New Horizons Annual Report 2007

Transcription

1 New Horizons Annual Report 2007

2 Key Figures Financial Statements (IFRS) Fiscal 2007 Fiscal 2006 Fiscal 2005 Fiscal 2004 Gross revenues in tsd. EUR 678, , , ,365.2 Ebit in tsd. EUR 28, , , ,557.4 Earnings before tax in tsd. EUR 29, , , ,057.5 Net profit in tsd. EUR 21, , , ,574.1 Total assets in tsd. EUR 673, , , ,367.8 Shareholders equity in tsd. EUR 326, , , ,025.3 Shareholders equity ratio % Shares outstanding * 1 EUR 8,731,325 7,507,801 5,693,698 5,401,198 Earnings per share * EUR Shares outstanding 1 EUR 8,993,576 8,101,797 5,941,198 5,401,198 Market capitalization ** in tsd. EUR 1,124, , , ,322.0 Closing price ** EUR Staff (REpower Systems AG) number 1, * Weighted average ** Last trading day

3 Contents Letter to Shareholders 12 The Share 16 Corporate Governance 22 Management Report 30 Business model 32 Market 33 Business development 36 Disclosures in accordance with Article 289 Paragraph 4 and Article 315 Paragraph 4 of the German Commercial Code (HGB) 40 Asset, finance and earnings situation 41 REpower Systems AG 42 Risks and opportunities 43 Supplementary report 46 Forecast 47 Long-term sustainability 48 Research & development 51 Closing statement on the report on relations with affiliated companies 52 Group Notes 54 Introduction 64 Consolidation 64 Accounting policies 66 Information on individual balance sheet items 72 Information on the income statement 81 Contingent liabilities and other financial obligations 84 Financial risks and financial instruments 76 Capital management 89 Information on segment reporting 89 Information on the cash flow statement 89 Related party disclosures 90 Information on the corporate bodies of REpower Systems AG, Hamburg 90 Declaration of conformity to the German Corporate Governance Code 91 Remuneration for the Supervisory Board and Executive Board of REpower Systems AG 91 Information on fees paid to auditors 93 Appropriation of REpower Systems AG result 93 Material events after the reporting date 93 Auditors Report 98 Corporate bodies 100 Supervisory Board Report 102 Glossary 106 Imprint 112

4 Contents

5 Neue New Horizonte Horizons New Horizons Within just a few years REpower advanced from a pioneer to a real top-class brand. As a prime supplier we are consistently striving to satisfy our own high quality standard in the development of new turbine types and services. No matter if it is about strong winds or gentle breezes, plains or mountains, onshore or offshore projects: REpower provides the optimal solution for every location and all conditions in an efficient, reliable and profitable way. The REpower 5M offshore wind turbine serves not least as symbol for a successful transfer of our internationally proven technology to new dimensions.

6 New Horizons Sustainabil Perhaps little Johnny will leave school in 2024 but whichever year it is, you can be sure that he will be enjoying the clean, green renewable energy produced by REpower turbines. Only the right combination of innovation and proven technology delivers long-term performance. Our investment in new technologies and in our employees know-how ensures a reliable product which secures your investment s value.

7 New Horizons ity

8 New Horizons Tra

9 New Horizons nsparency Transparency means security. This holds true for our customers and for our shareholders. Our REguard Wind Farm Management System provides our customers with comprehensive analysis and reporting functionalities that can be accessed via the Internet anytime, anywhere.

10 10 Neue New Horizons Horizonte Intelligenc Those who consider the importance of maintenance during the design phase, save themselves expensive separate solutions. Ease of access, generous working space and optimum lighting provide our service teams with ideal working conditions and a safe environment. This ensures that our customers benefit from fast servicing and an excellent operational availability.

11 Neue New Horizonte Horizons 11 e

12 12 Letter to Shareholders Letter to Shareholders

13 Letter to Shareholders 13

14 14 Letter to Shareholders Letter to Shareholders Dear Shareholders, We look back on one of the most eventful fiscal years in REpower s history: a battle for the majority holding in our company between the Areva Group and the Suzlon Group, a capital increase, changes to the Executive Board and Supervisory Board, expansion into the US market and other major commercial successes these were the milestones in this exciting year. In fiscal year 2007, we once again succeeded in improving our important financial key ratios significantly: consolidated sales increased by more than 48 percent to EUR million. The consolidated operating result of EUR 28.2 millions not only constitutes the largest in the company s history but also an increase in the EBIT margin to 4.2 percent compared with 2.6 percent in the previous year. Profitable growth was an important cornerstone of our RE-New program. We achieved the targets we set ourselves in We are proud of this success. However, we are not resting on our laurels; rather we will continue to strive for profitable growth. At 1,179.5 megawatts, the volume of newly acquired orders was almost 50 percent up on the previous year s figure with the result that the order backlog reached the record figure of 1,297.5 megawatts at the year-end. This figure does not yet include orders which will result from the successful conclusion of various framework agreements. The ability to innovate, excellent reliability, outstanding quality and performance-oriented service are the characteristics that customers appreciate in REpower. We have set standards worldwide with our products and are now profiting to a very strong extent from growth in our market. The new shareholder structure will not change these claims in any way either. You can rely on that. Per Hornung Pedersen Pieter Wasmuth Matthias Schubert CEO CFO CTO

