Annual report 2003

Report of the Board of Directors

The business policy of Ovit ZRt. for year 2003 was adopted by the General Assembly of the Company in its resolution No. 6/2003.(IV.7) with the following requirements:

• The Company should completely meet the requirements included in the Basic Grid Operation Agreement with MVM Rt (Hungarian Power Companies Ltd.). With efficient utilisation of the available resources and with severe economy in expenditure it should be ensured that the availability of the Basic Grid does not decrease.
• With adequate market activity the Directorate for Construction should keep its position in the field of work on the grid. To fulfil the requirement of the diversifying of activities it should strive for acquisition of new market segments. The orders of MVM Rt. should be executed by keeping the price level with respecting the deadlines and increasing the quality.
• Besides the objectives set in items 1) and 2) the Company should make efforts to reduce the indirect expenses and it should ensure that the pre-tax profit of the Company exceeds 250 MHUF.
• In year 2003 the corrected yearly basis-average earning of the Company was 2.140.079 HUF/man-year. According to the medium level wage-agreement the Company can realise 4,5 % increase of real income.

The results of the activities of Ovit ZRt. in year 2003 show complete fulfilment of the requirements. Ovit ZRt. safeguarded its economic position, financial stability and improved its profitability.

2003 was the twelfth year of the operation of Ovit as a joint stock company. Also in 2003 the Company regarded the fulfilment of the needs of customers as its primary task. The 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 was carried out with availability of fixed resources and with effective 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. Contracts with MVM Rt., with the largest client of the Company also in 2003, provided 69% of the revenue; the share of distributing companies and power plants increased to 17%, while 14% realised in co-operation with other consumers belonging to electricity industry.

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 Company succeeded in maintaining or improving its supply with resources.

The financing of Ovit ZRt. in year 2003 brought much greater financial burdens than in the previous year, while unexpected and unpredictable phenomena appeared in money-market. The undisturbed financing of the operation could be ensured only by use of larger magnitude and longer-term loans, but their extent remained in a safely manageable level. As a consequence of large magnitude credit stock in the second half of the year, which proved to be long-lasting, the financial result in the last quarter of year became negative.

In 2003 Ovit ZRt. in conformity with the aims and objectives of the Company, operated the quality control systems meeting the requirements of the new ISO 9001:2000 standard as well as the Environment-Centred Control System meeting the requirements of ISO 14001:1997 standard successfully, that were built up and accredited as Integrated Management System. The external and internal audits performed in the accounting period were successful. Out of these audits the following should be emphasised: supervisory audit carried out by ÉMI-TÜV Bayern Kft, the certifying audit carried out by the Nuclear Power Plant Paks and the qualifying accreditation procedure at the Chemical Laboratory of Central Auxiliary Services Plant resulting in extension of Accreditation Document for further 3 years.

In the course of the management in 2003 Ovit ZRt. fulfilled the objectives and met the requirements. This provides a solid basis for meeting the future needs of its consumers and the expectations of its owners.

Shareholders of Ovit ZRt.

There was no change in the ownership structure of the Company in 2003 as compared to the previous year.

Officials of Ovit ZRt. (December 31. 2003.)

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:

Ms. 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 2003

The production value of the Company in 2003, its own performance, totalled up to 14.800 Million HUF, the composition of significant contributions is given in the following table:

The effect of increase of sales revenue influencing the production value significantly, on the change of composition of activities 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 Basic Grid Operation Agreement concluded for an indefinite time by MVM Rt. and Ovit ZRt. and brought up-to-date every year. The annual inclusive operation rate for year 2003 determined in the Agreement was 3650 MHUF. In accounting period the sales revenue of this branch was 3679.3 MHUF, which included beyond the inclusive rate fixed in the Agreement also 29,3 MHUF amount covering the costs of surplus breakdowns according to the Agreement.

Considering the requirements formulated and adapted by the General Assembly of the Company as codicil of the business policy the annual allocation of expenditure was the following:

The operation cost exceeded the allocation of MVM Rt. by 1,8%, the difference was covered by Ovit ZRt.

