Annual report 2006

Annual Report of the Board of Directors for the 2006 Business Year

The General Meeting of Ovit ZRt. held on 5 April 2006 adopted the Company’s 2006 business policy by its Resolution No. 6/2006 (IV.5.) with the following supplements and requirements:

The results of the activities of Ovit ZRt. in 2006 reflect that all expectations have been duly met. The Company has preserved its business management position and financial stability and has improved its profitability.

2006 began with organizational restructuring in the Company’s history. Restructuring was launched, for the purposes of compliance with the provisions of Directive (EC) 2003/54 of 26 June 2003, by Government Decree 1070/2005. (VII. 8.) in which it designated MAVIR Magyar Villamosenergia-ipari Rendszerirányító Részvénytársaság (MAVIR Hungarian Transmission System Operator Company Ltd.) as Integrated Transmission System Operator (TSO). MAVIR commenced its operation as an Integrated Transmission System Operator (TSO) on 1 January 2006. Simultaneously with establishment of TSO, the Division for Network Operation of Ovit (National Power Line Company Inc.), the operator of the Transmission Network, integrated into MAVIR Rt. based on the resolutions of the General Meeting, in conjunction with the Division for Transmission Network of MVM Rt. This measure caused also the change of the key customer who ordered transmission network projects, improvements and maintenance works and, accordingly, the dominant role of MAVIR Zrt. amongst customers was prevailing in 2006 and the value of contracts concluded with that customer made 65.5% of the sales revenue.

The remaining 34.5% of net sales revenue is distributed among the following major customers: 2.7% was realized through contracts with MVM Zrt., 4.5% from the Paks Nuclear Power Plant, 9.5% from supply and power companies, and 17.8% from other customers.

The 2006 pre-tax profit of Ovit was HUF 306.9 million, which exceeded the planned figure of HUF 235 million by 30.6% so shareholders’ expectations have been achieved in full. The contractual requirements defined by customers have been met by the Company successfully in terms of technical specification, deadlines and quality alike. It is a favourable trend in business management that several contracts concluded in 2006 include works to be continued in the year following the reporting period.

Ovit takes a specific and special place among the MVM Group companies since the consideration of its activity is not accounted as per pre-defined tariffs but it is realized as sales revenue received from works acquired and implemented in the relevant year, as a rule, under competitive circumstances. The Company operates as a profit-oriented entity and so contributes to group-level efficiency improvement by enhancing profitability. Therefore, the Company’s efficiency enhancement program implies efficiency as profitability and it is measured by a profitability index calculated as quotient of Pre-tax profit/Personnel expenses and it envisages that index to reach 5% compared to the reference value in each year. Ovit has fully achieved the envisaged goal in 2006, the first year of measurement.

The Company contributed to execution of the measures intended for implementing the MVM Medium-term Strategy through elaboration of and consultation upon the introduction processes prior to 1 May 2006 and through serving already “existing” administration services provided commonly.

The Company’s investment activities consisted in making the equipment required for operation tasks available. The Company’s resource adequacy has improved through improvements implemented as replacement improvements, in particular in respect of modernization of activity-specific machinery and equipment, and worn-out equipment is replaced continuously, by implementingthe approved strategic campaigns.

The full-time wage bill of HUF 2,829 million defined in the business policy adopted with supplements and the personnel expenses of HUF 4,940 million have been corrected in consultation with MVM Zrt. as a result of the branch extension programs carried out by the Company in 2006 (operation of MOL electrical plant in Százhalombatta; operation of MVM telecommunications network; machining, electrical and control engineering maintenance activities serving the Paks Nuclear Power Plant) and the changes in personnel headcount involved. Ovit has realized cost savings both in respect of full-time wagesand personnel expenses compared to corrected figures.

Financing of the Company’s 2006 operation involved such cash management tasks which surpassed those in the previous year. Both the term and volume of short-term loans raised exceeded the term and volume of those raised in previous years and the proposed level. Loans outstanding remained at a safely manageable level, however, their effect was perceivable in unfavourablefinancial results.

In the reporting period development of the Integrated System continued. The success and results of supervision audits conducted by ÉMI-TÜV Bayern Kft. between 11-24 December 2006 proved that the Company’s IR system operated in compliance with the requirements of ISO 9001, 14001 and OHSAS standards. TÜV audit teams evaluated positively that operation of the management (IS) systems was ensured throughout the Company’s overall organizational restructuringand personnel changes, which have been entered in the documentation system.

