ANNUAL REPOR T 2006 E N E R G Y

Transcription

1 ANNUAL REPOR T 26 E N E R G Y

2 THE SCHMACK GROUP AT A GLANCE * EARNINGS POSITION Sales 9,8 34,134 Sales growth % 17.9 % EBITDA 5,278 1,445 ** EBIT 4,431 1,24 ** Net income*** 1,331 *** 2,511 EBIT margin 4.9 % 3. % ** Earnings per share (in EUR) ASSET AND CAPITAL STRUCTURE Non-current assets 36,969 2,99 Current assets 46,526 12,159 Equity 4,97 3,438 Equity ratio 49. % 24.1 % Non-current liabilities 15,38 1,177 Current liabilities 27,28 9,643 Total assets 83,495 14,258 Cashflow / Investments Cash flow from operating activities -1,557 1,151 Cash flow from investing activities -24, Free cash flow -26, Cash flow frim financial activities 41,343 1,217 Cash balance 18,636 3,586 EMPLOYEES AT BALANCE SHEET DATE * Data provided for the previous year derive from the unconsolidated Schmack Biogas AG financial statements to which reference is made in the Notes. This data is provided for informational purposes only; direct comparability is not afforded. ** Adjusted for one time effects from write-offs. *** After income minority shareholders.

3 CONTENT INTERVIEW WITH ULRICH SCHMACK 4 On politics, the market for renewable energies and the Schmack Biogas AG INTERVIEW WITH DR. ALEXANDER GÖTZ 12 The new CFO on the key data, the outlook and Investor Relations REPORT 16 Biogas as a substitute for natural gas REPORT OF THE SUPERVISORY BOARD 22 CORPORATE GOVERNANCE REPORT 24 CONSOLIDATED MANAGEMENT REPORT 3 CONSOLIDATED FINANCIAL STATEMENTS 6 Consolidated Income Statement 61 Consolidated Balance Sheet 62 Change in Group Equity 64 Consolidated Cash Flow Statement 66 Group Notes 67 Report of the Independent Auditors 121 FINANCIAL CALENDAR 122 CONTACT 123

4 4 Interview with Ulrich Schmack Ulrich Schmack, CEO In particular, the problems surrounding the Russian gas supplies have demonstrated just how important access to self-reliant energy sources is for Germany, all other EU countries and the USA. Being storable and very similar to natural gas, biogas can make an important contribution to ensuring the future reliability of energy supplies.

5 Annual Report 26 5 Interview with Ulrich Schmack But looking at the extremely dynamic developments in the energy and biogas market in the past few months, I must say that it is simply exciting to be able to work in such an environment. Mr. Schmack, Schmack Biogas AG was listed on the stock exchange just under a year ago - what has changed since then? Schmack: Our market position has clearly improved. The listing and the resulting higher attention of the general public and, in particular our industry, have enhanced our reputation. I have noted this at every meeting, be it with major energy providers or local utilities. I believe that our good reputation was also instrumental in the realisation of our two joint ventures with ESB and REWAG aimed at expanding our own plant operation activities. It has also been helpful when talking to such major energy providers as E.ON as well as political decision-makers. This means I can devote 9 percent of my time to our business, the implementation of our strategy and, most importantly, the projects undertaken with our major customers. My personel effort has increased due to the greater number of day-to-day projects which can now be funded from the proceeds of our IPO. But looking at the extremely dynamic developments in the energy and biogas market in the past few months, I must say that it is simply exciting to be able to work in such an environment. I was quite optimistic at the outset but my expectations have even been exceeded. The listing has also resulted in numerous positive effects - as well as a lot of work - within the company. On the one hand, employees motivation has further increased because they feel privileged to work for a publicly listed company. On the other hand, the extensive media coverage of energy issues also provides everybody at Schmack with a more profound understanding of what we do and people at every level of the company are better able to see the whole picture. This is also why we have found it easier to attract and recruit qualified new employees, which is a genuine asset given the scarcity of people with specialist expertise in our industry. What has energised the market? Apart from such well-known factors as rising energy prices and the need to protect the environment, two major factors have recently attracted enormous attention across all spheres of society - the climate debate and the reliability of energy supplies. In particular, the problems surrounding the Russian gas supplies have demonstrated just how important access to self-reliant energy sources is for Germany, all other EU countries and the USA. Being storable and very similar to natural gas, biogas can make an important contribution to ensuring the future reliability of energy supplies. And what has changed for you personally? Well, I thought it would be a lot tougher. But seriously, my scope for action has been considerably broadened. Our company now has access to the funds required to undertake truly promising projects. At the same time, this means a lot of work at the strategic and operating levels of the business. Actually, I am glad that I do not have to spend too much time on investor relations which are now expertly handled by Dr. Alexander Götz, our new CFO. So things are going your way. What view are politicians and the major energy companies taking of the role of renewable energies and biogas? What was your impression of the discussions at the German Energy Summit? The inaugural Energy Summit hosted by the German chancellor essentially revolved around the question what an optional energy regime should look like with respect to the trinity of ecology, economy and reliability. At the time the first summit

