g GE Oil & Gas Business Report and Financial Statement Nuovo Pignone S.p.A.
December 31, 2005 g
Summary
I Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 ........................................... Introduction ....................................................................................................................... ........................................................................... Economic situation and prospects ........................................................................... Performance by business sector Quality `Lean Six Sigma' ................................................................................................ 3 3 5 6 9 Research and development ........................................................................................ 10 Property, plant and equipment ................................................................................. 14 Intangible assets ............................................................................................................... 14 Employment ......................................................................................................................... 15 Economic and financial performance .................................................................... 15 Reclassified Income Statement .................................................................................. 16 Reclassified Balance Sheet .......................................................................................... 17 Transactions with parent companies and companies in the Nuovo Pignone Group and the General Electric Group ................................... 18 Own shares and shares in parent companies .................................................... 18 Management and coordination ................................................................................. 18 Secondary offices .............................................................................................................. 18 Expected future development ................................................................................... 18 Significant subsequent events and other information ..................................... 20 I Financial Statements of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 ............................................. 21 Balance Sheet ................................................................................................................... 22 Income Statement ........................................................................................................... 24 Notes to the Financial Statements ........................................................................... 25 I Statutory Auditor's Report on the Financial Statements as at and for the year ended December 31, 2005 .......................................... 63 Independent Auditor's Report .................................................................................. 66 Resolutions from the Shareholder's Meeting ........................................................ 67 GE Oil & Gas
Via Felice Matteucci, 2 50127 Florence - Italy Nuovo Pignone S.p.A. Entered in the Florence Register of Companies under No. 04880930484 1 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 BOARD OF DIRECTORS Chairman Piero Salvadori Vice Chairman and Claudi Santiago Managing Director Directors Stefano Ciolli
Pier Luigi Ferrara Stefano Giuliano GENERAL MANAGERS Michael Bellamy
Fernando Bertoni Paul Fama (1) Claudio Materazzi (1) Joseph Mastrangelo Brian Masterson Mohammad Ehteshami Ken Resnick Bernardo Nicoletti Jay Wileman Frederic Ribieras Marco Sguanci STATUTORY AUDITORS Chairman Cosimo Imbrioscia Standing Auditors Angelo Ciavarella
Antonio Angelo Manzoni INDEPENDENT AUDITORS KPMG S.p.A. Substitute Auditors Mario de Togni
Filippo Pasquini (1) In position at the date of approval of the current Annual Report 2 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 To the Shareholders, The Financial Statements for the year ended 31 December 2005 are presented for your examination, together with the business report prepared pursuant to Art. 2428 of the Italian Civil Code. Overall, 2005 was a very satisfactory year for Nuovo Pignone S.p.A., with the achievement of especially significant results in such key sectors as the liquefaction of natural gas and high pressure compression. The internal reorganization that began during the second half of 2004 in order to more effectively respond to market needs, took effect during the year. On 28 June 2005, the Company acquired GE Capital Funding Services S.r.l. from Nuovo Pignone Holding S.p.A., the parent company. The purchase price, 102,000 thousand Euro, was determined through a professional appraisal. The positioning of this investment under the control of an operating company is expected to facilitate the coordination of Financial Statements for consolidation purposes. In this regard, the activities of GE Capital Funding Services S.r.l. are carried out principally with Nuovo Pignone S.p.A.. The Company formed Fondazione Pignone on 29 July 2005, which obtained the legal status on 13 October 2005. The objects of this nonprofit Foundation are to promote, develop and enhance the culture and image of Nuovo Pignone S.p.A.. Its principal focus is to provide specialist and managerial training and education, for young people in particular, in the oil and gas sector where the founder is active. The Chairman Piero Salvadori Vice president & CEO Claudi Santiago 3 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 To this end, the Foundation will organize and administer specialized and refresher courses, master-level classes and other forms of education, award study grants, promote, organize and carry out research projects, and communicate and preserve the business culture and traditions of Nuovo Pignone through the establishment of a historical archive and perhaps even a museum. Fondazione Pignone is a nonprofit organization that, in time, should be able to combine its educational and research activities with the provision of services to third parties. Gradually, without becoming predominant, these services will help to finance part of the Foundation's activities. The ability to generate self-financing will be a key factor both for the recognition and confirmation of the Foundation's mission, and for the growth and expansion of its activities. The Company has subsidiaries but, pursuant to Art. 27.3 of Law 127 (D.Lvo. n°127) dated 9 April 1991, has elected not to prepare consolidated Financial Statements, since these will be prepared by the parent company, Nuovo Pignone Holding S.p.A., and filed in accordance with legal requirements. With regard to the new criteria established by the Authority for the Protection of Personal Data, the Company has carried out all activities needed to update the Security Planning Document prepared pursuant to Decree 196/03. This update was completed prior to 31 December 2005. Qatargas II (yard) 4 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Economic situation and prospects