15 Letter to Shareholders 15

16 16 The Share REpower shares

17 The Share 17

18 18 The share Share price rises by 60 percent Share capital increased to EUR 8,993,576 With growth in the share price of just under 60 percent, the REpower share achieved all-time highs for the second year in succession. The closing price in 2007 was EUR compared with EUR in the previous year. The reasons were the assumption of good figures, the large number of framework agreements obtained and major orders at REpower Systems AG as well as excellent national and international conditions for the wind energy sector as a whole. Greater interest in investments in the area of renewable energy and the takeover pushed up average trading volume on the XETRA trading platform markedly in On average 26,693 shares were traded a day in 2007 compared with 17,070 in the previous year: an increase of 56.4 percent. The capital increase in April 2007 was very positively received by shareholders. Over 95 percent of the new shares were subscribed as part of the rights offer at a price of EUR per share. The remaining shares were placed with institutional investors through a so-called accelerated bookbuilding process at a price of EUR by HSBC Trinkaus & Burkhardt. Shareholder structure Freefloat 13,5% Martifer 23,0% Stock price chart 170 EUR Suzlon 33,6% AREVA 29,9% January February March April May June July August September October November December As a result of the capital increase, the share capital of REpower Systems AG has increased by EUR 810, from EUR 8,117, to EUR 8,928, As part of the 2005 share option plan, a total of 65,400 of 67,150 subscription rights were exercised in This resulted in a contingent capital increase of EUR 65, The share capital increased to EUR 8,993, as a result.

19 The share 19 Coverage of REpower has fallen in recent months because of its low free float of 13.5 percent. It is currently monitored by Goldman Sachs (target price EUR 200), HSBC (target price EUR 140) and Lehman Brothers (target price EUR 155). Parallel to the publication of the quarterly reports, REpower organised international telephone conferences at which the financial community had the opportunity to address the Executive Board directly. The company s shareholders again expressed their support for the company at this year s Annual General Meeting on 21 June. All the items on the agenda were passed in line with the recommendations of the Executive Board and the Supervisory Board by significant majorities. Some 63 percent of the voting capital was represented at the Annual General Meeting: part of the shares which were offered to Suzlon as part of the takeover bid were not transferred in time for registration on the relevant cut-off date. At an extraordinary General Meeting on 17 October 2007, the beginning of REpower Systems AG s fiscal year was moved, with the consent of 100 percent of the capital present there, to 1 April each year. Accordingly the fiscal year will end on 31 March of the following year. The period from 1 January 2008 to 31 March 2008 is to be a short fiscal year. Share data ISIN Share type DE No-par shares Initial listing 26 March 2002 Capital measures Increase of the share capital by EUR 810, to EUR 8,928, by issuing new shares in April Increase of the share capital by EUR 65, to EUR 8,993, as part of a share option plan Share capital as of 31 December 2007 EUR 8,993, Market capitalisation as of 28 December 2007 EUR 1,124,197, Year high Year low EUR /share EUR 77.23/share Next Annual General Meeting 20 August 2008

20 20 The share Takeover On 5 February 2007, the French AREVA Group submitted a voluntary public takeover bid for the shares of REpower Systems AG in accordance with the WpÜG (German Securities Acquisition and Takeover Act). The bid amounted to EUR per share. At the time, this was equivalent to an enterprise value of EUR 851 million. On 9 February 2007, Suzlon Windenergie GmbH informed REpower Systems AG of its intention to submit a counter bid to the takeover bid by the French AREVA Group. The counter bid by Suzlon Windenergie, an investment company of Suzlon Energy Ltd., the Indian wind turbine manufacturer, and Martifer, the Portuguese steel and metal corporation, offered shareholders a takeover price of EUR 126,00 per share. On 15 March 2007, the AREVA Group raised its bid to EUR 140 per REpower share. On 10 April 2007, Suzlon announced the acquisition of a share package amounting to 7.7 percent of the share capital of REpower Systems AG at a price of EUR 150 per share. As a result of the acquisition, the price offered by Suzlon Windenergie GmbH rose by virtue of law to EUR 150 per REpower share. Based on the new share capital (including the capital increase concluded in April 2007), this offer was equivalent to an enterprise value of EUR 1,339 million. After announcement of the take-up rates by the bidders on 11 May 2007, the legally stipulated further acceptance period began and ended on 25 May At this date, the offers of the AREVA Group and Suzlon Windenergie GmbH were EUR 140 and EUR 150 per REpower share respectively. On 24 May 2007, the AREVA Group and Suzlon agreed to a voting pool agreement. AREVA will transfer its voting rights to Suzlon but will retain its shares in REpower Systems AG. The Executive Board of REpower Systems AG had already announced during the takeover battle that both bidders were suitable strategic partners for achieving accelerated growth in the rapidly expanding international wind power industry. Through the agreement now reached between ARE- VA and Suzlon, REpower can benefit from collaborating with both bidders.