6 6 Interview with Ulrich Schmack also debated the pros and cons of expanding the renewable energy sector. The second Energy Summit took place against the background of growing insecurity about the long-term reliability of foreign gas supplies. At this time it had become clear that the reliability of supplies was now the single most important issue; the need for renewable energies was no longer disputed by anyone - even though the renewables sector was certainly not overrepresented at this top-level event. So what conclusions can be drawn from these market trends and from the German Energy Summit? First, there is now enormous investment pressure on storable biogas. This is reflected, for example, in the foundation of Bioerdgas GmbH, an E.ON subsidiary, but also in the response from national and international investors to our roadshow in the run-up to our capital increase in February. I have noted clearly growing interest in our company since the problems surrounding the natural gas supplies from Russia. This interest is now translating into growing investment. The big energy providers move into biogas has finally demonstrated to institutional investors that we are not talking about a passing fad but about an economically profitable form of energy which is viable for the long term. This is the kind of feedback I got when speaking with investors in Germany, the UK and the USA. Speaking of your company in particular, is there not the risk of the big energy providers getting a grip on what is now becoming a big business? Will the situation in the biogas sector become the same as it is in the natural gas sector today? No, that is not going to happen. Biogas is different in that it is not possible to put a big plant - like a coal-fired or nuclear power station - on a greenfield site and then push a remote button to run it. When we speak of biogas we are talking about numerous small plants which need to be built and operated, and numerous very small target groups who have to be recruited into the effort - from farmers and local governments to regional energy providers. This is not the kind of business which the big multinationals are good at. When such major companies make an investment in our sector, they are glad to team up with a partner who can interface with these groups. This is the kind of role which Schmack Biogas is going to play going forward, meaning that the major energy companies growing biogas activities will further increase our business potential. We are confident that the energy providers will invest in this sector - however they will not be our competitors but rather our customers. This is also evident in the case of Bioerdgas GmbH, the new subsidiary set up by E.ON. And what needs to happen for these potentials to translate into actual biogas production and biogas use - particularly when we are talking about volumes large enough to substitute natural gas supplies? Could you briefly describe the three most important prerequisites? First of all we need an economically acceptable, i.e., affordable access to the gas grids. I am working on the assumption that the energy providers - who own the grids - will implement their biogas plans, which will open up grid feeding possibilities also for ourselves. Should this situation not materialise contrary to my expectations, the Bundesnetzagentur (federal networks regulator) will put pressure on those companies in order to ensure fair competition and the availability of biogas through the grid; this is the remit of the Bundesnetzagentur. Last but not least, political decision makers have clearly recognised that the reliability of energy supplies can be ensured only if biogas can be fed into the grid. Seen from this viewpoint, the measure of last resort would be a Gas Grid Feeding Act. This option has already been debated and Schmack could live very well with it. But as I said, I assume that this kind of legislative force will not be necessary at all. This is the first prerequisite. What about the others? Secondly, it is important to involve the farming sector in the partnerships between the biogas sector and the energy providers. Given that biogas production constantly requires renewable resources, we have to depend on reliable partners who have a strong interest in making this a success. After all, feedstock accounts for 4 % of the total costs of biogas production. This is why we have to give farmers a share in the economic success of biogas rather than treat them as mere commodity suppliers.

7 Annual Report 26 7 The major energy companies growing biogas activities will further increase our business potential. It is understandable that you are interested in these partnerships, considering that other forms of energy such as biodiesel fuel compete with you for farmers and their fields. This will not affect us in the foreseeable future. Biogas features a far higher efficiency per hectare than all other forms of biomass. The biogas yield from a given field is several times higher than for example the bioethanol yield from the same field. Given that efficiency is not merely a catchword but actually the single most important factor when it comes to safeguarding tomorrow s energy supplies, everything is going our way. The question what form of energy delivers the highest yield per hectare has long been answered - biogas is the way forward. So what is the third prerequisite? Well, biogas is not a panacea. Nobody should claim that biogas alone can solve all our energy problems. What we need is a considerably decentralised energy regime which also involves solar and wind energy. But the key problem of biogas remains in place - it is much too expensive. You will appreciate that I do not share this view. Based on the price charged to the final consumer, natural gas today costs 6 euro cent per kilowatt-hour. We supply biogas at a price of 8 euro cent. Two cents does not seem to be a lot of money. But the price difference is still 3 percent. This is true, of course. But then, the difference between today s natural gas price and the price three years ago also happens to be 3 %. And considering the thirst for energy currently in evidence in China, India and even the western world, it would be foolish to assume that this advance will stop any time soon. The price of natural gas will continue to rise. At the same time, we are in a highly comfortable position in that our biogas production is based on a relatively young technology which is bound to see further efficiency gains and cost reductions both as a result of improved engineering and microbiological refinements. This is why I expect the price gap to be closed in five to eight years time. Germany s EEG act is currently supporting the required improvement of the competitiveness of biogas. Anyway, this objective is shared by the energy providers. Access to competitively priced biogas as an alternative to natural gas will give them a much better negotiating position in Russia. This means that Schmack will not be left to its own resources when working on improving the efficiency of biogas. We welcome this involvement by the big energy providers who we view as partners and important players - the development of biogas would take much longer without their financial power. In conclusion, three groups are vital to the overall development - farmers, energy providers and biogas companies. Let s talk about your company. How did Schmack Biogas AG fare in 26? We are very happy with the results we have seen. Being a leader in this industry, we benefited more than others from the positive development in the market. Our sales grew by more than 16 % to EUR 9 million and we expect to report a high double digit growth rate also for 27. Our premier objective in this dynamic