The world economy grew by almost 4.5 percentage points during 2005. This fast rate of growth, among the highest achieved since the end of the 1980s, is expected to continue throughout 2006 and 2007, albeit at a slightly slower rate. The economies of the United States and Japan expanded by 3.6% and 2.4% respectively, while Latin America grew by 4.5%. On the other hand, the Chinese economy has continued to expand explosively throughout the past two years, with growth in excess of 9%. Growth in the European Union was not as high, averaging about 1.7%. This was slightly lower than in 2004, but better than in 2002-2003. Within the European Union, the economies of the member nations have separated into three distinct groupings, each with markedly different growth rates: 1.4% for the 15 nations member that joined prior to May 2004, 3.7% for the Eastern European nations, and as much as 7.3% for the Baltic Republics. The annual growth for the period 2006-2007 is expected to average about 2%, compared with worldwide expansion of around 4%. The strength of the world economy has resulted in a higher demand for raw materials and oil in particular, with a consequent rise in prices. However, the sharp increase in oil prices casts a shadow over prospects for the expansion of the world economy. The jump in crude prices - Brent averaged $54.99/bbl in 2005, compared with $38.36/bbl in 2004 - represents the greatest uncertainty when considering the chances for sustained growth over the long term. Rotor of MS5002C Gas Turbine 5 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Certain geographical areas that are key to meeting the world's demand for oil (the Middle East, Venezuela, Nigeria, Western Africa) continue to be afflicted by the geo-political instability that helps keep oil prices high. These high prices for oil and natural gas, together with growing demand from the developing nations, have sustained the upward trend experienced by the Oil & Gas Industry within which Nuovo Pignone S.p.A. is one of the leading suppliers of goods and services. In particular, the high price of oil has shifted part of the global demand towards gas, with a consequent increase in prices there too. The average price of natural gas in 2005 was $8.9 per MMBtu, compared with $5.9 in 2004. Given these conditions, investment in the Oil & Gas sector is expected to grow at an average annual rate of 25% per year over the next three years. In addition to the established exporting and production segments, the leading sectors now include the refining of oil and the transportation of gas. Indeed, there is heavy ongoing investment in plants for the liquefaction of gas (LNG), mainly in the Middle East. There is also massive investment in the development and construction of Gas-toLiquids (GTL) plants, which will transform gas into clean fuel oils. This solution will help buyers to break free from the grip of high oil prices, while also strengthening the ability to comply with antipollution regulations. Performance by business sector
The Company completed an internal reorganization in 2005, consolidating the preexisting Upstream, Midstream, and Downstream units into one division, New Units. New Units is accompanied by the Global Services division, which addresses the installation and start-up of machines and provides a wide variety of aftersales services. This reorganization is expected to simplify internal processes and to offer synergies in the areas of project management and commercial operations, all with a view to enhancing customer satisfaction. The New Units Division operates in a number of areas:
I Natural Gas sector This continues to be a key business, where the Company retains significant market share and leadership in high pressure services. The Company Bluestream - Russia/Turkey Gas Pipeline 6 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 won major contracts in China and the Middle East during 2005. The successful testing of the compression train for the Kashagan field in Kazakhstan was an important achievement in the high pressure sector. This re-injection unit reaches the highest operating pressure (820 bar) recorded to date. The extremely sour nature of the gas processed represents a further technological challenge faced by this installation.
I Liquefied Natural Gas and Pipeline sector There was a new peak in orders in the Liquefied Natural Gas (LNG) sector, with an increase of 35% with respect to last year. The steady increase in the demand for natural gas suggests that this segment will remain robust for at least the next five years, and the Company is well placed to maintain world leadership in the supply of turbocompressors. Five major orders for installations in Qatar, Algeria and Yemen were obtained during the year, confirming the fundamental importance of the Middle East as a key area for business development. The successful testing of the first compression train for Qatargas II was an important event in the LNG sector, since this is the world's largest LNG plant. The highest power output for an individual LNG train (92 megawatts) was reached during this trial. In the Pipeline segment, an important order for turbocompressors was obtained for the construction in China of 12 boosting stations along the "WGTE" gas pipeline.