21 The share 21

22 22 Corporate Governance Corporate Governance

23 Corporate Governance 23

24 24 Corporate Governance Code as maxim for building confidence Promoting shareholder interests is central focus The increasing internationalisation of the capital markets requires value-oriented corporate management and oversight. REpower Systems AG secures this by implementing the principles of the German Corporate Governance Codex and recognises the guidelines as the basis of its corporate activities. REpower Systems AG has a strong commitment to efficient cooperation between the Executive Board and Supervisory Board, to promoting shareholder interests and to open and transparent communication between management and investors. The key principles of the code have thus been applied in practise across the company for some time. The simultaneous provision of shareholders and the interested public with information takes place largely via the Internet, primarily in the form of ad hoc notifications and press releases. In addition, the Annual General Meeting is presented on REpower Systems AG home page, from the established deadlines, the invitation, the agenda to the voting outcomes and the speech of the Executive Board. The internationally recognised IFRS account standards ensure the necessary transparency of business transactions in the quarterly and annual reports. A variable remuneration of the REpower Executive Board is aligned to the increased value of the company. This promotes ongoing improvement of the company organisation, corporate strategy and management. Remuneration report The remuneration report is a component of the Group management report. Since the 2006 reporting year, in the section from to the German Corporate Governance Code makes reference to the Executive Board Remuneration Publication Act and demands the disclosure of Executive Board remuneration in the Management Report. The remuneration report outlines the principles that are applied when setting the remuneration of the Executive Board of REpower Systems AG and explains both the amount and the structure of Executive Board income. The principles and the amount of the Supervisory Board s remuneration are also described. Executive Board It is incumbent upon the Supervisory Board s Personnel Committee to set the structure and the amount of the remuneration paid to the Executive Board of REpower Systems AG. For its part, it will keep the Supervisory Board regularly informed of its resolutions. The demand placed on the remuneration system for the Executive Board is to remunerate members of the Executive Board appropriately in line with their area of operation and their area of responsibility and at the same time to take account of the Executive Board s performance and the company s success through variable components. To this end, the remuneration system consists in detail of a fixed basic remuneration, a variable remuneration and a component based on share options, which offers a long-term incentive. The

25 Corporate Governance 25 amount of the variable remuneration is based on achievement of the Group s planned net income before taxes and interest (EBIT) with reference to the fixed remuneration. The amount of the variable remuneration is capped. The target figure for EBIT is set each year in advance on the basis of the plans adopted by the Supervisory Board. The amount of the fixed remuneration is shown in the following table. The performance-related, variable remuneration amounts to 30 percent of the fixed annual salary if 75 percent of the amount budgeted for EBIT is achieved. It increases proportionally to 40 percent of the fixed annual salary if the amount budgeted for EBIT is achieved in full. It rises further to 50 percent of the fixed annual salary if EBIT reaches 125 percent of the budgeted amount (maximum bonus). Name Year Fixed Variable remuneration remuneration Pension Share options EUR EUR EUR EUR Prof. Dr. Fritz Vahrenholt , ,000 20,000 (CEO) ,000 66,000 80,000 24,000 Pieter Wasmuth , ,000 15,000 (CFO) ,750 48,000 68,250 19,000 Matthias Schubert , ,000 15,000 (CTO) ,000 48,000 60,000 14,000 Since fiscal year 2006, the Executive Board has had the opinion of transferring part of the fixed remuneration into a company pension. All three members of the Executive Board took up this option. In the context of the existing share option programs, share option rights were also granted to members of the Executive Board in fiscal years 2006 and The options can only be exercised if the share price of REpower Systems shares rises to at least 120 percent of the base price on at least 21 days before exercise. The fair value of the options as of 31 December 2007 totals EUR 3,772 thousand (previous year: EUR 783 thousand). At the time the options were granted in 2006, the fair value amounted to EUR per option, while it amounted to EUR in Payments to former members of the Executive Board In addition to the above remuneration, the Executive Board member who left in the fiscal year 2005, Thomas Franck, was also granted share-based remuneration which depends on the future development of profits. In fiscal year 2007, the remuneration was paid in cash. For the former Chairman, Prof. Dr. Fritz Vahrenholt, who left the Executive Board on the reporting date, payment of the remaining claims under his employment contract of EUR 1,631,500 was agreed. Of this figure, EUR 1,072,500 was paid in 2007 and the residual amount of EUR 559,000 was transferred to provisions. Undertakings in the event of employment ending prematurely Generally, payment of a severance package is not envisaged in the employment contracts of Executive Board members in the event of their employment ending prematurely.

26 26 Corporate Governance Supervisory Board The Supervisory Board s remuneration is set by the Annual General Meeting; it is regulated in the company s Articles of Association. The current regulation provides for members of the Supervisory Board receiving a fixed remuneration of EUR 10, per fiscal year lasting 12 months and an attendance fee of EUR per Supervisory Board meeting in addition to reimbursement of their expenses. In addition, members of the Supervisory Board receive an amount of EUR per percentage of the profit, which is distributed to shareholders above 20 percent of the company s share capital as variable remuneration in line with the Annual General Meeting s proposal for the appropriation of profits. However, the variable remuneration may not exceed EUR 20, per fiscal year. The Chairman of the Supervisory Board receives twice the remuneration while the Vice Chairman of the Supervisory Board receives one and a half times. If sales tax is payable on the remuneration, the company is obliged to reimburse it. The table below provides a breakdown of Supervisory Board member remuneration for fiscal year 2007 in line with the REpower Systems AG Articles of Association. Name Attendance fees 2007 Fixed remuneration 2007 Total EUR EUR EUR Tulsi R. Tanti (Chairman since 21 June 2007) 5,000 10,000 15,000 Bertrand Durrande (Supervisory Board Chairman to 21 June 2007, Vice Chairman from 22 June 2007 to 7 February 2008) 11,000 17,500 28,500 Dr. Jorge Martins (member to 31 December 2007, Vice Chairman to 21 June 2007) 7,250 12,500 19,750 Dr. Rolf Bierhoff 3,500 5,000 8,500 Dr. Hans-Joachim Reh 6,000 10,000 16,000 Oliver Heinecke 6,000 10,000 16,000 Alf Trede 6,000 10,000 16,000