8 8 Interview with Ulrich Schmack

9 Annual Report 26 9 market phase is to clearly expand our market shares and to further improve our leading position in as many areas as possible. The claims are being staked now, which is why we are going for growth rather than margin for the time being. Needless to say, we will continue to operate in the black and report profit growth. In the prior year our earnings before taxes and interest were EUR 2.8 million. So the EUR 4.4 million reported for 26 represents an improvement by more than 5 %. Our minimum target is to raise our EBIT margin into double-digit territory. But as I said - at this time priority has to be given to occupying all relevant markets and strategically important positions. This is why we need to take a three to four year view ahead. What objectives have driven your acquisitions in recent months? Could you single out a particularly important acquisition? All our acquisitions are very important for our group of companies, given that our vertical integration is currently our top priority. This means that we want to cover all essential stages from the planning and construction of a biogas plant to the marketing of heat and electricity - this is what is expected by our customers, i.e. energy providers, local utilities and investors. These customer groups want only one thing - the lowest possible production costs per kilowatt-hour. Accordingly, we have to be able to supply everything from a single source, and each of our subsidiaries makes a contribution. In addition, all the acquired companies already maintained close customer relationships in their respective markets. Schmack can now build on these relationships and complement them with our own products and services. As for our internal operations, the acquisitions mean the integration of complementary technologies, which will help strengthen our position as the technology leader. For example, the acquisition of Stelzenberger has given us direct access to stirring devices, which are a key component in biogas production plants. CarboTech has outstanding and market-leading expertise in gas purification which is essential for upgrading biogas to natural gas standards before feeding it into the grid. This is an important key technology for us, given that grid feeding allows us to improve our revenues by several cents per kilowatt-hour. We already worked with CarboTech on our first grid feeding project in Austria. This company is clearly the technological market leader which is why it is now a member of our group. What about Köhler & Ziegler, your first investment last year - are they not active in the same field? Yes, partly. Köhler & Ziegler Anlagentechnik s special expertise resides, on the one hand, in the ORC process which converts the process heat generated during biogas production into electrical power - this is another area which makes a significant contribution to the efficiency of a biogas production plant. On the other hand, they have particular strengths in the construction of cogeneration systems. In addition, this company has highly specific experience in integrating these different components into the design of biogas production plants. After all, Schmack s main goal is to offer customers all requisite components as an integrated package and to make effective use of the potential synergies. Will integrating these many subsidiaries not cost a lot of money in the initial phase? We are aware of the special complexities involved and will act accordingly. Our subsidiaries will remain organisationally independent and continue to operate successfully in the market in the same way as they did before. To make sure that this works out, we have retained virtually all of the previous owners and managing directors on long-term contracts which give them a performance-based share in the company s success. I meet with these management teams several times a year to discuss both our overall strategy and the development of the individual subsidiaries. This is one of my core tasks. Given that each unit also benefits from the others, all group members liaise constantly and establish suitable structures also on a day-to-day basis. Centralised functions include accounting and finance, in particular. Dr. Alexander Götz, our CFO, has put in place the requisite structures to make sure that we are going to earn money at the end of the day.