Ovit ZRt. has achieved the objectives as well as the requirements to be met by it during its 2006 business management, which might lay the foundation of the Company’s ability to comply with customers’ demands and shareholders’expectations.

Shareholders of Ovit ZRt (31 December 2006)

In 2006 there was no change in the Company’s shareholders structure compared to the previous year.

Executives of Ovit ZRt (31 December 2006)

The Company’s activity in 2006

Through its sales activity, the Company realized net sales revenues of HUF 27,430.9 million which exceeded the previous year’s figure by 7.1%. The following diagram shows distribution of net sales revenues by activities as follows:

In 2006 the most significant increase in the absolute value of sales revenues occurred in the field of services, technological mounting as well as manufacture and sale of finished products and those from network mounting fell 27.9% compared to the previous year. The proportion of services, sale of finished products, and other activities within company-level sales revenues all demonstrate an increase while the proportion of sales revenues from network mounting and technological mounting diminished.

The production value of our Company was up 7.4% to HUF 17,468million compared to the 2005 value as shown in the following table:

Figures in million HUF

As concerns its components, the growth rate of the sales revenue(7.1%) exceeded the rate of change of other determining factors (6.4%).

The following diagram shows distribution of the own performance figure by activities:

The following diagram shows distribution of company-level sales revenues realized in the reporting period by customers:

73.3% of our net sales arise from the activities of the MVM Group member companies.

The dominant role of MAVIR ZRt. is prevailing (65.5%) as of 1 January 2006, through TSO restructuring, amongst our customers. The sales revenues arising from activities sold on the supply and power market increased at a nearly equal rate (+60.2%, + 62.4%) and orders beyond the branch show a substantial increase both in respect of share and amount. In the reporting period the most considerable customer of the supply field (25%) was E.ON Dél-dunántúli Áramszolgáltató Zrt. (E.ON South-Danubian Power Supply Plc) and in the power field the highest share (90.3%) is represented by Paksi Atomerőmű Zrt (Paks Nuclear Power Plant Plc).

In 2006 75.9% of our sales revenues arose from performance or partial performanceof the following works yielding sales revenues of HUF 100 million or more:

Orders of MAVIR ZRt

Orders of MAVIR ZRt

Orders of MVM Zrt

Orders of power companies

Orders of supply companies

Other orders

Property status

Assets

The 2006 balance-sheet total of our Company was HUF 19,502.1 million, which exceeded 73.3% the previous year’s closing balance. This increase was attributable to the change in trade debtors recognized among current assets, including, in particular, receivables from subsidiary undertakings coming to HUF 6.6 billion.

Distribution of the main balance-sheet items of assets is shown in the followingcolumn diagrams:

A change of adverse direction can be observed in individual main groups of the balance-sheet (Fixed assets, Current assets) compared to the reference year. Current assets have increased more than 2.3 times and a 12.4% decrease can be observed in Fixed assets, mostly as a result of TSO restructuring. The closing value of Prepayments and accrued income grew near 3.3 times and HUF 59.1 million in absolute value compared to the 2005 year value.

The following diagrams reflect the changes in the composition of Fixed assets:

In 2005 and 2006 the greatest change in percentage occurred in Intangible assets. As a result of sales due to restructuring, their closing balance was 43.3% lower than on 31 December 2005 in the aggregate.

In the reporting period Tangible assets dropped 11.6% in the aggregate.
As a whole, the closing balance of Real estates was 20.5% lower than the opening balance, attributable first of all – in association with the TSO restructuring – to the sale of the areas beside substations as well as plant buildings and sites of line inspectorates in a net total value of HUF 508.5 million.
Other equipment, fittings and vehicles decreased by 17.1% also as a result of substantial asset sales.
However, the closing balance of Technical equipment, machinery and vehicles reflects a 0.7% increase.

In comparison with the opening figure, the closing value of Construction in progress was HUF 40.4 million higher, showing a 2.2 times increase.

Financial investments have decreased by 11.3% by 31 December 2006, basically as a result of decrease in receivables from sale of residential units.

As a whole, the Current assets of our Company exceed the similar figure of the reference period by HUF 8,776.8 million.

Cash and cash equivalents were 21.8% higher compared to the opening figure in the beginning of the year.

The greatest change (2.3 times increase) occurred in Receivables in association with various supply, contracting, service providing and other contractual relationships, as a result of the near 2.6 times increase in Trade debtors and Receivables from the member companies of the MVM Group due to year-end invoicing.

The closing balance of Inventories necessary for manufacturing processes was 79.4% higher than a year before, as a result of the carry-over effect of our considerable contracts. As a whole, the closing figure of Work in progress and semi-finished products increased by HUF 678.7 million while the aggregate of Materials and Goods grew HUF 516.7 million by the end of the reporting period.

