Annual report 2005

Report of the Board of Directors on financial year 2005

The business policy of Ovit Rt. for year 2005 was adopted by the General Assembly of the Company in its resolution No. 6/2005.(IV.4) on April 4. 2005. with the following complements and requirements:

The results of the activities of Ovit Rt. in year 2005 show complete fulfilment of the requirements of the owner. Ovit Rt. maintained its economic position, financial stability.

2005 was the fourteenth year of the operation of Ovit Rt. Also in this year 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.

In accounting period MVM Rt was the largest customer of our Company. Contracts with MVM Rt. provided 81% of the revenue; 9% was realised with distributing companies and power plants, while the share of other consumers belonging to electricity industry was 11%.

In the accounting period the pre-tax result of the Company was 372.6 MFt, that exceeded the planned amount, so the expectations of the owner were completely realised. The contractual requirements set by the customers were successfully met both in terms of technical content, deadlines and quality. Several existing contracts include works continuing also in year 2006 contributing to the success of the business processes of the present year.

In order to fulfil the wage-agreement with the sectoral and local business federations in year 2005 the increase of average earning was with the permission of the owner 7 % safeguarding the peace of labour in this way.

The experts of the Company promoted the structural reconstruction of the electricity industry, including the integration of the Directorate of Operation of OVIT into MAVIR ZRt, i.e. the establishment of TSO. We have participated in working groups elaborating the legal, labour law, financial, economical, technical conditions and frames, we have provided the necessary material and human resources, and we have accomplished our tasks precisely on schedule. The integration of our operation activity was accomplished by January 1. 2006.

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 it succeeded to keep the level of i.e. to improve the supply with resources of the Company with special regard to the modernisation of the pool of function-specific equipment and instruments.

Also in year 2005 the undisturbed financing of operation meant a task for money management the difficulty of which exceeded that of the previous years. The financing could be ensured by using credits of longer term and higher volume, but their rate did not exceed the manageable level. The current account credits offered by the trade banks were gradually replaced by the cash-pool agreement of MVM.

In accounting period the development of Integrated System was continued, in the course of which the modifications of the new standard MSZ EN ISO 14001:2005 on environment-centred control were built into the controlled processes. The recertifying audits, due in every 3 years, carried out at our Company in December 12-16, 2005, was successful. The Certificates were extended for another 3 years.

In the course of the management in 2005 Ovit Rt. fulfilled the objectives and met the requirements. This can provide solid basis for the Company in the future for meeting both the needs of its consumers and the expectations of its owners.

Shareholders of Ovit Rt. (December 31. 2005.)

There was no change in the ownership structure of the Company in 2005 as compared to the previous year.

Officials of Ovit Rt. (December 31. 2005.)

The activity of the Company in 2005

The own numerical performance of the Company decreased in contrast to that of previous year by not more than 0.1 %, since the sum of the change of the self-produced stock, the net costs of sold goods and the value of mediated services exceeded the relevant value of the previous year by 8.9%, and this change exceeded the increase of sales revenue. 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

According to the Basic Grid Operation Agreement actualized for year 2005 the annual inclusive operation rate was 4,449.2 MHUF which exceeded the allocation for year 2004 by 7.8%. The increment beyond inflation covered the costs of carrying out surplus tasks caused by the increase of number of substations and power lines.

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

The operation costs exceeded the allocation ensured by MVM Rt. by 1.5%, as consequence of the resource consumption over planned of handling and availability, the changes in the pace of the introduction of the remote operation and the non-recurrent costs of a new working model: establishment of regional centres of operation.

In year 2005 the following changes took place in the management tasks of operation:

• The remote control of equipment of Oroszlány substation owned by MVM Rt. was carried out from the Handling Centre in Győr, established in May 2005. This is the reason why the operation activity accomplished by Vértesi Erőmű Rt. in the framework of a subcontract decreased, reducing the operation costs, too.
• Permanent handling personnel had to be ensured instead of the planned date, the end of first quarter of year 2005, adjusted to the corrected date of the opening of the Operation Centre of Toponár, until the end of November 2005 to the 400/120 kV substation Pécs put in operation already in 2004. The service at substation Pécs in order to carry out the task needed additional costs.
• In relation to the opening of the Operation Centre of Toponár (opened later then planned, in November) the introduction of the remote switching from Operation Centre of Toponár became possible on December 20, 2005. This was followed the establishment of the full remote control from February 1. 2006. This caused additional operational costs.
• The reconstruction of Dunamenti substation was finished at the end of October 2005, which made the remote control of the equipment of the substation from Zuglo operation centre possible. The costs of the operation of the substation corresponded to the planned ones.
• In December 2005 as a consequence of the control engineering extension at the Operation Centre Sajószöged the staff of this Centre has taken over the remote control of the equipment of Felsőzsolca substation.

