national boundary 400 kV power line	1.180,0
400 kV reconstruction of Litér substation	1.078,4
Primary and secondary reconstruction of 220 kV site-lines of Sajószöged substation	909,1
Steel-construction work and renewal of foundation at Sajószöged-Göd 400 kV power line	796,7
Mounting of 400 kV 4. site of Sajószöged substation	713,6
Construction of Győr- Szombathely dual-system 400 kV power line	562,8
220kV secondary reconstruction of Albertfalva 220/120kV substation	517,2
Construction of 120 kV dual-system block-line and related demolition works at Power Station Pécs	449,1
Corrosion prevention works on DHE-Albertfalva 220 kV power line	319,9
Construction of Hévíz - national boundary 400 kV power line	316,1
Reconstruction of Sajószöged-Szolnok 220kV power line	287,1
Extension of 120 kV switching station at Power Station Pécs	284,4
Transport of poles and fastening material of power line Győr – Szombathely	268,5
Reconstruction of DHE - Dunaújváros 220 kV power line	224,6
Reconstruction of national boundary – Győr 220 kV power line	221,4
Maintenance work on DHE - Dunaújváros 220 kV power line	199,5
Planning and implementing work related to the change of transformer No.1. of Göd transformer station	146,1
Maintenance of fence and gates and corrosion prevention of 220kV portals at Sajószöged substation	120
Reconstruction of 400/220/120 kV Sajószöged substation	112,7
Construction of 400/120 kV Szombathely substation	112,5
Steel-construction and corrosion prevention work on Detk - Szolnok 220 kV power line	105,4
Steel-construction and corrosion prevention work on Detk - Szolnok 220 kV power line	103,6

Orders from distributing companies

 

Orders from power plant companies

 

Other orders

Financial situation

Development of assets

Our Company closed the financial year 2004 with 11.808,8 MHUF total amount of balance sheet, which indicates an 112,5 MHUF, i.e. 1% increase of resources in comparison to the position on December 31. 2003. The change in assets according to the composition is shown in the following graph:

Changes in the stock of invested assets - serving the Company at least for more than one year - according to its composition are shown by the next figure:

The closing value of the stock of immaterial assets increased by more than 160%, which is due to the purchase of intellectual goods (software). The stock of material assets increased until December 31, 2004. by 11,1%. Within this the increase stock of intangible assets was only 1%, but the increase of the stock technical facilities, machines, vehicles was 65,9%. Simultaneously in stock of other devices, equipment, vehicles 14,5 % decrease occurred. The closing stock of investments, reconstructions and the advances for investments exceeded the opening stock of the accounting period by 15,9%.

As a consequence of the decrease of long term outstanding debt originating from sale of flats, the stock of invested financial assets decreased by 7,7%.

In 2004. the current assets of the Company decreased in absolute value by 370,6 MHUF. Changes in the components of closing stock of current assets are as follows:

The closing stock of inventories of Ovit ZRt. increased in absolute value by 336,1 MHUF. Changes in the components of closing stock of inventories are shown in the following figure:

Development of composition of resources

Between closings at December 31. 2003 and December 31, 2004 the following changes occurred in resources of Ovit ZRt.:

The stock of own capital increased by 4% with respect to the closing value of the last year, increased by the result according to the balance of year 2004 by 218,7 MHUF.

The stock of short-term liabilities decreased by 296,9 MHUF. The change of the stock of liabilities (providers) related to the transport and services was the most significant (829,2 MHUF) in this component.

Based on the mobility and qualification of expiration of liabilities the following four-phase liquidity balance can be compiled:

The value of liquid and mobilizable assets of Ovit ZRt. furthermore exceeds the value of liabilities. As a consequence of the significant (73,5%) decrease in the stock of consumers the stock of mobile assets is by 20,3% smaller than that of prompt liabilities.

Cash management

The most significant objective of cash management of Ovit ZRt. in year 2004, in harmony with the business policy of the Company to ensure the continuous financing of the operation and the liquidity was fulfilled by the Company successfully.

The revenues realised from financial point of view in the accounting period exceeded the expenses by 1,7%, in comparison to previous year the increase of income and expenses was 46,1% and 40,2%, respectively. The biggest difference between income and expenses occurred in positive sense in December in negative sense in May.