27 Corporate Governance 27 Supervisory Board Committees The REpower Systems AG Supervisory Board following the recommendations of the German Corporate Governance Code and established committees last year. The members of the Audit Committee are Dr. Jorge Martins, Dr. Hans-Joachim Reh and Oliver Heinecke. The Personnel Committee is made up of Bertrand Durrande, Dr. Jorge Martins and Dr. Rolf Bierhoff. In view of the personnel changes in the Supervisory Board, the Personnel Committee and the Audit Committee had to be re-staffed. The current version of the German Corporate Governance Code also requires the creation of a Nomination Committee, which proposes candidates for election to the Supervisory Board to the Annual General Meeting and which must be staffed with shareholders representatives. With effect from 1 January 2008, the Personnel Committee is made up of the members Tulsi R. Tanti, Bertrand Durrande and Prof. Dr. Fritz Vahrenholt. In future, the Supervisory Board members Andre Horbach, Oliver Heinecke and Bertrand Durrande will be represented in the Audit Committee. The new Nomination Committee will be staffed by Bertrand Durrande and Tulsi R. Tanti.

28 28 Corporate Governance Declaration of Conformity Pursuant to Article 161 of the Stock Corporation Act, the Executive Board and Supervisory Board of a listed company have to declare on an annual basis that the company complies with the recommendations of the German Corporate Governance Code and which recommendations are not or will not be applied (submission of the so-called Declaration of Conformity). The company has declared that it complies with the recommendations. After verbal discussion, the Executive Board and Supervisory Board resolved the following Declaration of Conformity: The company is in conformity to the recommendations of the German Corporate Governance Code in the version updated 14 June Conformity is to be maintained in the future. Since issuing the previous year s disclosure pursuant to Article 161 of the Stock Corporation Act, the company has complied with the guidelines made in the Government Commission German Corporate Governance Code with the exceptions noted in the previous Declaration of Conformity.

29 Responsibility statement 29 Responsibility statement To the best of our knowledge, and in accordance with the applicable reporting principles for financial reporting, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the management report of the group includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal opportunities and risks associated with the expected future development of the group.

30 30 Management Report Joint Management Report In 2005, we reviewed the strategic focus of REpower Systems AG and adapted it to requirements with the RE-Act program. As a pacesetter in terms of the wind industry s technological development, we are focusing on our strengths. We supply our customers with premium products that set standards and outstanding services 24 hours a day was another year characterised by sustained growth. Our sales increased by over 48 percent to EUR million, while the operating result grew even more rapidly by percent to EUR 28.2 million. As a result of our successful participation in tenders and numerous major orders as well as framework agreements, we recorded a record order backlog of just under 1,300 megawatts. In addition, our move into the USA market means that we are now positioned in one of the world s most important markets.

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32 32 Management Report Business model Quality is our overriding priority Ongoing optimisation of the product portfolio The core business of REpower Systems AG is the system development, production, licensing and sales of wind turbines with nominal capacities between 2,000 and 6,000 kilowatt. The production facilities of Husum/Schleswig-Holstein and Trampe/Brandenburg have an annual production capacity of approximately 625 turbines. This figure is calculated from a capacity in Trampe of 275 turbines operating on a double shift basis and a capacity of 350 turbines in Husum, also operating on a double shift basis. In the reporting period, work also started on the construction of an additional production site in Bremerhaven. The dimensions of the REpower 5M, whose nacelle is the size of a detached house and weighs around 290 tonnes, place particular demands on the size and infrastructure of the production site. In Bremerhaven, REpower has found a suitable production site for volume production of its offshore turbine 5M, at which initially some 80 5M offshore turbines will be produced per year in a double shift operation. In addition to realising turnkey wind farms, REpower also offers service and maintenance packages in line with individual customer requirements. REpower thus meets the highest claims on technology and quality while continuing to pursue its values of effective business results, sensitivity to social issues and ecological responsibility. In terms of innovation, quality and profitability of wind turbines, REpower Systems AG is targeting the technology leadership. With its top flight products, it wants to make a decisive contribution to wind energy competing with fossil fuels. With a high standard of quality for developing new turbines and services, the company concentrates specifically on parts of the wind energy value-added chain, in this way generating profitability and synergy effects. At our development site in Rendsburg alone, more than 130 qualified engineers are working systematically to optimise our existing product lines and develop new, higher performing ones. Inhouse engineers also develop key components which are then manufactured by selected, qualified suppliers. With an extensive service range, REpower provides a high level of quality in the services sector. 24-hour remote monitoring secures ongoing control and ensures the smooth and reliable operation of the wind turbines. A tightly interlaced service network with a REpower service team of 400 provides for rapid reaction times. In Germany, a service team employee can reach the systems maintained by REpower in less than two hours and he can reach those in our European core markets in less than 24 hours. As a result, REpower achieves an above average technical availability of more than 97.5 percent for the whole of Europe. In addition, for the fifth time REpower is ranked second in terms of customer satisfaction in the annual service survey carried out by the German Wind Energy Association.