10 1 Interview with Ulrich Schmack Most recently you acquired Hese Biogas GmbH. In this context you also implemented your first capital increase. The Hese acquisition was really a lucky strike. This company was one of the few really serious competitors in the market and was even better positioned with financial investors than we were. So when this opportunity arose, we simply had to make our move. Is working together not quite a challenge for two companies which used to be competitors? I know what you mean, there are indeed competitors with whom we could not really cooperate. However, Hese was never one of them and we have always had great respect for one another because we both knew that the other guys were really good at what they were doing. In addition, the Hese acquisition has improved our access to such customers as RWE and EWE and has widened our project pipeline. Hese s order books alone are currently worth some EUR 3 million at this time. This shows that the company is very well positioned in the marketplace, which is why it will continue to work under its own brand - on behalf of Schmack. You are also planning to use your own brand to market energy from your own production. Why did you decide to do this jointly with regional energy providers? We took this decision when we realised that partnering with regional players such as Erdgas Südbayern and Regensburg s REWAG allows us to implement projects on a much bigger scale. While we have the expertise it takes to erect biogas production plants and to generate electricity and heat, our partners have access to consumer households and long-standing experience in selling energy. This makes for a perfect fit. Together we can handle bigger volumes; the first two joint ventures alone are to invest as much as EUR 8 million over the next five years. The current speed of market growth and the strong demand mean that the major challenges do not lie in winning orders or finding opportunities in the market but rather in the operational implementation of projects. We can realise far bigger projects by concentrating on what we already know best and by relying on the complementary strengths contributed by our respective partner. Could you give a more concrete idea of the contribution made by biogas to regional energy provision once you have completed such a project? Take our Renion joint venture with REWAG, the local utility in Regensburg. A EUR 5 million investment translates into 25 MW of capacity. This is enough to supply 11, households, i.e. some 33, people. Regensburg, the fourth-largest city in Bavaria, has a population of approximately 13,. So we are talking about quite a sizeable contribution to the overall energy provision. Add to this the fact that renewables already account for 21 % of the total energy supplied by REWAG today. The ultimate goal would be to completely substitute nuclear and fossil power. How many local utilities and regional energy providers are there in Germany? How many such joint ventures do you intend to set up? All told there are some 3 larger regional energy providers in Germany, including some 3 to 5 that would be suitable for partnering with us. But then, we want to bring every joint venture to life, which requires a lot of work. This is why I envisage only a handful of partners and joint ventures over the next 18 months. But these would be major undertakings of the same magnitude as Renion and Energiefeld Bayern. Apart from the good development in Germany you have also launched a number of international activities. Where do you expect to generate the highest profit contributions? We have certainly made the most progress in Italy where we have targeted at least EUR 12 million in revenues. This makes Italy our most important international market at this time.

11 Annual Report In the past quite a number of project developers - for example in the wind power industry - have seen their international ventures fail. This may have been the case for one or two listed companies in that industry, although I am not in a position to say what factors may have caused those failures. Conversely, I know many project developers with very successful international activities, even though they may not have a high profile in the capital market because they are not listed companies. In the international arena, too, it is important to cooperate with local partners who are familiar with the market. This is what we are doing in Italy where things are working out excellently for Schmack Biogas. Was this also the reason why you decided to enter the US market through a joint venture with a local partner? Yes, this was one of two fundamental reasons. Our partners in the joint venture, Bio-Energy, have long-standing experience on the ground in the US. The second important reason was that our partners are active in sewage sludge disposal. This sludge can be a highly useful feedstock for biogas production. In contrast to corn, we do not have to pay for this material but even get paid for collecting it and can then use it as an economic resource. This offers a highly interesting business perspective. When will the first plant be commissioned? Our first plant will start operations by mid-year. More projects are under construction. What kind of potential are you looking at in the USA? In the USA we are looking at different magnitudes compared to Germany and Europe; the potential is several times that of the German and European market. At present a lot of US investment is being poured into agricultural projects for growing corn for bioethanol production. However, people have started to notice that biogas offers clearly superior energy efficiency. Many major investors and energy companies are closely monitoring the German market and want to know what is happening in the biogas sphere. This is reflected in the numerous invitations to conferences and the inquiries which we receive. I have received this kind of feedback myself in many meetings in the US. At this time I assume that our business will experience an enormous boost from 28/29 onwards. I believe that this momentum will outshadow the development in Germany - and we will make sure we are ready when things start happening. Let us return to the capital market for a moment. When do you expect the next biogas company to go public? At present I know of no company in our industry which could achieve the degree of vertical integration required for the development and execution of major projects. I believe this to be a key prerequisite for taking a biogas company public today. What about Schmack Biogas AG? Your stock price has almost doubled since the initial listing and you have completed a 1 % capital increase. Is your company really worth that much? Well, I suppose the stock market knows best and our stock price reflects its view of our company. And looking at the development of our market in the past twelve months and the significant opportunities which Schmack has been able to capitalise on, I think it is fair to say that our company has come a very long way since the IPO and that its present market capitalisation has to be seen against this background.

12 12 Interview with Dr. Alexander Götz Dr. Alexander Götz, CFO I met with numerous potential high-calibre investors at the German Equity Forum in late 26 and most recently on the roadshow we took to Germany, London and the USA. Interest in our company was very strong and demand has been intense, as can be seen from our placement of shares worth approximately EUR 1 million only nine months after our IPO.