The incomes fluctuated significantly in the course of the year as a consequence of the revenue realised at the end of the year due to the decrease of possibilities of partial invoicing, while the distribution of expenses was more uniform during the accounting period. The revenues exceeded the expenses in months January, June, August, October and December. Their distribution in time is shown by the following graph:

The following graph prepared according to the law of accountancy shows the cash flow statements for the past three years:

Profitability

The business plan of Ovit ZRt. for year 2004 determined the objective concerning result in a pre-tax profit 350 MHUF. Ovit ZRt. surpassed this requirement and the result realised in the previous year by 10% and 6,6%, respectively.

The values of main result components determining the pre-tax profit is shown by the following graph:

The composition of expenses according to types of costs in accounting period as compared to the previous (basis) year can be seen in the following diagram:

 

Human resource management

Staff and payroll management

The number of the employees participating in the activity of the organisation developed according to the increase of tasks, change of their pace, the seasonality and workforce needs of the work, considering the space of manoeuvring set by the control of wages.

The development of staff can be seen in the following table:

The breakdown of fluctuation according to qualification is the following:

Regarding the labour force balance in year 2004 the number of hired staff exceeded in all qualifications the number of leaving staff. The biggest difference between hirings and leavings was in group of employees with higher education qualification (30/13 employees), while the biggest fluctuation occurred at skilled workers. The fluctuation at Company level was 22,1%.

Fluctuation broken down according to age groups of employees is the following:

In the agreement with the business federations the planned increase of mean basic wage projected on the mean basis wage (2.332.610 HUF/person/year) was 8%. The Company kept the increase of mean wage permitted by the owners.

Welfare and social provisions

The chapter for welfare and social provisions of business plan of the Company for year 2004 was compiled according to the medium level wage, social and welfare agreement.

The comparison of basis and actual data of welfare and social expenses are shown by the following graph:

Quality and Environment-Centred Control System

In year 2004 the development of Integrated Quality and Environment Control System (MIR-KIR) was continued, in the course of which the Control System for Working Place Health Protection and Safety (MEBIR) was introduced, that was integrated into the already operational system. Its certifying audit was carried out carried out by ÉMI-TÜV Bayern Kft. simultaneously with MIR-KIR supervisory audits between November 22-26, 2004. The investigated units of the company came up to the requirements successfully.

The leadership and units of the Company united the fulfilment of tasks determined in 2004 business plan with the efficient operation of Integrated Quality and Environment Control System (MIR/KIR/MEBIR). The processes of quality and environmental control as well the measures aiming at the reduction and control of risks related to working place health protection and safety were built in into the work of all units.

The linking of environmental as well as working place health protection and safety aspects with the quality control components and their integration during the implementation of tasks increased the sense of responsibility of leaders and staff. During the implementation of the quality, environment and working place health protection and safety objectives the employees participating in their implementation could feel their own contribution to the achievements.

 

Environment protection

In 2004 Ovit ZRt. ran the environment-centred control system based on MSZ EN ISO 14001 standard as part of the integrated quality and environment management system successfully.

The operation of Basic Grid and the construction of its facilities, therefore the Basic Grid and its environment are connected closely. Close co-operation was developed with the Directorates of National Parks on the basis of trilateral agreements concluded earlier. The objectives of these agreements are that the Company respects the environmental protection requirements and tries to reconcile the demands when operating or developing the power line sections of the Basic Grid situated on the territory of National Parks.

On the basis of Basic Grid Operation Agreement Ovit ZRt. operates the substations and the Basic Grid power line of system length 4200 km, owned by MVM Rt.

In the frame of the "Complex programme of renewal of transformers and environmental reconstruction of their base" launched by the owner in 2001 we continued the alteration of open pebble bed to that of closed system meeting completely not only the fire protection rules but also the environment protection requirements. In this way the pollution of environment, soil, water, groundwater caused by oil dripping and leakage was stopped.

At those substations where transformers are still operating with open pebble bed the soil and groundwater pollution was stopped by using tray systems.

In order to detect the possible pollution of groundwater monitoring systems were set up, in year 2004 at 11 substations of the Basic Grid with 53 monitoring sites. Sampling occurs in time intervals according to the prescription of the competent Environment Authority, and the total hydrocarbon content of the samples was analysed in accredited laboratory. The results were transferred to Environment Authority and MVM Rt. KVO. The results were accepted by the Environment Authority so neither the Company nor MVM Rt. was forced to implement special measures.

As a summary it can be stated that in 2004, according to the environmental protection policy of the Company, both in the operation and in the construction activities the environmental aspects were respected prominently. The same was expected and enforced also in our co-operations and links.