33 Management Report 33 Market Sustained global economic growth German economy is expanding Wind energy branch is generating jobs Economic framework conditions According to the Federal Statistical Office, the German economy again grew rapidly in Initial calculations indicate that inflation-adjusted gross domestic product (GDP) was 2.5 percent higher than in the previous year. Manufacturing industry, in particular, recorded strong growth of 5.2 percent. The German economy was again driven by exports and corporate investment. At 8.3 percent, exports increased far more markedly than imports. In 2007, companies again invested far more (+ 8.4 percent) in new machinery, equipment and vehicles than in the previous year. In 2007, growth in global real gross domestic product of an estimated 5.1 percent was only slightly lower than in 2006 (5.4 percent). However, the economic climate deteriorated towards the yearend, particularly as a consequence of the property crisis in the USA. The global economy will lose momentum perceptibly over the next year. In addition to other factors, the booming global economy has led to another increase in the oil price. The sustained high level of prices for fossil energy sources in conjunction with growing climate awareness, which was reflected at this year s G-8 Summit, continues to stimulate investment in renewable energies. According to calculations by the German Renewable Energies Association, the emission of 115 million tonnes of CO2 could be avoided in Germany alone through the use of regenerative energy sources. Oil price development 100 USD/Barrel Top prices for fossil energy sources Source: Bloomberg

34 34 Management Report Over the next few years, in addition to benefiting from high oil prices and climate awareness, the German market could also benefit from the amendment of the Renewable Energies Act (EEG). In its draft amendment, the German government is planning to cut the annual decline (decrease) in the rate for wind energy from onshore turbines by one percentage point. At the same time, a bonus of 0.7 ct/kwh will be granted for grid-friendly onshore turbines. Electricity tariff for wind power versus stock exchange price 9 ct/kwh Tariff for new turbines low wind speed 2) EEG-hurdle rate 3) 2 EEX Baseload 1) Year 1) EEX baseload: weighted average price for baseload electricity by quarter 2) A higher minimum rate per kwh is applied for the first five years for every new wind turbine installed. Thereafter, rates are determined by the amount of power the system would generate in a referential location with an average annual speed of 5.5 m/s at a height of 30 m above ground. 3) Applicable rate after expiration of the rate described under point 2) Sector development In 2007, wind energy again recorded strong growth. According to initial estimates by the Global Wind Energy Council (GWEC), some 20,000 megawatts of new capacity was installed. At the end of 2007, global installed output totalled over 94,000 megawatts against 74,223 megawatts in This means that the global market grew by around 30 percent. Growth was driven most notably by the markets in North America, Europe and Asia. According to estimates by the German Wind Energy Association, German value-added amounted to over EUR 5.6 billion in 2006 and the first projections indicate that EUR 7.4 billion is expected for In Europe, installations totalling 8.5 gigawatts (GW) were registered, led by Spain with 3.5 gigawatts. In 2007, the world s largest individual market was the USA (5.2 gigawatts) followed by Spain and China (3.4 gigawatts). By contrast, growth in the German market has slowed: at 1.6 gigawatts, newly installed output was approximately 25 percent down on the previous year.

35 Management Report 35 Offshore wind energy The planned EEG amendment is expected to stimulate the German market. The decrease applicable to offshore wind energy use will not be phased out as originally planned in 2008 but only in According to the draft law presented by the federal cabinet, the initial rate will be increased from 8.74 cents to 12 cents per kwh and for turbines which are commissioned before 31 December 2013, to 14 cents per kwh. New output installed in Germany 3,500 Installed capacity in MW 25,000 3,000 2,500 2,000 1,500 1, Newly installed Cumulated 20,000 15,000 10,000 5, Cumulated installed, MW Source: DEWI In addition, a limitation regarding the assumption of grid connection fees for offshore wind farm projects by the grid operator, which was originally to run until the end of 2011, was cancelled. Appropriate framework conditions were created by the adoption of the Accelerated Infrastructure Planning Act by the German government in The legislation states that grid operators must assume the costs for linking offshore wind power to the grid. The attractiveness and economy of offshore wind farms are being markedly increased by the new regulations.

36 36 Management Report Business development Sales and income figures well up on the previous year Order backlog at record levels A joint Management Report has been produced as the business summary and opportunities and risks reports of REpower Systems Group and parent company REpower Systems AG are equivalent. Overall it is apparent that business development has gone well both at the parent company REpower Systems AG and in the REpower Systems Group. REpower Systems Group The following information is based on the business figures of the REpower Systems Group in line with IFRS. Installed output up Installed output percent Further increase in the share of MM series turbines In fiscal year 2007, the REpower Systems Group installed or delivered 332 wind turbines for a total output of megawatt. In the previous year period, 263 turbines with a total output of megawatt were installed or delivered. In terms of installed output, this equates to an increase of 32.6 percent. The share of MM series turbines with a rated output of two megawatt again increased during the reporting period. As a result, these units constituted 80 percent of units generating sales recognised during the year (previous year 66 percent). The share of MD series turbines with a nominal output of 1.5 megawatts shrank accordingly to approximately 18 percent (previous year 33 percent). Progress in marketing offshore technology In June 2007, the second 5M turbine in the Scottish Beatrice project was commissioned for our customers Talisman and Scottish and Southern Energy Offshore. Despite delays in this project, the project is a great success as it is a visible demonstration of REpower s involvement in the offshore market segment. When operating, the turbines will provide valuable experience for expanding offshore business. Following intensive negotiations, a supply contract for six REpower 5M turbines for the Belgian Thornton Bank project was signed with the contracting party C-Power in May 2007 in Ostend. The turbines will be supplied, erected and commissioned in summer Special concrete gravity foundations are presently being constructed in Ostend for the project. The investment volume for the first stage of construction amounts to EUR million. Among others, EDF Energies Nouvelles is involved in the project, which is regarded as a further important step towards expanding offshore wind energy in European waters. Plans are in place to extend the project by installing a further 18 turbines in 2010 and 36 turbines in Once the first six turbines are installed successfully, REpower considers it has an excellent chance of concluding the contractual negotiations for the subsequent expansion positively. At the end of 2007, agreement on the installation of 18 REpower 5M turbines for the German Nordergründe offshore wind farm was reached with Energiekontor AG. The total output stands at 90 megawatts and the project will be constructed within the 12 nautical mile zone at the