Statistics and evaluation of breakdowns

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 immediately decreased in comparison to the past year data, but in comparison to the previous years more breakdowns were registered. In year 2005 the number of break-downs to be reported was similar to those of previous years. As consequence of the decreased number of breakdowns to be reported immediately, the total number of break-downs decreased by 20%, too.

In contrast to the extremely high value of year 2004 the energy loss to consumers decreased, but it exceeded that of years 2003 considerably. The main reason for the energy loss in 2005 was the bus short-circuits occurred at substations Debrecen and Dunaújváros at 120 kV voltage level causing 29362 kWh energy loss, 75% of the total. Beyond this, energy losses were caused by failures of medium voltage equipment, out of which the highest break-downs were caused by failures of 20kV bus interrupter switches at Szolnok substation.

In comparison to previous years no significant improvement occurred in the number of breakdowns due to direct or indirect personal faults.

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 Rt. on the basis of customer contracts with the owners.

The sales revenues realised at substations are shown in the following table:

Main parameters of the equipment operated

The quantity of the network elements operated by the Company as on December 31, 2005 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 Rt. from non-operation activities was 21.1 Billion HUF, 82.2 %, of the total revenue of the Company.

The structural composition of the revenue from non-operation activities according to branches of business is shown in the following figure:

Regarding the revenues of the main branches the most significant increases in contrast to previous year can be observed in the field of industrial and building investment, technological mounting and production of steel structures. As compared to the previous year the increase of revenue of power line construction is less, while the share of services in non-operation activities decreased considerably.

The most significant projects in the fields of non-operating activities were:

• demolishing of reinforced concrete portals of transformers, trimming of internal row of portals at 120kV open space of the company seat of Dunamenti Power Station
• Litér substation renewal supplementary works
• At 220/120 kV substation rebuilding of 120/KÖF transformers No. I-II-III and the grounds of adjacent star-point equipment, preparation of technical plans
• poles and fastening material for Győr-Szombathely 400 kV power line
• manufacturing of the strain poles of Győr-Szombathely 400 kV power line
• manufacturing of various steel structures for export
• planning of 400 kV power line Békéscsaba - national frontier

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

The breakdown by customers of sales revenue of non-operation activities changed slightly: the share of the orders both of MVM Rt and of distributing companies increased, while the share of orders of power plants and other orders decreased. As compared to previous year the sales revenue from orders of distributing companies increased significantly, by 46.8%, while the decrease of the sales revenue due to activities for power plants as well as for companies outside the branch was 46.4% and 9.3%, respectively.

The most important projects, worth more than 100 MHUF, amounting 75.1% of the sales revenue from non-operation activities, are listed according to the customer:

Orders of MVM Rt.

Orders from distributing companies

Orders from power plant companies

Other orders

Financial situation

Development of assets

Our Company closed the financial year 2005 with 11,252.6 MHUF total amount of balance sheet, which falls by 4.7% behind the position on December 31. 2004. The change in assets according to the composition is shown in the following graph:

The closing stock of invested assets at December 31, 2005 exceeded by 3.9% the similar value of the previous year, while the reduction of current assets amounts to 10.1%, which occurred basically on claims. The stock of pre-paid expenses compared to the opening stock decreased by 16.6%.

The closing value of the stock of immaterial assets within invested assets increased by 53.8%.

In 2005 the increase of the stock of material assets compared to that of previous year was in total 3.2%. Within this the increase stock of technical facilities, machines, vehicles was 27.3%. The stock of real estates increased only by 0.3%, while the stock of other devices, equipment, vehicles decreased by 12.3%.
70.8% decrease can be observed when comparing the closing stock of uncompleted investments to the opening stock of the accounting period.

As a consequence of the decrease of outstanding debt originating from sales of flats, the stock of invested financial assets decreased by 5.6%.

The next figure shows the changes in the stock of invested assets specified above, according to its composition:

Between closing dates December 31, 2004 and December 31, 2005 the stock of current assets of the Company decreased by 727.7 MHUF. Changes of the balance-components of closing stocks of current assets are as follows:

Apart from the cash the share of both credit balance and stocks increased in the accounting period.

Compared to the opening stock the closing stock of cash decreased by 87%. Regarding the stocks the stock of materials (- 153.8 MHUF), unfinished production and products (-73.8 MHUF) decreased, but the closing value of goods increased to more than twice as much as the opening value of the accounting period. This change is basically caused by the increase (325.5 MHUF) of the stock of the non-invoiced mediated services related to long term contracts.

The closing stock of credit balances increased by 4.1% as a consequence of increase of stock of claims against consumers and connected enterprises (total 6%), while the value of claims against employees and tax offices decreased.