I Refinery, Petrochemicals, and Industrial Power Generation sector The growth in the demand for fuel in 2005 and the consequent major increase in the price of oil have stimulated investment in the Refinery and Petrochemicals sector, where orders have virtually doubled with respect to last year. The regions leading this growth are North America, the Far East, Centrifugal Compressors PCL804 for "WGTE" gas pipeline - China 7 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 especially China, and the Middle East, where a huge order has been obtained as part of the reconstruction of Iraqi petrochemical plants. Looking ahead, considerable attention will be given to GTL (Gas-to-Liquids) as a potential new market in the refining field, to the unconventional reserves represented by Oil Sands, and to reactors, for which a number of large orders are expected in 2006. The Industrial Power Generation sector is currently stable, although developments in this field are expected given the growth in demand for LNG regasification plants. The first MS5002/E unit, a new gas turbine model, will be offered in this sector in 2006. The Global Services division continued to sustain the Company's growth during 2005, with strong orders booked and sales exceeding a record one billion dollars. Long-term activities (contracts for technical assistance and the upgrading of machines) were mainly responsible for these results, while the more traditional sectors (sales of spare parts and field maintenance) are gradually being absorbed by contractual service agreements. Among the most significant contracts of 2005 is an 18-year agreement signed in Trinidad & Tobago at the start of the year for the provision of technical assistance for 4 LNG compression trains (Frame 5Ds and Centrifugal Compressors). Investment by Global Services has continued to focus on the introduction of new technologies for the improvement of machinery and for remote monitoring to forecast the future performance of machinery. In this regard, a new Remote Monitoring & Diagnostic Center has been opened at the Florence plant. As mentioned, in addition to being one of the leading suppliers to the Oil & Gas Industry, the Company via Fondazione Pignone pursues social, cultural and promotional initiatives intended to communicate externally and consolidate the Company's image and culture. The "Oil & Gas University" was inaugurated during 2005. This is a six-month course for employees of companies operating in the Oil & Gas sector, featuring a curriculum that ranges from leadership to technical subjects. This initiative involves leading Oil & Gas experts and will be repeated with the matriculation of a new class in October 2006. With reference to GE Capital Funding Services S.r.l., this subsidiary is dedicated to purchasing the non-Group trade receivables of companies within the General Electric Group. Factoring turnover amounted to 2,042 million Euro, compared with the 1,551 million Euro generated in the prior year (+31.7%), of which 861 million Euro MCL Compressor - Qatargas II project 8 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 were related to the domestic market (707 million Euro in 2004, +21.8%) and 1,181 million Euro were for exports (844 million Euro in 2004, +39.9%). Net factored receivables as of 31 December 2005 amounted to 945 million Euro (658 million Euro at the end of 2004, +44%). The increase in total turnover with respect to the prior year was due both to the introduction of new industrial partners (Jenbacher S.r.l. and Datex Omeda S.r.l.), and to an increase in the volume of business within Nuovo Pignone S.p.A.. This growth is only partially reflected in the operating margin, since there was an increase in the cost of funding in the second half of 2005. There was also an increase in overhead costs due, primarily, to recruiting and the higher cost of services; as a result, the operating margin amounted to 17.8 million Euro compared with 26.4 million Euro in the prior year. Quality- `Lean Six Sigma'
The established "Six Sigma" quality methodology was coupled with the principles of "Lean Management" in 2005, giving birth to a quality program ("Lean Six Sigma") that now represents one of the Company's strategic initiatives. Lean Six Sigma is a managerial strategy of continuous improvement that focuses on product quality and process speed. This program draws on the synergies between the Six Sigma and Lean Production (Lean) methodologies. Six Sigma aims to eliminate defects, breakdowns and quality control problems with regard to both the products and services provided, and in relation to managerial and organizational activities. The Lean methodology contributes to the cutting of waste by optimizing the use of resources and cycle times, and covers all the principal aspects of the production process (redesign of line layout, reduction of set-up time, cost control, plant maintenance, etc.). Applying Lean Six Sigma considerably improves efficiency in each business area, not only in production terms, but also with regard to transaction processing. It creates an awareness within the Company of the importance of a new way of working and of interpreting the concept of continuous improvement. In particular, the synergy between Lean and Six Sigma delivers the following benefits: Pulsing Line of small BCL Centrifugal Compressors 9 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 - flexibility in production and decision-making processes; - improvement in the quality of business operations, and the products and services offered to customers; - major reduction in lead time; - lower production overhead. During 2005, the application of Lean Six Sigma resulted in the creation of "Pulsing Lines", "Fast Set Up" and many other new processes designed to deliver better products, faster. Research and development
As in 2004, during 2005 Nuovo Pignone S.p.A. maintained its commitment to technological innovation with a view to creating added value for customers through the products and services offered to them. In terms of innovation, the Company has benefited from the multitude of technologies available within the various General Electric businesses, which have supported the further consolidation and expansion of its already substantial wealth of knowledge and experience. Research and development activities have expanded, year by year, in terms of both the human and financial resources committed. As in prior years, the Company has continued to work together with firms and universities of recognized technological standing, in many cases as part of programs sponsored by the European Union and National Ministries. The primary objective has been to steadily improve the competitiveness of our products and services and to benefit from all new opportunities available. Nuovo Pignone continues to dedicate special attention to the development of gas turbine Steam Turbine buckets 10 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Axial Compressor AN250 for LNG plants technology. In particular, during 2005: · a program to improve the performance of the GE10-2 turbine was completed to extend the product's competitiveness, and the results of