37 Management Report 37 mouth of the Weser north of Wilhelmshaven. This will make Nordergründe one of the first offshore projects to be completed in Germany and also the first bank-financed offshore project with 5 MW turbines in German waters. The 18 turbines are to be manufactured in the new REpower assembly plant in Bremerhaven, delivery is planned for the period from April to June International installations remain at a high level As in the previous year, the international share of output in relation to turbines which made up sales stood at just under 66 percent. In 2007, output recognised as sales by REpower in Germany stood at megawatts after megawatts. Market share in the German market rose to approximately 10.9 percent. As a result, REpower remains the third largest supplier of wind turbines in Germany. The REpower French subsidiary S.A.S. implemented 80 wind turbines with a total output of megawatt last year (previous year: 65 turbines with megawatt). For REpower, the third largest market behind Germany and France in 2007 was the US market where sales of 56 turbines, or 112 megawatts, were posted. Turbines posted as sales Country Number Output in megawatt Belgium China Germany France Italy Portugal UK Hungary USA Japan Overall result Consolidated sales up Including the consolidated companies, the company generated a total operating performance of EUR million in comparison to EUR million in Consolidated sales rose in comparison to the previous year from EUR million by 48.2 percent to EUR million. 332 erected or supplied wind turbines were recognised as sales. Total output percent In the reporting year, completion of projects was significantly affected by the availability of components. Suppliers failure to keep to deadlines for delivering core components such as blades, large size bearings and gears led to projects being spread unevenly through the year: a very weak first half was followed by a heavy concentration of deliveries in the fourth quarter. The REpower Systems Group generates its consolidated sales primarily (2007: 92.7 percent, 2006: 91.3 percent) from the manufacture and sale of wind turbines, some of which were developed as turnkey solutions with the relevant infrastructure. Other sources of revenue included services, licensing, electricity sales, project sales and other services.

38 38 Management Report Marked improvement in income figures In 2007, the consolidated operating result (EBIT) of EUR 28.2 million was considerably up on the previous year figure of EUR 12.2 million. In the reporting year, the personnel expenses ratio stood at 7.3 percent after 6.2 percent in the previous year. Based on total output, a material expenses ratio of 81.4 percent was achieved, which is an improvement of 2.3 percentage points on the previous year s figure. Other operating expenses increased virtually in line with growth in sales to EUR 48.7 million (previous year: EUR 33.1 million). Apart from the expansion in business volume and the consequent increase in capacity utilisation, the improvement in the operating result is based primarily on the systematic implementation of the RE-New program, which envisages optimisation of contract terms both for purchases and sales as well as numerous reductions in expenditure. Among other things, this is expressed in the improvement in the material expenses ratio. Other operating income rose from EUR 3.0 million to EUR 7.0 million. Improved financial management and the rise in cash generated an increase in interest income. This has improved the balance of interest income and expense vis à vis the comparative period from EUR 1.2 million to EUR 1.4 million. The net result improved from EUR 7.1 million to EUR 21.2 million. The tax rate was 27.1 percent. Order backlog up Order backlog in MW +39 percent Order backlog again rose substantially over the year. As of 31 December 2007, it encompassed 636 wind turbines (previous year: 478 turbines) with a total output of 1,297.5 megawatts (previous year: megawatts) and potential sales volume of approximately EUR 1.3 billion (previous year: EUR million). Framework agreements are not included in the order backlog. Turbines are only included in the order backlog when the customer makes an actual call under a framework agreement. Order backlog breaks down by country as follows: Czech Republic USA France Italy Belgium Japan Portugal Germany Australia Great Britain Country No. of turbines Output in megawatt Germany France Italy USA Great Britain Australia Czech Republic Japan Portugal Belgium Total 636 1,297.5

39 Management Report 39 In the reporting period, the average price per megawatt in the order backlog was EUR thousand. In the previous year, the average price was EUR thousand per megawatt. The increase is due particularly to the higher share of the MM92 turbine in the overall order backlog. MM92 is becoming a bestseller With a share of 98.2 percent, the MM series (2 megawatts) was by far the most important product family in REpower Systems AG s order backlog. The MM92 turbine, which was first produced in 2006, has evolved into the most sought after product in the portfolio within a few months. Turbine type 31 Dec Dec No. of wind turbines Output in megawatt No. of wind turbines Output in megawatt 5M MM MM MM MD ,5 Total ,5 Strong incoming orders in 2007 In the reporting period, the REpower Systems Group received new orders for 586 turbines (previous year: 402) with a total output of 1,179.5 megawatts (previous year: 789.0). Incoming orders for 1,179.5 megawatts Investment volume higher Investments of EUR 45.7 million were made in fiscal year 2007 in comparison to EUR 25.4 million in In 2007, investment concentrated on the production hall in Bremerhaven for series production of offshore wind turbines and the manufacture of rotor blades. EUR 13.2 million were invested for these projects in the reporting year. A further EUR 5.0 million related to the acquisition of rotor blade moulds, EUR 3.6 million for the acquisition of IT equipment and EUR 2.3 million for acquiring land at the Büttel location (Schleswig Holstein). For replacement and extension investments in the vehicle fleet EUR 1.7 million, were invested, for other means of transport EUR 1.5 million. Approximately EUR 1.0 million related to the capacity extension of the production site (Brandenburg). Financing situation The finance management of the REpower Systems Group is aligned to the efficient use of its available resources. Among the Group s long-term objectives are achieving positive total returns and return on equity. In the reporting period, REpower Systems AG significantly increased its lines of credit and guarantees through negotiations with existing and new banks. The company now has lines totalling EUR million at its disposal compared with EUR 194 million as at 31 December On the balance sheet date, guarantee credits of EUR million had been drawn.