In year 2003 the following changes took place in the management tasks of operation:

Among tasks recorded as removal of breakdown - disregarding the breakdowns caused not directly by technological facilities - more than 50% were represented by those interventions in which the effective breakdown of facilities could be prevented by repairing defects recognised during inspection of substations and power lines or with diagnostics.

Statistics of breakdowns

The comparative data of the breakdowns can be seen in the following table:

The number of breakdowns to be reported immediately decreased significantly in comparison to the high number (61) in 2001, but there is only a slight change with respect to basic year. The number of breakdowns to be reported increased in 2003, so it exceeded the respective figure of 2002. The energy loss to consumers, which is not significant in total, increased because of the rise of the number of breakdowns to be reported. 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 owner.

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, 2003 are 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 82,4 % of the total revenue of the Company, the structural composition according to branches of business is shown in the following figure:

In 2003 the share of both technological mounting and power line construction increased, and the sales revenue increased to many times of that belonging to basic year. The most significant projects of this activity were:

• 400 kV extension and primary mounting of Békéscsaba substation
• construction of protection-automation and control systems necessary to 400 kV
• secondary reconstruction of Sajószöged 400/240/120 kV substation
• Realisation of 120 kV connection between Kispest Power Station and Kőbánya 120/10 kV substation
• Building of Pécs 400/120 kV substation
• Reconstruction of heavy current electrical equipment of Oroszlány Power Plant Rt.
• Establishment of Göd 120 kV substation
• Substructure building and construction-mounting labour on Paks - Pécs dual-system 400 kV power line
• Construction-mounting of 400 kV single-system power line Sándorfalva- Békéscsaba
• establishment of 120 kV dual-system aerial line Szigetvár - Barcs.

These constructions reached 52,5% of the sales revenue realised with technological mounting, and 81% of that of power line mounting, The sales revenue realised in power line mounting and other services is by 8,8 % smaller than that of previous year, while the total sales revenue of industrial and building investment, transport and other activities exceeded that of previous year by 15,9%.

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 previous year only slightly. The revenue resulted from the order MVM Rt increased 71,9 %, its share is 62.5%. The revenue from segment of other consumers of the industry sector doubled in 2003. Within this the share of distributing companies increased, while the share of power plants decreased. The revenue resulted from orders of other customers from outside the industrial sector increased by 59,5%, but considering its share it decreased by 1,8%.

In 2003 both the sales revenue of previous year and that of planned for the accounting period were overfulfilled. The contracted order-book increased during the year month by month. Disregarding few exceptions the Company succeeded in winning the tenders for projects included by the plan. The number of projects was significant, where the sales revenue surpassed that of predicted in the plan. We competed for several projects announced after the preparation of the plan successfully. Despite the decrease of share for each customer group, the market position of the Company strengthened in the field of power plants.

Investments of MVM Rt.

Renewal and maintenance for MVM Rt.

Orders from distributing companies

Orders from power plant companies

Other orders

The projects listed above amounted to 69% of the sales revenue besides operation revenue, the orders between 50 MHUF and 100 MHUF represented further 15,1% share.

Financial situation

Development of assets

The value of Ovit ZRt.''s total assets increased December 31. 2002. and December 31. 2003. by 46,7 %. 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 more than one year - according to its components are shown by the next figure:

The stock of invested financial assets and intangible assets decreased by 10,7% and 25,7%, respectively compared to the previous year, while the stock of material assets increased in total 8,4%. In this item the stock of real estates increased by 3,9%, the stock of other devices, equipment, vehicles by 56,9%, the reason for which is mainly the procuring of requisites in frame of financial leasing-contracts during the year. The stock of technical facilities, machines, vehicles decreased by 5,2%. The closing value of unfinished investment and advances for investments is by 4% smaller than that of basis year.

In December 31. 2003. the current assets of the Company is 3.437,8 MHUF higher than that of previous annual settlement. 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

The changes in resources of Ovit ZRt. during last year can be seen below:

After payment of divident the own resources increased by 3.3% as consequence of profitable operation of the company.

The four phase liquidity balance systematising the assets and liabilities of the Company as regards mobilizability is shown in the following graph:

The liquid, mobile and mobilizable assets of Ovit ZRt. - similarly to the situation in year 2002 - exceed the similar values of liabilities, therefore from the point of view of liquidity the position of the Company can be regarded as stable.