tests of the new power output are in line with expectations; · testing of the "Generator Drive" configuration of the FR5-2E gas turbine successfully confirmed its operability in conditions of partial or full loss of load. This configuration joins the "mechanical drive" version which was introduced into the market last year; · there was continued focus on combustion-related technology, addressing both low emissions (including the ability to handle changes in temperature and load) and fuel flexibility. To this end, tests with inert gases (CO2) and liquid fuels were carried out on the GE10 gas turbine combustor and, after successful studies and testing, approval was given for the market launch of the FR5­2D DLN "extended operability" gas turbine, which guarantees emissions of less than 42 ppm NOx up to 60% of peak load; · design work was also completed on the "HSPT" low pressure unit for the new "G4" gas generator developed and manufactured by GE Aviation. The introduction of this product, planned for the end of 2006, will maintain the Company's competitiveness in the 30 MW range of the market for aero-derivative turbines; · after careful assessment, development work on the new GE15-2 gas turbine was suspended. The new technology introduced suggested that this would be an innovative product of great interest to the market; nevertheless, the difficulties encountered at the detailed design stage caused such widespread delays that it would not have been possible to meet the technical and commercial objectives within a reasonable time frame. The numerous design cycles required, the
11 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 new problems encountered and the difficulties experienced in quantifying the technical risks together compromised the time and costs involved in developing the product. Nuovo Pignone therefore decided to place the project on hold in its current state and to terminate the program financed by the Ministry for Productivity early, while awaiting clarification of possible solutions to the above risks. The work performed to date has nevertheless achieved highly innovative results of great interest for the compressor, the combustion chamber, the high-pressure turbine and the power turbine. The 3rd and final Progress Report was presented to IMI-San Paolo, the program manager, in December. The decision on the final financing will be made by IMI-San Paolo together with the Ministry after evaluation of the results achieved to date. This evaluation will presumably be completed by June 2006. The objective of our research on centrifugal and axial compressors during 2005 focused essentially on performance improvements. The Company invested 70% more in this area compared to last year, and obtained the following major results: · validation of the AN250 axial compressor for LNG plants, with 12% greater capacity than the current AN200 model and about a 1% improvement in efficiency. · completion of the preliminary designs for the hybrid axial-centrifugal compressor for GTL (Gasto-Liquids) plants with a capacity of 3600 t/d of O2. In particular, the performance of the axial section of the compressor, which is identical to the booster for the LMS100 aero-derivative turbine (developed by GE Aviation), was verified during the load trials carried out during the year; · numerous families of centrifugal compressor stages have been validated for improved performance. Over 20 tests were completed on new impellers during 2005, with 70 trial sessions generating more than 130 performance curves that have improved the Company's predictive capabilities and ability to select the compression stages for machines to be supplied under contract; · continuation of the work to set up a high pressure test bench (500 bar) for measuring the dynamic behavior of the intermediate seals of compressors. Numerous studies and research were performed to improve the reliability of gas seals and to introduce new abradable impeller eye seals, whose behavior will be analyzed through model testing in 2006. With support from the GE Global Research Center, studies were performed in 2005 for the development of variable speed electric motors. The LNG market is especially interested in motors of more than 30 MW that can be coupled directly to the compressor train. A management and control Turbocompression trains for gas injection plant in Kashagan, Kazakhstan - tests running at Massa plant 12 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Green Stream pipeline - Mellitah, Algeria system for such motors has been developed that minimizes fluctuations in torque, thus eliminating torsion problems. Preliminary design work was also carried out on integrated compressors, focusing on the development of 6-12 MW electric motors with permanent magnet rotors, which will be applicable for undersea pumping systems. Both these research activities will continue with experimental tests performed in 2006. With regard to reciprocating compressors, the improvements made to the API618 product line have increased its power, performance and reliability while retaining the same basic physical structure. A similar program has begun for the high speed models. The Service market has shown special interest in portable diagnostic systems and systems for the monitoring of valve noise for reciprocating compressors. These systems have already been installed on machines currently in use, providing customers with valuable diagnostic tools. Again with regard to the enhancement of so-called "mature" products, progress has been made in the area of repair technologies with the introduction into the Company's service shops of new techniques and processes for the repair of critical components (such as gas turbine blades and nozzles). These technologies expand the services offered to customers throughout the maintenance life cycle of machines that are already in operation. In 2005, new funding of 70 thousand Euro was approved by the Region of Tuscany for a program (DOCUP Ob. 2 years 2000-2006 - Measure 1.8. Action 1.8.1) titled "Assistance for industrial and precompetitive research" for the introduction of numerically controlled anthropomorphic robots and multi-axis manipulation devices for welding operations at our Massa plant. During 2005, numerous proposals for funding were presented to the European Union (HyWays-IPHE, Framework Program 6), to the Ministry for Productivity (proposed project for the "Development of a low-emission burner for 11 MW industrial turbines fueled by natural gas with a high content of inert gases and heavy hydrocarbons"), to the Ministry for Research and Universities (proposed project for "Research, development and demonstration of "zero emission" cycles using hydrogen, coordinated by Enel Produzione S.p.A.), and to the Ministry for the Environment (proposed project for the "Development of "zero emission" cycles using hydrogen"). In addition, Nuovo Pignone S.p.A. has applied for numerous patents covering the research work performed during the year. Total spending on research and development activities of 55.7 million Euro, compared with 45.7 million Euro in 2004, was charged to the income statement for the year.