13 Annual Report Interview with Dr. Alexander Götz Dr. Götz, since last October you have been CFO at Schmack Biogas. What did you do before joining Schmack Biogas? Dr. Götz: Before joining this company I spent a number of years as a partner in a corporate finance consultancy specialising in private equity and capital market funding. Schmack Biogas had been one of my clients for several years and I was also involved in preparing and implementing the IPO. So I was already very familiar with the company, its principals and its environment, meaning that I was off to a flying start when I came on board last October. What are currently your main tasks as chief financial officer? My colleagues on the board are Ulrich Schmack and Herbert Abel, two brilliant strategists with strong operational abilities, who continue to develop the business further on a day-to-day basis. I see my main task in providing professional support on the finance side. Together with my team I make sure we have the optimal basic conditions and the human resources required to attain our strategic and operational objectives. Of course my tasks also include the continued professionalisation of financial controlling and risk management, the preparation of the annual and quarterly reports as well as investor relations activities - and, most importantly, budgeting and planning with permanent monitoring of PLAN and ACTUAL figures, something which is very important in a dynamically growing company. High-profile projects in the past months have included the acquisitions of our new subsidiaries as well as the planning and implementation of our February 27 capital increase. Currently my main focus is on structuring the financial set-up of our group of companies. The acquired companies - Stelzenberger Biogas, CarboTech Engineering and Hese Biogas - have to be efficiently integrated with a view to building a functioning group of companies. At the same time, we are setting up the structures for the third and most recently created division, namely the operation of own biogas plants in our currently three joint ventures with regional energy providers. After all, we and our partners are planning to invest some EUR 9 million in these projects alone within the coming years. Integrating these new subsidiaries into Schmack Biogas AG is certainly not an easy task. What areas are you focusing on? At the top of our agenda is the integration of the new subsidiaries into our financial management structures, i.e. our accounting, controlling, IT, risk management and financing systems. We establish our financial budgets, install early warning systems and plan measures to preclude potentially undesirable developments. Another priority is to progressively tap into the potential synergies resulting from our new structures - this remains a significant objective of our acquisitions. You are also in charge of your company s Investor Relations activities. What are your priorities in this field? I intend to continue our present strategy which aims at creating the greatest possible transparency of our strategic decisions and current developments, thereby providing capital market investors with a solid basis for taking informed decisions. I met with numerous potential high-calibre investors at the German Equity Forum in late 26 and most recently on the roadshow we took to Germany, London and the USA. Interest in our company was very strong and demand has been intense, as can be seen from our placement of shares worth approximately EUR 1 million only nine months after our IPO. We will continue to nurture and intensify these contacts. After all, we have set our sights on being listed in the TecDax index. As in the previous months, we will maintain a regular presence at investor and analyst conferences. In addition, comprehensive information will also be provided for private investors who account for a significant proportion of our shareholder structure and whose support we value very much. We set great store by intensive communication because we know that the more

14 14 Interview with Dr. Alexander Götz familiar people become with our business model, the clearer their perception of the enormous potential which this company is looking at will become. What was investors response to the capital increase at the roadshow? And what kind of feedback did you get from investors on the occasion of your first time visit to the USA? The feedback was excellent - both in terms of the talks we had and in terms of the subsequent demand for our shares. The transaction was several times oversubscribed, with significant orders from the USA and France. In contrast to our IPO, investors already had a better understanding of the biogas market and its value drivers. The strong public awareness of energy issues and the need to secure tomorrow s energy supplies is now also reflected in extremely strong interest on the part of investors who are very much aware of the importance to be acquired by biogas in the coming years. After all, we are only at the beginning of a longterm development. Where do institutional investors see the greatest potential - and what risks do they see? Investors fully appreciate our strategy to feed biogas as a natural gas substitute into the gas grid and they see the potential arising in this market. All investors agree that we cannot remain dependent on a few states and gas suppliers indefinitely. So the issue is not whether but only how fast substitution can be accomplished. The fundamental risk identified by investors relates to the development of prices for our input materials. We have discussed this issue proactively too, because we recognise its importance and we are confident that our approach will turn out to be more competitive than bioethanol and biodiesel because we deliver a higher energy efficiency per hectare. If there should really be shortages in feedstock supplies over the long term, the superior efficiency of our biogas process would also enable us to pay higher prices. Having said that, this issue will become topical only five or ten years down the road, given that no scarcities are to be expected in the short and medium term. Nevertheless, we intend to address this issue even more effectively from a strategic viewpoint in 27 and saw your sales advance clearly ahead of the forecasts. Was this due more to the development of the market or to Schmack Biogas growth? Indeed, the market developed even faster than expected. This kind of dynamics had not even been anticipated by Ulrich Schmack who knows this industry like nobody else and has always been very optimistic about the overall development. This put us in an excellent position; our superior technology and our newly gained reputation enabled us to grow ahead of the industry and to further expand our market share. So why is your margin comparatively low? Is there improvement in sight? First of all, we have a clear strategy to exploit all current growth opportunities and expand our market shares. Our objective is to serve all important customers, enter all relevant international markets and build on our technological lead. The required investments in the expansion of our structures and human resources mean that our margins cannot yet realise their full potential. Even so, we attach great importance to steady profit growth which remained an important objective also in 26 - adjusted for the prior year s non-recurrent effects, our EBIT grew by more than 33 %. Going forward, we want to achieve consistent year-on-year growth in our margin, recognising that a growing business needs to be profitable, too. Having said this, we still want to exploit all opportunities which take us ahead in the long term. This is why we are prepared to renounce short-term margin gains where this makes sense in a long-term perspective. We feel that our shareholders are supportive of this strategy.