The following diagram shows the changes in Current assets:

The 2006 closing value of Inventories exceeded the opening value by HUF 1,193.1 million in a breakdown shown in the following diagram:

Composition of Liabilities and stockholders’ equity

In the reference period between 31 December 2005 and 31 December 2006, the following changes occurred in our Company’s Liabilities and stockholders’ equity:

With the exception of Accruals and deferred income, in 2006 a considerable change occurred in the share of all items of Liabilities and shareholders’ equity compared to the reference period.

By the end of the year, our Total liabilities grew some 2.5 times (by HUF 8,158.9 million in absolute value), of which Short-term liabilities showed an increase of HUF 8,188.1 million. Long-term liabilities – payable on financial leasing payable over one year – fell by HUF 29.2 million.

The closing balance of Stockholders’ equity has not changed due to distribution of dividends.

According to qualification of the mobility of assets and due dates of liabilities, the following four-stage liquidity balance can be compiled:

In this reporting period the value of Liquid and Mobilizable assets exceeded that of Liabilities. However, Mobile assets were lower than Short-term liabilities, which is attributable mostly to the short-term loans outstanding also as at 31 December 2006 due to the fact that technical performance could be invoiced only in the last months of the year.

Cash management

The 2006 cash management of our Company allowed to finance its operation continuously and to maintain its liquidity in compliance with the requirements conceived in its business policy as a basic principle.

The following diagram shows the temporal change of revenues and expenses during the year:

In the reporting period revenues exceeded expenses in March, April, October and November. Notwithstanding that expenses grew by 0.2% only compared to the previous year, revenues paid actually dropped by 30.3% compared to the previous year’s figure because a considerable share of the sales revenue invoiced in December was paid effectively only in January-February 2007. The largest positive and negative difference between the values of revenues and expenses was shown in October and January, respectively.

On 31 December 2006 our cash flow exceeded that in 2005 by HUF 33 million.
The following diagram illustrates the cash flow of our Company in relation to the last three years:

Profitability

In 2006 our Pre-tax profit was HUF 306.9 million and so it over-fulfilled shareholders’ expectations by 30.6%.

The following diagram shows the main components of Pre-tax profit:

The following diagram shows distribution of costs of production arisen during 2006 by cost types in comparison to the previous year:

In the reporting period costs of production grew 11.3% compared to the previous year in association with growth of production volume. The most substantial growth was in Cost of materials (57.2%) the proportion of which within Total costs has increased considerably. Nevertheless, Personnel expenses and Cost of material-type services consumed have fallen due to organizational changes on the one hand and the consequent staff reduction on the other.

Human policy activity

Headcount and wage management

The headcount of the staff who participates in our Company’s activity depended on the seasonality of technical activities and their labour time requirement, in addition to the aggregate effect of the organizational changes due to TSO restructuring, branch extension, and the staff taken over from the member companies of the MVM Group.

The following chart shows the details of changes in average headcount:

* corrected due to TSO restructuring

The following diagram shows distribution of fluctuation according to vocational qualification:

When reviewing headcount movements according to qualification, the greatest difference is between the number of entering and leaving employees amongst skilled workers (109) and the smallest difference can be observed amongst employees with other qualification, i.e. those who have completed 8 classes of primary school or a basic level vocational training course. The greatest headcount movement occurred also amongst employees with skilled worker’s qualification (227).

As concerns headcount changes according to age, the greatest difference can be observed amongst employees between 30 and 50 (112). As regards employees under 30 and above 50, fluctuation is 12-13%. In the reporting period employment of 32 employees ceased due to retirement. On 31 December 2006 the average age of those who participated in the Company’s activity was 42.8 years.

Similarly to the member companies of the MVM Group, our Company has also become subject to wage bill regulation since 1 January 2006. In addition to the wage bill, including full-time personnel wages, the annual amount of personnel expenses was determined by the General Meeting. Pursuant to the agreement with the local representative organizations, the proposed rate of basic wage increase was 6%.

Welfare and social benefits

In the reporting period the scheme and rates of welfare and social benefits to be granted to employees were established in accordance with the trade association of the Company.