13 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Property, plant and equipment
Investment during the year was focused on the development of the Company's technologies and on productivity improvements. The major projects were concentrated at the Florence and Massa plants. With regard to Florence, the principal additions were: - three 5-axis machine tools to further expand the capacity of the existing centrifugal compressor impeller production line; - completion of the Bunker for the balancing of large compressor shafts for LNG plants. Additions at Massa: - test facilities for the performance of special trials -FR7 and FR9 string tests for LNG and HP re-injection; - new assembly line for large centrifugal compressors and steam turbines; - test facility for mechanical trials of large centrifugal compressors. Intangible assets
In recent years, the Company has worked on a key program for the renewal and expansion of its IT platforms involving the replacement of the previous IT system with the Oracle Applications ERP (Enterprise Resource Planning) package. This program began in 2003 and comprises two major projects: the first focused on the overhaul of crossfunctional processes (Oracle Shared Services), while the second revises various processes in the production cycle (MRP/BoM, "Manufacturing Resource Planning & Bill of Material Redesign"). The first project, completed in July 2004, involved upgrading the Oracle platform (from version 10.7 to the new version 11i) for the financial modules, the purchasing module and the human resources module, together with a new implementation of the Oracle sales invoicing module which was previously handled by a non-Oracle legacy system. In addition to the process benefits, this first project also prepared the systems architecture for the subsequent MRP/BoM project. The second project (MRP/BoM) was organized in two phases. The first covered the operations of the New Units division and was completed in January 2005, while the second covered the operations of the Global Service division and was completed in February 2006. The New Units portion involved implementation of an integrated solution that underpins the entire production cycle. Achievement of this objective involved a complete overhaul of the division's business processes, from acquisition of the sales order to shipping of the finished product to the end customer, and integrated the Planning/Production modules with the Engineering modules. The verification phase of the MRP/BoM system for New Units was successfully completed in the second half of 2005. Implementation of the Global Service portion of the project extended to phases preceding the order acquisition - especially as regards the short cycle business (spare parts) ­ and management of the databases needed to support the maintenance work carried out on customers' machines (Enterprise Asset Management). The new system became operational in February 2006 and is now in the normal verification phase. This program for the implementation of an integrated IT system is highly strategic and provides fundamental support for the expected growth and development of the Company. LM2500 DLE Dual Fuel gas turbine - Aluheim project, Norway - tests running at Massa plant 14 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Employment
The Company employes level is at 3,747 as of 31 December 2005, and consists of 164 executives, 2,855 managers/clerical staff and 728 blue collar workers. Personnel training activities continued throughout 2005, with a commitment of more than 70,320 man-hours. An agreement was signed with the unions on 4 July 2005 involving the dismissal of 50 redundant workers at the Florence factory. In addition, with agreement with the unions, new flexible employment arrangements have been introduced that go far beyond the previous rules. These major changes apply at all levels, including the executive functions. Economic and financial performance
The financial statements as of 31 December 2005 report a net profit of 177 million Euro compared with 509 million Euro for the year ended 31 December 2004, down 332 million Euro. In this regard, the "Elimination of fiscal interference" in 2004, required when Decree 6 of 17 January 2003 came into force, benefited the results of that year by 345 million Euro net of the related deferred tax. Furthermore, the "Distribution" line of business was sold during 2004 producing a capital gain of 82 million Euro which, net of the adjustment for the goodwill allocated to that business (11 million Euro), contributed extraordinary income for the year of 71 million Euro. Excluding the extraordinary effects of the elimination of fiscal interference and the sale of the "Distribution" business, the results for 2005 reflect an increase of 84 million Euro with respect to 2004. This was essentially due to the marked improvement in operating results, as well as the impact of deferred tax assets of 23 million Euro related to tax losses carried forward by the Company. The gross operating profit of 307 million Euro was 70 million Euro higher than in the prior year. This was essentially due to the notable savings on the purchase of materials and to the improvement in the sales mix of the New Units division. Considering the gross operating profit after exchange losses, the increase with respect to 2004 was still 70 million Euro; the policy of hedging exchange rate risk via "forward" and "option" contracts generated results that were in line with the prior year. Income tax for the year was lower than in 2004 mainly due to the recognition of deferred tax assets of 23 million Euro related to the tax losses carried forward by the Company. Bunker for large compressors' rotors balancing 15 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Reclassified Income Statement 2005