15 Annual Report Going forward, we want to achieve consistent year-on-year growth in our margin, recognising that a growing business needs to be profitable, too. Having said this, we still want to exploit all opportunities which take us ahead in the long term. This is why we are prepared to renounce short-term margin gains where this makes sense in a long-term perspective. We feel that our shareholders are supportive of this strategy. In the past two years your financials have reflected a strong seasonality - will this also be the case in 27? Given that we build biogas plants, the seasons of the year will continue to play a role. Our sales tend to be lower in winter and spring, i.e. in the first two quarters. This pattern seen in the previous years will not change. The best example is the fourth quarter of 26 when we reported almost the same level of sales as in the full year 25. However, these seasonal fluctuations will diminish as our overall sales volume increases. In 27 we have already operated more construction sites during the winter time, concentrating on indoor works. In the medium term, our cashflows will clearly become steadier, reflecting the growing importance of our service and management activities particularly as part of the operation of our own plants. Schmack Biogas has announced that the operation of own biogas plants will be expanded and the first three joint ventures are said to involve investments in the region of EUR 9 million. What are the potential sales and profits from a, say, EUR 1 million investment? How long does it take for such investments to turn a profit? We currently assume that a EUR 1 million investment will support annual sales revenues of between three and four million euros. This also depends on the utilisation of process heat which we intend to increase progressively. How much of this sales growth will be organic and how much will result from acquisitions? While our acquisitions certainly contribute to sales growth, one must bear in mind that Schmack Biogas remains one of the most important customers of our new subsidiaries. Our focus is clearly on organic growth, even though the recent acquisition of Hese Biogas has lifted our 27 sales forecast by some EUR 2 million. This move certainly took us a significant step ahead. Where do you see Schmack Biogas 1 years from now? Where are the company and its financial ratios headed? Looking 1 years down the road is quite a challenge, particularly for a CFO who is expected to keep his eyes on the actual facts and figures. Having said this, our objective is to build a multinational company, given that the potential for growth is neither confined to Germany nor to Europe. In Germany we are already the market leader, our Italian operation will make a double-digit million contribution to 27 sales, and we also expect to see significant growth rates in the USA in the coming years. At the same time, we want to make steady progress towards our goal of a 1 % EBIT margin. What kind of sales and profits is Schmack Biogas likely to report in 27 and 28? We have budgeted consolidated sales between EUR 15 and 17 million for 27, anticipating sales growth between 65 % and as much as 9 %. Our EBIT will grow even faster - we expect to report at least EUR 1 million, representing an improvement by more than 1 %, which means that our margin will increase as well. We intend to continue this growth also in 28. While a more exact forecast can only be provided in the course of the year, we want to clearly exceed the EUR 2 million mark in sales and achieve further improvements in our EBIT margin.

16 16 Report Forecast share of natural gas imports in total primary energy supply in the EU % % % % % % Source: Survey Possibilities of a European strategy for feeding biogas into the grid of the Institute for Energetics and Environment in Leipzig, Germany

17 Annual Report Biogas as a substitute for natural gas Germany s strong dependence on natural gas and oil imports was never a secret. Most recently, however, attention has focused on the country s dependence on Russia in particular, and this issue is now being debated by experts more intensively than ever before. Germany currently consumes some 95 billion cubic metres of natural gas per year. This is equivalent to around 24 % of the country s total primary energy supply. Approximately 85 percent of this natural gas is imported; more than 35 % from Russia and this share will inevitably continue to rise unless Germany makes substantial efforts to develop alternative sources. A similar situation can be observed at EU level. While half the gas consumed today still comes from regional sources, in the medium term three quarters of the gas consumed will have to be imported. This would obviously heighten Germany s and the EU s dependence, especially against the background of the growing hunger for energy in Asia, particularly in India and China. These trends continue to fuel political, scientific and economic debate about ways to ensure Europe s energy supplies in the coming years and decades based on forms of energy which have already proven their worth. A study entitled Möglichkeiten einer europäischen Biogaseinspeisungsstrategie ( Possibilities of a European strategy for feeding biogas into the grid ), by the Institute for Energy and Environment in Leipzig has explored the question whether biogas has the potential to substitute natural gas and guarantee supplies in the EU. According to the results of this study, the cultivation of energy crops suitable as feedstock for biogas production in a corridor along European natural gas pipelines, could end Germany and Europe s dependence on natural gas imports. The EU currently consumes approximately 5 billion cubic metres of natural gas per year. Assuming a reasonable increase in energy efficiency, this quantity could be replaced by biomethane by 22. Apart from ensuring the reliability of supply, this would also result in a clear reduction of greenhouse emissions, create more than one million jobs all over Europe and retain substantial financial funds within the European economy instead of expending them on import bills.