The closing stock of inventories of the Company increased in the accounting period by 88,9 MHUF. The changes in closing stock of inventories are shown in the following figure:

Development of composition of resources

Between closings on December 31. 2004 and on December 31, 2005 the following changes occurred in resources of Ovit Rt.:

In the accounting period - except other factors - change of the share of all stocks of resources can be observed.

In comparison to previous year the stock of own capital increased only by 0.8 MHUF, since the result - except this amount - was disbursed as dividend.

At the end of the year the stock of all liabilities of the Company decreased by 8.9% (in absolute value 532.9 MHUF). Out of this the closing stock of long term - paid in framework of financial leasing - longer than one-year liabilities is by 52.1 MHUF lower than in the basic year 2004.

In the accounting period the stock of short term liabilities decreased significantly, by 480,8 MHUF. In this the changes of stocks of liabilities in relation to the deliverers (-342.3 MHUF) and related enterprises (-282.6 MHUF) were the most significant.

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

At the end of 2005 the value of liquid and mobilizable assets exceeded the value of liabilities furthermore.

Cash management

In the accounting period Ovit Rt. fulfilled the significant underlying principle determined in the business policy of year 2005: it ensured the continuous financing of the operation, the liquidity was continuously safeguarded, and the deliverers were paid on schedule.

The revenues realised from financial point of view in the accounting period exceeded the expenses by 2.154,7 MHUF that is treble of the same value for the previous year. The reason for this is that MVM Rt. settled the bills related to our performances in year 2005 already in December. The increase of incomes was 3.6% but the expenses decreased by 1.2% compared to the previous year. The biggest difference between the volumes of income and expenses occurred in December in positive sense but in January in negative sense.

The revenues exceeded the expenses only in months July, November and December. Their distribution in time is shown by the following graph:

The following graph shows the cash flow and its composition for the past three years:

Profitability

The business plan of Ovit Rt. for year 2005 determined a pre-tax profit 370 MHUF as an objective set by the owner. Ovit Rt. met this requirement by realising 372.6 MHUF pre-tax profit.

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

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

Human resource management

Staff and payroll management

By considering the expectation of the owner the number of the employees participating in the activity of the organisation developed according to the human resource needs necessary to the implementation of tasks.

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 2005 the largest difference between hirings and leavings occurred at skilled worker qualification (-12 persons), the smallest difference is at higher education qualification. The biggest fluctuation occurred at employees with secondary education qualification (97 persons).

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

According to the agreement with sectoral and local business federations and with the permission of the owner the increase of average earnings projected on the corrected mean basis wage adopted by the General Assembly (2.545.066 HUF/person/year) was 7 %.

Welfare and social provisions

The chapter for welfare and social provisions of business plan of the Company for year 2005 was compiled according to the medium level wage, social and welfare agreement concluded with the local business federations.

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

Integrated System

The leadership of the Company and the units of divisions combined the implementation of the tasks of year 2005 with the efficient operation of the Integrated System. With the knowledge of set objectives concerning quality, environmental protection and MEB, during the implementation of these objectives the employees taking part in the processes felt their responsibility concerning quality, environmental protection and MEB aspects and with their simultaneous handling directly, how far they can contribute to the results of the Company. During the development of the Integrated System the modifications of the new standard MSZ EN ISO 14001:2005 on environment-centred control were built in into the controlled processes and in the related documents.

The results of recertifying audit due in every 3 years, carried out by the teams of ÉMI-TÜV Bayern Kft. in December 12-16, 2005 proved that the Integrated System operates efficiently and corresponds to standards ISO 9001, ISO 14001 and to OMSAS requirements. The Certificates were extended for another 3 years.

The qualifying audit of Paksi Atomerőmű Rt. was successful, like the annual accreditation qualification processes carried out by NAT at Chemical Laboratory of KSZÜ, in the Termovision Laboratory, and at Metrology Branch in Göd.

Environment protection

Also in year 2005 Ovit Rt. ran the Environment-Centred Control System based on MSZ EN ISO 14001 standard as part of the Integrated System successfully.

The operation of Basic Grid and the construction of its facilities, therefore the Basic Grid and its environment are connected closely. That is why we find the close co-operation developed with the Directorates of National Parks on the basis of trilateral agreements concluded earlier very important. 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 Rt. 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 grounds" 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 year 2005 this activity was finished in all substations but the Albertirsa substation. In this way the pollution of environment, soil, water, groundwater caused by oil dripping and leakage was stopped.

At Albertirsa substation where transformers are still operating with open pebble bed the soil and groundwater pollution was stopped by using tray systems. The tray systems reduce the oil pollution which can be decreased to about 10%.

In order to detect the possible pollution of groundwater monitoring systems are operated at 12 substations of the Basic Grid with altogether 76 monitoring sites. Sampling occurs in time intervals according to the prescription of the competent Environment Authority, and we had the total hydrocarbon content of the samples analyzed in an 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 year 2005, 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.