Thousands of Euro % 2004
Thousands of Euro % Operating revenues * Other revenues and income Purchases, services and other costs Payroll and related charges Gross operating profit Depreciation and amortization ** Operating profit Financial income (expense) Exchange gains (losses) Results from ordinary business Extraordinary income (expense) Effect of eliminating fiscal interference Results before taxes Income taxes NET PROFIT (LOSS) FOR THE YEAR 2,437,042 34,547 (1,941,230) (223,001) 307,358 (150,220) 157,139 (12,993) 25,953 170,099 3,277 0 173,376 4,095 177,470 100.0 1.4 -79.7 -9.2 12.6 -6.2 6.4 -0.5 1.1 7.0 0.1 0.0 7.1 0.2 7.3 2,027,638 24,523 (1,617,168) (197,676) 237,316 (149,949) 87,366 (19,624) 25,781 93,524 71,665 344,622 509,810 (1,145) 508,665 100.0 1.2 -79.8 -9.7 11.7 -7.4 4.3 -1.0 1.3 4.6 3.5 17.0 8.1 -0.1 8.1 Qatargas II project - MS9001 Gas Turbine * Operating revenues comprise revenues from sales and services and the change in contract work in progress. ** Depreciation and amortization are stated net of the portion of capital grants received during the reporting period. The financial position reflects a net capital requirement of 1,292 million Euro, which is covered entirely by shareholders' equity. Net capital invested has decreased by 88 million Euro with respect to 2004, mainly due to the marked reduction in working capital (net working capital). There was a significant improvement in net financial position in 2005, to 584 million Euro from 318 million Euro as of 31 December 2004. The cash flow generated in 2005, 266 million Euro, reflects the cash flow from operating activities of 425 million Euro which easily covered the investment of 160 million Euro mainly related to GE Capital Funding Services S.r.l. acquisition ­ 102 million Euro - as well as to the net investment in fixed assets during the year. The value of receivables factored without recourse during 2005 was 192 million Euro greater than in 2004, and the value of receivables factored with recourse was 271 million Euro greater than in 2004. 16 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Reclassified Balance Sheet
2005
Thousands of Euro % 2004
Thousands of Euro % Intangible assets Property, plant and equipment Investments Non current assets Current assets Current liabilities Provisions for risks and charges Net working capital Retirement reserve NET CAPITAL INVESTED Shareholders' equity Provision for accelerated depreciation Long-term financial position Short-term financial position Net financial position COVERAGE 1,300,138 256,134 102,100 1,658,372 1,466,343 (1,276,848) (499,089) (309,594) (56,888) 1,291,890 1,875,720 0 13,311 (597,141) (583,829) 1,291,890 100.6 19.8 7.9 128.4 113.5 -98.8 -38.6 -24.0 -4.4 100.0 145.2 0.0 1.0 -46.2 -45.2 100.0 1,401,978 247,580 5 1,649,564 1,210,520 (917,889) (508,694) (216,063) (53,570) 1,379,930 1,698,249 0 21,272 (339,591) (318,319) 1,379,930 101.6 17.9 0.0 119.5 87.7 -66.5 -36.9 -15.7 -3.9 100.0 123.1 0.0 1.5 -24.6 -23.1 100.0 Massa plant - test beds set up 3MCL1403 casing 17 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Transactions with parent companies and companies in the Nuovo Pignone Group and the General Electric Group
The activities of the Company involve financial and commercial transactions with its parent companies, Nuovo Pignone Holding S.p.A. and General Electric Co., and with companies in the Nuovo Pignone Group and the General Electric Group. These transactions are governed by specific supply contracts, and contracts for the provision of services and the exchange of know-how, that are settled on normal market conditions. The economic and financial relations with these companies are detailed in the notes to the financial statement. correspondence and in a Special Section of the Companies' Register, if their activities are subject to management and coordination by other parties. Article 2497 sexies stipulates, except where stated otherwise, that such management and control activities be exercised by the holding company at the time of consolidation of the company, or by the company that controls it pursuant to Art. 2359 of the Italian Civil Code. This Company is consolidated and controlled by Nuovo Pignone Holding S.p.A. which currently owns its entire share capital. Secondary offices
The Company does not have any secondary offices. Own shares and shares in parent companies
The Company does not hold any of its own shares or shares in parent companies, whether directly or via trust companies or intermediaries. None of its own shares or parent company shares were purchased or sold during the year, whether directly or via trust companies or intermediaries. Expected future developments