The change of welfare and social benefits of 2006 compared to the previous year is reflected in the following diagram:

Integrated System

Under continuous operation of the Integrated System, the three-level system documents were revised in accordance with the organizational change in our Company introduced as of 1 January 2006 and then the new Rules of Organization and Operation effective as of 1 July 2006. The annual Internal Audit plan and the extraordinary internal audits following introduction of the new regulations demonstrated efficient operation of the IS. The quality-environmental OHSAS (Occupational Health and Safety Management System) objectives set in the beginning of the year have been achieved on the level of organizational units and the commitment of employees to QEM-EMS-OHSAS requirements and their common responsibility have further enhanced.

The success and results of supervision audits conducted by ÉMI-TÜV Bayern Kft. between 11-24 December 2006 proved that the Company’s IR system operated in compliance with the requirements of ISO 9001, 14001 and OHSAS standards. TÜV audit teams evaluated positively that operation of the management (IS) systems was ensured throughout the Company’s overall organizational restructuring and personnel changes, which have been entered in the documentation system.

The Company’s customer audits, in particular the audit conducted on 7 November 2006 for supervising compliance with nuclear safety by Paksi Atomerőmű Zrt. – OAH NBI and the customer audit conduced by ABB on 22 December 2006, were closed with positive results.

During the year it was demonstrated also on the annual review held by the Chemical, Thermovisional and Electrical Accredited Laboratories of the Central Special Services that the quality management system of the laboratories complied with the requirements of MSZ EN ISO/IEC 17025 Standard and operated effectively.

Environmental protection

Ovit ZRt. operated its Environmental Management System (EMS) – included in the Integrated System – based on the requirements of MSZ EN ISO 14001 Standard successfully in 2006 as well.

The Company determined its environmental objectives and targets in the course of processes involving environmental aspects considered as imposing significant impacts taking account of the requirements stipulated in law, financial opportunities, market conditions, possible technical solutions, and operation requirements, at each level and in each area concerned and in accordance with the demands of the parties concerned. The objectives and targets could be achieved and implemented through Environmental Programs elaborated in detail and implemented properly and laying down also the related activities and responsibilities.

Our Company lays a special emphasis on environmental laws and other requirements. Accordingly, our most important tasks include to register and monitor the environmental laws and regulations and other requirements concerning our Company’s activities, to become acquainted with relevant laws and requirements, to evaluate fulfilment of the resultant tasks, and to comply with related specifications and requirements.

In 2004, according to its statutory obligation, Ovit prepared its individual 6-year Company Waste Management Plan which included its waste management activities laid down in plans and in which the waste management plans of individual sites were indicated in independent sections. The Plan has been duly revised as stipulated in every two years and, if appropriate, corrected according to such revision. The 2-year summary evaluation had been submitted until 1 March 2006 to the Körös-vidéki Environmental, Nature Conservation and Water Management Inspectorate whose approval issued subsequent assessment was received by us.

We perform our activities inspired by our responsibility for the environment and bearing always the importance and economic and social significance of sustainable development in mind. During our work we handle the aspects of protection of the environment as a prominent issue and endeavour to enforce it also in our business relations. Accordingly, it can be stated that we gave prominent importance to and enforced environmental aspects in our fields of activities both in operation and establishment processes in accordance with the provisions of our environmental policy and required also our partners to do so also in 2006.

Evaluation of the environmental conditions and the environmental situation in 2006:

• There were no minor or gross environmental events, damages or emergencies.
• There were no official conviction.
• The Company continues to pursue its activities in accordance with the provisions of environmental laws and other requirements and, accordingly, no fine has been imposed on or no litigation has been brought against it.

In compliance with our environmental commitment, our undertakings fully observe the environmental demands of our customers and ensure, by prudent measures, to avoid to cause any adverse impact on or damage to the environment during their works.

In our contracts with our contributing subcontractors/suppliers we lay down our demands for environmental protection and require them to enforce the same during their activity always bearing protection of the environment in mind and to carry out proper management of generating industrial and dangerous wastes.

As of 1 January 2006, the organizational units pursuing operation activities were transferred from the field of activity consisting of operation, maintenance and installation of transmission network lines and substations to MAVIR ZRt. Accordingly, the Company’s environmental activities have also been altered. We continue to consider important to maintain close relations with the National Park Directorates based on the provisions of contracts for construction works, with the view to take environmental and nature conservation aspects fully into consideration and to coordinate demands when pursuing activities in the territory of National Park Directorates.

During our transmission line construction and mounting activities, natural habitats and agricultural areas might become damaged from time to time (deforestation, green damage), so such areas would be restored by recultivation and the timber cut at establishment would be compensated after creating forest clearings in accordance with the local resolution of the forestry authority, to be implemented in the form of payment of forest maintenance contribution or (as the case may be) by forest plantation.