40 40 Management Report On the balance sheet date, there were current bank liabilities of EUR 0.5 million. At EUR 1.4 million, non-current loans were below the low level of the year-end 2006 of EUR 2.4 million. A capital increase implemented in April 2007 generated net issue proceeds of EUR million by issuing 810,179 new bearer shares and 65,400 shares from an employee stock option program. The capital increase was implemented taking account of the legal subscription right. These additional liquid funds are needed and will be used for the company s ambitious growth targets. As a rule the transactions of the REpower Systems Group are invoiced in euros. Accordingly, currency risks only have to be hedged in rare cases. The Executive Board decides on whether to hedge currency risks on a case-by-case basis. Disclosures in accordance with Article 289 Paragraph 4 and Article 315 Paragraph 4 of the German Commercial Code (HGB) The share capital of the company is EUR ,00. The share capital is divided into 8,993,576 shares. The company shares are bearer shares. The form of shares, the share of profits and the renewal coupons are determined by the Executive Board, with approval by the Supervisory Board. The claim of shareholders to a securitisation of their shares is excluded. The company may combine individual shares into share certificates which securitise a larger number of shares (global shares). In the case of capital increases, the start of profit sharing for the new shares can be in deviation from Article 60 Paragraph 2 (3) of the Stock Corporation Act. With the approval of the Supervisory Board, the share capital of the company may be increased up to 29 May 2011 by issuing new shares against cash or non-cash contributions on one or several occasions, after partial utilisation of EUR 810,179 up to EUR 3,240,719. The company is authorised to issue profit sharing capital of up to EUR 20 million up to 8 June The company has not yet exercised this right. The share capital has been contingently increased by up to EUR 2,475, The contingent capital increase may only be implemented in the case of issuing cum-warrant and convertible bonds. In addition, the share capital has been contingently increased by up to EUR 504,300. The contingent capital increase is implemented by issuing up to 504,300 new bearer shares is implemented only to the extent that the owners of the subscription rights utilise them in the context of employee stock option plans. The legal regulations of the German Stock Corporation Act apply in the matter of appointing and dismissing members of the Executive Board and of changing the Articles of Association. On 21 June 2007, the Annual General Meeting authorised the Executive Board up to 30 December 2008 to buy back shares with a proportion of up to 10% of the share capital entered in the com-

41 Management Report 41 mercial register on the day of the Annual General Meeting or if this value is lower the share capital existing at the time of exercise of the present authorisation. The shareholder structure and voting rights have changed significantly in the course of the takeover. As a result of the agreement on voting rights by the major shareholders Suzlon, AREVA and Martifer, Suzlon holds 86.5 percent of the voting rights. Following the takeover, these stakes in REpower Systems AG are divided as follows: Suzlon owns 33.6 percent, AREVA 29.9 percent and Martifer 23.0 percent of the shares. Asset, finance and earnings situation The figures for REpower Systems Group assets, finances and earnings for fiscal year 2007 are presented in comparison to those for Assets Non-current assets rose from EUR 57.0 million to EUR 90.2 million. This is due, in particular, to an increase in investment activities. Current assets rose from EUR million to EUR million. This is due to the increase in trade accounts receivable, which rose to EUR million after EUR 95.1 million. Production orders with an asset side balance amounted to EUR 61.3 million compared with EUR 37.0 million in the previous year. On the balance sheet date, liquid funds rose to EUR million (previous year: EUR million). Equity and liabilities At EUR million shareholders equity was considerably up against the level of the previous year of EUR million. The equity ratio increased to 48.4 percent (previous year: 46.0 percent). The increase related primarily to the share capital increase implemented in April Overall, the company has a very sound equity structure, with equity covering 100 percent of non-current assets. At EUR 20.8 million, provisions were slightly up on the level of the previous year (EUR 17.0 million). Of this figure, EUR 19.2 million was attributable to warranty provisions (previous year: EUR 16.5 million). At EUR 1.4 million non-current bank liabilities were even under the low previous year figure of EUR 2.4 million. Trade accounts payable increased from EUR 77.0 million to EUR million. In conjunction with cash and cash equivalents, the Group has adequate resources to finance the continued expansion of its business operations. A further increase of financing requirements resulting from growth opportunities in an expanding market is not excluded. Margin The EBIT margin (operating result in relation to total operating performance) was 4.2 percent after 2.6 percent in the previous year. The reasons for the positive development are the expansion in business volume and the resultant increase in capacity utilisation, price increases and continuing implementation of the RE-New restructuring program.