The forecast estimates for economic growth and expectations that energy prices will remain high mean that there is likely to be heavy investment in the Oil & Gas sector at all levels, from Upstream to the refining of hydrocarbons. Accordingly, Nuovo Pignone S.p.A. expects the volume of orders to rise by more than 10%. The areas of greatest interest are the Middle East, the Caspian, Asia and Africa, where the Company has a strong presence in the LNG and natural gas markets, as well as in the supply of related services (especially contractual service agreements). Positive results are also expected in the Middle East with regard to refining and petrochemicals. In order to achieve these growth objectives, Nuovo Pignone S.p.A. intends to pursue a number of strategic initiatives, including: - the improvement of productivity via the ongoing re-engineering and computerization of processes (the MRP/BoM was implemented at the start of 2005 for the New Units division and at the start of 2006 for the Global Services division); - the adoption of Lean Six Sigma, which combines Lean Technology with Six Sigma to shortening shop production cycles, and also aims to simplify Management and coordination
Articles 2497 - 2497 sexies of the Italian Civil Code require companies to state in their documents, Oil & Gas University - Florence Learning Center 18 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 and optimize the main business processes; - the expansion of R&D programs for new products, both by sharing the technological know-how available within the GE Group, and by greater investment consistent with the Group's worldwide technology development policies. Massive resources have been and will be allocated to the design of gas turbines, particularly for the reduction of environmental emissions, the development of compressors for Gas-To-Liquids (GTL) plants, the development of oil-free electro compressors for undersea and other applications, and the improved performance and output of existing compressors and turbines. In particular, synergies within the Infrastructure Business, to which Nuovo Pignone S.p.A. belongs, will contribute to improving technology and services for LNG applications, re-injection, the transportation of natural gas along pipelines, and oil sands. - the strengthening of localization initiatives that sustain the Company's growth and ability to compete in various parts of the world and in particular, such strategic and emerging markets as Qatar, Nigeria, Kazakhstan and China. Turning to the activities of Fondazione Pignone, the foundation will continue to work on many social, cultural and promotional initiatives. In particular, the activities of the "Oil & Gas University" will continue in 2006. This follows upon the six-month program introduced in 2005 for employees of companies operating in the oil & gas sector, in which modules that ranged from leadership to technical topics were offered. These courses, involving leading Oil & Gas experts, are planned to be repeated in 2006. Lastly, the turnover of GE Capital Funding Services S.r.l. in the first quarter of 2006 was 422 million Euro, up 24% with respect to the comparable prior year period. Accordingly, it is anticipated that the results achieved in 2005 will be repeated in 2006. Opening ceremony of the new RM&D center inside Florence Plant 19 Annual Report of Nuovo Pignone S.p.A. as at and for the year ended December 31, 2005 Significant subsequent events to the year end and other information
The Tax Authority began a general tax audit covering 2003 and 2004 on 14 February 2006, which has not yet been completed. Considering the matters raised to date in the daily audit reports, it is unlikely that there are any risks that would require contingencies to be recorded in the financial statements. Pursuant to Art. 2364 of the Italian Civil Code, it is confirmed that recourse to the extended 180-day period for the presentation of these financial statements is justified by the Company's multinational structure. In addition, the general audit currently being conducted by the Tax Authority has absorbed much of the time of administrative and financial personnel that would otherwise have been dedicated to the preparation of the financial statements. The information on the Company's financial instruments required by Art. 2428.2.6 bis of the Italian Civil Code is discussed in the sections of the explanatory notes entitled "Foreign currency transactions" and "Memorandum accounts". FOR THE BOARD OF DIRECTORS THE CHAIRMAN PIERO SALVADORI Darquin project - turbocompression train equipped with BCL305C Centrifugal Compressor 20 GE Oil & Gas Financial Statements of Nuovo Pignone S.p.A.
December 31, 2005 GE imagination at work Financial Statements of Nuovo Pignone S.p.A. - December 31, 2005 BALANCE SHEET Assets
(values in Euro)
12.31.2005 A) Share capital proceeds to be received B) Intangible assets I - Intangible assets 1) Organization costs 3) Industrial patent rights and intellectual property rights 4) Concessions and licences 5) Goodwill 6) Fixed assets in progress and advances 7) Other assets Total II - Property, plant and equipment 1) Land and buildings 2) Plant and machinery 3) Industrial and commercial equipment 4) Other assets 5) Fixed assets in progress and advances Total III - Financial fixed assets 1) Investments: a) shareholdings in subsidiaries d) shareholdings in other companies Total Total fixed assets (B) C) Current assets I - Inventories 1) Raw, auxilliary materials and consumables 2) Product in process and semi-finished products 3) Work in progress 4) Finished products 5) Advances Total 12.31.2004 II - Receivables 1) Trade receivables - due within one year - due after one year 12.31.2005 (values in Euro)