18 18 Report Development: Biogas plants in Germany 26 3,5* 24 2, 22 1,6 2 1, Source: German Biogas Association * estimated

19 Annual Report The important role played by biogas in the renewable energy mix has long been an established fact. Its potential for mass production and its potential to guarantee energy supplies in Germany and in the EU were however less certain. The study therefore focused on this important issue, analysing the available potentials and all technical aspects as well as the costs of production and provision. The results provided a basis for assessing the viability of feeding biogenous gases into the gas grid and its potential contribution to the provision of energy in Europe and Germany. In addition, the study discussed the legal and market-relevant framework conditions as well as the ecological aspects of this technology. The conclusion: fossil natural gas can be substituted by biomethane which can be produced from both biogas and from Bio-SNG (synthetic natural gas). Both processes are very similar but rely on different sources of feedstock and are therefore highly complementary. However, biogas is technologically further advanced and suitable for mass production already today; research into Bio-SNG is still at a very early stage. This means that only biogas is actually available as a substitute for natural gas in the medium term. Legal framework European legislation is needed to push ahead this development. At present, most European energy providers are not yet obliged to allow processed biogas to be fed into their grids. This is why the authors of the study call for Germany s successful EEG (renewable energy grid feeding act) to be translated into a Europe-wide framework which consistently defines the feeding conditions as well as the amount and the duration of the remuneration paid to the biogas producers. Agricultural prerequisites There is sufficient arable land available which could be utilised to grow energy crops in order to make Germany and the EU independent from natural gas imports. The Leipzig researchers also looked at the parallel development of arable land available for food production. They found that there was still sufficient unused land alongside the natural gas pipelines which could be used to grow energy crops. The crops could be processed in nearby facilities, enhanced to natural gas standards and then be fed on site into the grid.

20 2 Report Efficiency per hectare as a decisive criterion Example biofuel: From one hectare you can drive... Kilometers 8, biogas, biomethane 6, 4, bioethanol 2, biodiesel vegetable oil Source: German Biogas Association

21 Annual Report Though the cultivation of these crops competes for land with other exploitation methods like the cultivation of rape for biodiesel production and the cultivation of grain for the production of ethanol, the higher energy efficiency per hectare militates in favour of biogas. Reduction of greenhouse gas emissions. Feeding biogas into the grid could not only help to ensure the reliability of supplies but also contribute significantly to the reduction of greenhouse gases and other forms of air pollution. According to the study, the substitution of natural gas would reduce emissions of greenhouse gases by almost 1 billion tons by 21. Another 2 million tons could be saved in the period up to 22. This means that the EU 25 could reduce their carbon dioxide emissions by 15 % in the period up to 21, thereby exceeding the EU target set in the Kyoto Protocol. While the use of locally produced biogas would certainly be preferable from an environmental point of view, the import of biogas would hardly detract from its ecological benefits and would still represent a clear advantage compared to natural gas. Benefiting the economy Promoting the use of biogas would also mean substantial benefits for the economy. The capital funds currently being transferred to the natural gas-exporting countries would be retained in Germany and in the EU and fuel the local economies. Assuming full use being made of all potentials, clearly more than one million new jobs could be created in farming and plant engineering and operation. Apart from highly qualified jobs in the engineering sector and in the skilled trades, this would create employment in the agricultural sector, in particular. These effects should be taken into account in the debate about the required government subsidies in the start-up phase - in the long term, goverments would receive billions of euros in VAT and income tax alone. Add to this the fact that a biogas industry of these proportions would be positioned as an international technology leader. Worldwide demand for biogas plants will rise strongly as soon as this technology becomes fully competitive with natural gas without requiring special subsidies and supporting legislation. Experts expect this to be the case three to five years from now. By then Germany will enjoy a significant competive advantage and the resulting export opportunities will bring positive effects for the German economy and employment market.