Cash management

In cash management of Ovit ZRt. the jam of realisation of sales revenue to the last quarter, moreover to the last month of the year had in 2003 stronger effect than in year 2002. So the fulfilment of one of the continuously operative requirements defined in the business policy of the Company: ensuring the continuous financing of the operation and establishment and keeping the liquidity required increased efforts in control of financial processes, and it was possible only with the help of significant outside resources.

The revenues and the expenses realised from financial point of view in the accounting period were higher by 35,8% and 32,6%, respectively, than last year. Although the total income exceeds the total expenses, the monthly data show seasonal fluctuations. In greater part of the year (except in April, November and December) the expenditures surpassed the revenues.

The change of revenues and expenses during the year is shown in the following graph:

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

Profitability

In the business plan of Ovit ZRt. for year 2003 the owners expected a pre-tax profit exceeding 250 MHUF. Ovit ZRt. overfulfilled this requirement by 44,4%.

The graph of the main components of the pre-tax profit is the following:

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

In year 2003 the pre-tax revenue of the Company was 361,1 MHUF, the Company tax was 37.8 MHUF.

Human resource management

Staff and payroll management

In the year 2003 the staff and payroll management of Ovit ZRt. was determined by labour requirements of the activities of Company, its financial possibilities and the expectations of the owners. The development of staff can be seen in the following table:

The breakdown of fluctuation according to qualification is the following:

Since the number of hired staff with higher education or secondary education qualification exceeded that of leaving staff of the same qualification, while the situation in case of skilled workers and workers without qualification was reversed, the level of qualification of the Company increased in year 2003.

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

According to the agreement with the business federations the planned increase of mean basic wage projected on the corrected mean basis wage (2.140.079 HUF/person/year) was 9%, along with the objective of 4,5% increase of real income. The Company kept the permitted 9% increase of mean wage.

Welfare and social provisions

The 2003 year plan of the Company for welfare and social provisions was determined according to the principles and quantities determined in the actual middle level wage and social agreement of electric energy industry and in agreement concluded with the corporate federation at the Company.

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

Quality and Environment-Centred Control System

In 2003, the leadership and units of the Company united the fulfilment of tasks with the efficient operation of the integrated quality and environment control system. The processes of quality and environmental control were built in into the work of all units considered, and the measures defined during the year were built in the controlled processes. Knowing the quality and environmental objectives, the participating employees felt their own contribution to the achievements directly during their implementation. The joining of environmental and quality control components and their integration during the implementation of tasks increased the sense of responsibility of leaders and staff.

The efficient operation of integrated management system was supported by the certifying audit carried out by the Nuclear Power Plant Paks, according to which the Quality Management system of Ovit ZRt. corresponds to ABOS requirements, furthermore the qualifying accreditation procedure at the Chemical Laboratory of Central Auxiliary Services Plant, carried out by NAT resulting in extension of Accreditation Document for further 3 years.

The continuous operation of integrated quality and environment management system was justified by the results of supervisory audits carried out between 24-27 November 2003 by the team of ÉMI-TÜV Bayern Kft, where the auditors stated that the management system meets the requirements of ISO 9001and ISO 14001standards, and the system operates according to the expectations.

Environment protection

In 2003 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, which was justified by a successful audit.

Both the operation of basic grid and the construction of the facilities of the basic grid, so the basic grid and its environment are connected closely. Consequently 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 try to reconcile the demands when operating or developing the power line sections of basic grid, situated on the territory of National Parks.

On the basis of Basic Grid Operation Agreement Ovit ZRt. operates the substations and 4200 km long basic grid power line 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 of basic grid in 2003 we continued the alteration of open pebble bed to that of closed system meeting not only the fire protection rules but also the environment protection requirements. The pollution of environment, soil, water, groundwater caused by dropping 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 at 10 substations of basic grid with 45 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 2003, according to the environmental protection policy of the Company, both in the operation and in construction activities the environmental aspects were respected prominently, that were expected and enforced also in our co-operations and links.