12.31.2004 662,604,620 589,983,534 662,604,620 89,597,031 1,207,311,296 3,229,339 83,831,612 1,304,173,148 13,973,471 2) Subsidiaries - due within one year - due after one year 440,764 589,983,534 440,764 4) Parent companies - due within one year 4-bis) Tax authorities 4-ter) Deferred tax assets 5) Other receivables - due within one year - due after one year 1,045,666,640 31,129,187 170,688,341 190,720,754 40,669,258 144,889,621 1,300,137,666 1,401,978,231 120,369,989 111,149,667 11,198,040 7,554,104 5,862,558 256,134,358 120,640,083 93,794,401 14,377,447 7,651,689 11,116,691 247,580,310 Total 82,479,389 2,586,598 85,065,987 1,995,595,539 - 632,418,738 2,553,583 634,972,321 1,601,235,488 - III - Current financial assets 102,000,000 100,000 102,100,000 1,658,372,024 IV - Cash 1) Bank and postal deposits 2) Checks 3) Cash-on-hand and cash equivalents Total Total current assets (C) D) Accrued income and prepayments 124,942,280 56,218,923 529,169,756 90,602,779 800,933,737 125,889,757 TOTAL ASSETS 40.056.430 432.866.795 66,694,504 665,507,485 5,000 5,000 1,649,563,541 2,612,043 109,331 2,721,374 2,799,250,650 2,340,836 4,459,963,510 1,864,258 103,372 1,967,630 2,268,710,604 2,579,053 3,920,853,198 22 Financial Statements of Nuovo Pignone S.p.A. - December 31, 2005 BALANCE SHEET Liabilities
(values in Euro)
12.31.2005 A) Net equity I - Share capital II - Share premium reserve III - Revaluation reserves IV - Legal reserve V - Statutory reserve VI - Reserve for own shares VII - Other reserves VIII - Retained earnings (carried forward losses) IX - Net profit (loss) for the year Total 194 (239,690,031) 177,470,456 1,875,719,541 194 (744,155,031) 508,665,355 1,698,249,084 Total 14) Other payables - due within one year - due after one year 46,770,092 2,027,325,578 19,694,062 15,493,707 98,470,320 1,819,774,540 98,470,320 1,819,774,540 12.31.2004 12) Tax authorities - due within one year 13) Social security and pension institutions - due within one year - due after one year 12.31.2005 12,059,360 (values in Euro)
12.31.2004 15,247,810 13,733,358 13,733,358 11,087,032 375,684 11,462,716 46,770,092 171,232,276 21,949 171,254,226 1,657,653,720 B) Provisions for risks and contingencies 1) Deferred tax liabilities 3) Other Total 200,047,060 299,042,113 499,089,173 201,084,408 307,609,609 508,694,017 E) Accrued expenses and deferred income 940,996 2,686,183 TOTAL LIABILITIES 4,459,963,510 3,920,853,198 C) Retirement reserve 56,888,222 53,570,193 GUARANTEES AND OTHER MEMORANDUM ACCOUNTS D) Payables Guarantees given by the Company - Secured guarantees 0 0 3) Borrowing from shareholders - Unsecured guarantees 1,092,320,057 897,935,850 4) Banks - due within one year - due after one year Total guarantees 3,675,525 13,311,229 16,986,755 2,743,780 16,271,888 19,015,669 1,092,320,057 897,935,850 Other memorandum accounts - Commitments - sale of goods and services 3,386,995,096 1,020,965,742 475,834,209 72,955,723 3,317,364 221,281 753,421,081 3,121,685,000 750,721,459 405,334,151 25.134.815 11,036,104 405,221,898 5) Other financing institutions - due within one year - due after one year 323,819,849 0 323,819,849 341,365,136 5,000,000 346,365,136 6) Advances 741,252,359 639,375,161 - Hedging derivatives - sale of currency - purchase of currency - purchase of currency options - sale of currency options - purchase of natural gas - Third-party assets 7) Trade payables - due within one year 9) Subsidiaries - due within one year 11) Parent companies - due within one year 652,293,312 418,396,444 Total other memorandum accounts 5,713,710,496 4,719,133,427 193,628,316 0 26,782,177 36,536,559 23 Financial Statements of Nuovo Pignone S.p.A. - December 31, 2005 INCOME STATEMENT
(values in Euro)
12.31.2005 A) Value of production 1) Revenues from sales and services 2) Changes in inventories of work in process, semi-finished and finished products 3) Change in work in progress commissioned by customers 4) Increase in internal fixed assets 5) Other revenues and income - grants relating to income - other 12.31.2004 C) Financial income and expenses 16) Other financial income a) Other financial income from long-term receivables d) other income - from parent companies - from subsidiaries - from others 12.31.2005 (values in Euro)
12.31.2004 2,340,739,531 2,070,618,316 148,550 4,089,900 0 12,056,348 16,146,248 16,294,799 (17,928,954) (270,847) (11,088,219) (29,288,019) 25,953,439 150,491 3,212,069 0 6,077,297 9,289,366 9,439,857 (84,636,819) 96,302,961 2,465,309 234,292 39,632,839 39,867,131 (54,959,764) (42,980,575) 829,596 612,976 28,192,093 28,805,069 2,002,312,641 Total B) Costs of production 6) Raw, auxiliary materials and consumables 7) Services 8) Leases and rentals 9) Payroll costs a) wages and salaries b) social security charges c) retirement reserve e) other costs 2,394,738,113 17) Interest and other financial charges - from subsidiaries - from parent companies - from others (9,661) (29,054,261) (29,063,922) 25,781,348 17-bis) Exchange gains and losses (1,115,178,193) (548,777,550) (59,124,256) (163,757,314) (46,295,018) (9,797,502) (6,978,073) (226,827,908) (763,349,160) (500,235,584)