22 22 Report of the Supervisory Board REPORT OF THE SUPERVISORY BOARD In the course of the fiscal year, the Supervisory Board was informed about the situation of the company, the business development and the business policy in written and oral reports by the Management Board as well as in joint meetings, and continuously monitored the management of the company on this basis. The Supervisory and Management Boards reperatedly discussed the recommendations and suggestions of the German Corporate Governance Code and issued a Declaration of Conformity in accordance with Section 161 of the German Stock Corporation Act (AktG). The explanations on the Declaration of Conformity have been included in the Annual Report 26. The Supervisory Board performed an efficiency review in the form of a self-assessment. The Supervisory Board held six ordinary meetings in fiscal 26. No committees were formed. Following the Annual General Meeting on April 6, 26, at which new Supervisory Board members were elected, the Supervisory Board addressed business issues that required its approval and discussed them in detail before passing a resolution. Business issues of particular importance included the IPO, the expansion of the Management Board, the market entry in the USA via the Schmack Bio-Energy LLC joint venture with the Kurtz Group, the investment in Stelzenberger Biogas GmbH, the takeover of CarboTech Engineering GmbH and the development of the business model for the operation of own biogas plants. In the context of this business model, the company established Schmack Energie Holding, which implements projects also in cooperation with regional and nationwide energy utilities. At these meetings, the Supervisory Board satisfied itself of the fact that the Management Board was managing the business properly and had taken all measures effectively and in a timely manner. In between meetings, the Management Board informed the Supervisory Board about the development of the company in a regular, timely and comprehensive manner. In this context, the monthly reporting system plays an important role; it shows and explains current key figures in comparison with the budgeted and previous year s figures. The Supervisory Board inspected the relevant planning and accounting documents and satisfied itself of their correctness and appropriateness. Furthermore, the Management Board notified the chairman of the Supervisory Board in periodical personal or telephonic conversations about all important developments and upcoming decisions. The Management Board s Code of Procedure regulates the amount of business dealings which are subject to approval by the Supervisory Board. Approvals of business dealings were carried out following the review of the documents and debate with members of the Management Board. The financial statements of Schmack Biogas AG prepared by the Management Board and the consolidated financial statements for the fiscal year 26 were audited under consideration of the accounts, the management report of Schmack Biogas AG, the Group management report, and the dependent company report, by Rödl & Partner GmbH, Wirtschaftsprüfungsgesellschaft, Steuerberatungsgesellschaft, Nuremberg, who were appointed auditors at the ordinary Annual General Meeting dated April 6, 26. In line with the review of the risk early identification system in accordance with Section 317 para. 4 of the German Commercial Code (HGB) the audit also covered the measures taken by the Management Board for the early identification of risks that may jeopardise the success and the continued existence of the company. The auditors raised no objections and issued an unqualified audit certificate. The financial statements and the management report of Schmack Biogas AG and the consolidated financial statements and management report, which received an unqualified audit certificate from Rödl & Partner GmbH, Wirtschaftsprüfungsgesellschaft, Steuerberatungsgesellschaft, Nuremberg, as well as the dependent company report and the auditors audit report were made available to the Supervisory Board for inspection. The Supervisory Board examined the documents that were submitted in accordance with Section 17 para. 1 and 2 AktG as well as the dependent company report and the auditors audit report and raised no objections. The Supervisory Board agrees with the audit results of Rödl & Partner GmbH, Wirtschaftsprüfungsgesellschaft, Steuerberatungsgesellschaft, Nuremberg.

23 Annual Report The certified public accountant charged with testifying the financial statements attended the relevant agenda items of the Supervisory Board meeting on April 16, 27, at which the financial statements were adopted and the consolidated financial statements were approved, and reported on the audit of the financial statements and the consolidated financial statements. The Supervisory Board approved the financial statements and the consolidated financial statements for the fiscal year 26. The financial statements have thus been adopted. The Supervisory Board agrees with the management report and the consolidated management report of the Management Board. In accordance with the revised Law Implementing the Takeover Directive (Übernahmerichtlinie-Umsetzungsgesetz), the Management Board provided information pursuant to Section 289 para. 4 and Section 315 para. 4 of the German Commercial Code (HGB) in the management report and consolidated management report. This information primarily relates to the composition of the subscribed capital with existing lock-up agreements and to contracts of Schmack Biogas AG that are subject to a change of control. The Supervisory Board reviewed these statements and explanations. The audit has shown that the information pursuant to Section 289 para. 4 and Section 315 para. 4 HGB as well as the explanations provided by the Management Board are accurate. Dr. Peter Terhart and Thomas Seibold resigned from the Supervisory Board with effect from April 6, 26. The Management Board and the Supervisory Board would like to thank both gentlemen for their work and their support. At the Annual General Meeting dated April 6, 26, Michael Fehn and Walter Gnauert were appointed to the Supervisory Board. Horst Kuschetzki was appointed substitute member. At the constituent meeting of the Supervisory Board on April 6, 26, Walter Gnauert was elected Chairman and Michael Fehn was elected Vice Chairman. Following the accomplished capital increase and placing in February 27, Dr. Philipp Hasler allocated his board membership. His place was taken by the previous substitute member Horst Kuschetzki at February 22, 27. Dr. Alexander Götz was appointed to the Management Board with effect from October 1, 26. He is responsible for Finance, Controlling, Legal, Human Resources, IT and Purchasing. Ulrich Schmack was appointed CEO. The Supervisory Board would like to express its thanks and respect to the Management Board and all employees for their achievements and the great commitment shown in the past fiscal year. Schwandorf, April 18, 27 Supervisory Board Walter Gnauert Chairman