42 42 Management Report Material expenses The materials expenses ratio was 81.4 percent in 2007 after 83.7 percent in the previous year. An increase of procurement prices for some materials was compensated in part by price increases for wind turbines. Personnel expenses The personnel expenses ratio increased year-on-year from 6.2 percent in the previous year to 7.3 percent in the reporting period. Personnel expenses include one-off payments in connection with personnel changes in the Executive Board. Operating cash flow In the reporting period, the company s operating cash flow amounted to EUR million. This is mainly due to the increase in receivables totalling EUR million. The high figure reported on the balance sheet date is attributable to business volume in the fourth quarter when just under 40 percent of sales were realised. In addition, inventories rose by EUR 31.3 million. The build-up of inventories is based on the increased requirement for buffer stock, in order to be able to counter short-term delays in deliveries of individual components. Liquid assets Despite the negative operating cash flow, liquid funds have, in contrast to the previous year, increased by 20.7 percent to EUR million. The capital increase implemented in April, which generated EUR million in additional funds, has contributed to this development. This was used to offset the operating cash flow and is largely responsible for the increase in liquid funds. Material changes in the scope of consolidation PowerBlades GmbH, Lemwerder, REpower Wind Systems (Beijing) Co. Ltd., Beijing, China, REpower Beneluxbvba, Brussels, Belgium and REpower U.S.A. Corp., Portland/Oregon, USA were acquired or established in 2007 and were therefore included in the scope of consolidation for the first time. REpower Systems AG The following information relates to the financial figures of REpower Systems AG in line with HGB German Commercial Code. The REpower Systems AG parent company generated a total operating performance of EUR million against EUR million in In the reporting period, sales increased from EUR million to EUR million. The operating result for the REpower Systems AG parent company was EUR 16.9 million, coming after EUR 3.3 million for 2006.

43 Management Report 43 REpower Systems AG: selected key ratios Fixed assets rose from EUR 38.6 million to EUR 70.8 million. This is due, in particular, to the increase in investing activities. Within current assets receivables and other assets increased from EUR million to EUR million. This is primarily connected with the increase in receivables from services that have not yet been invoiced, which increased to EUR million after EUR 22.3 million. As at the balance sheet date, liquid funds rose to EUR million (previous year: EUR million). At EUR million shareholders equity was considerably up against the level of the previous year of EUR million. The increase is primarily attributable to an increase in share capital implemented in April The equity ratio shrank from 43.1 percent to 40.4 percent. Overall, the company has a very sound equity structure, with equity covering 100 percent of non-current assets. At EUR 1.9 million, bank liabilities were below the low figure for the previous year of EUR 2.4 million. At EUR 67.7 million, trade payables remained at the previous year s level of EUR 67.5 million. The material expenses ratio was 84.9 percent after 85.4 percent in fiscal year Increases in costs compared with 2006 were virtually offset by increases in efficiency. The personnel expenses declined slightly from 6.6 percent to 6.5 percent. The EBIT margin (operating result in relation to total operating performance) improved from 0.7 percent in the previous year to 2.4 percent. This was primarily the result of higher sales and the consequent higher levels of capacity utilisation. The implementation of the RE-New program and optimising contract conditions in purchasing and sales were factors resulting that expenses did not rise as fast sales which increased by 42.1 percent. Risks and opportunities Risk Management System (RMS) The REpower Systems Group continued to implement measures in line with Article 91 Paragraph 2 of the Stock Corporation Act to ensure that developments jeopardising the continued existence of the enterprise are recognised in good time. These include the continuation of a monitoring system to ensure that existing risks are recorded, analysed and assessed and that risk-related information is systematically forwarded to the responsible decision makers. REpower Systems Group fully implemented this requirement as early as 2002, when it implemented a computer-assisted risk management system. In addition, an internal audit function was added to the risk management system in the second half of This takes account of the evolving risks resulting from the growth of REpower Systems AG. Within the framework of an annual audit plan agreed with the Executive Board, business processes are analysed with regard to risk, measures are devised and adopted. The implementation of these measures is tracked in line with set deadlines and re-evaluated in the form of re-audits.

44 44 Management Report Analysis The starting points for the risks and opportunities analysis at REpower Systems Group are the strategic corporate positioning and the corporate business policy objectives. The scope of risks is determined by the implicit framework of strategic, medium-range, budgeting and other corporate planning processes. Information on risks and opportunities are first established in a systematic fashion. The subsequent assessment provides an appraisal of the potential impact of financial losses or failure to meet business targets reasonably likely to be incurred or transpire, focusing on the effects (scope) and projected probability of incurrence. Risk management is then performed through such preventive measures as adapting market strategy, technology and software, organisational structures, staffing policies, through steps to ensure secure production processes, and through action in the areas of environmental protection, fire prevention and product liability. In addition to methods for managing risks, monitoring procedures are reviewed on an ongoing basis to uncover any potential gaps. Those with business and function responsibility in the REpower Systems Group are responsible for their risk situation and the risk management in their area. This so-called risk owners report twice a year on their risk area in the context of a risk assessment. The information flowing into this risk report allows the identified risks to be accumulated and evaluated by the risk management department. Any changes to risks are reported to the Executive Board. Risk reporting The company has identified 26 distinct business risks. These are subdivided into the three principle categories of corporate risks (14), market and competitive risks (4) and legal and other risks (8). Of these, 23 risks are classified as having a low to medium risk potential, representing no threat to the continued existence of the company. In particular, personnel, supplier, project and product risks are recorded in corporate risks while liquidity and exchange risks are part of the category legal and other risks. A complete evaluation of existing showed that the possible total estimated loss has increased by 10.6 percent compared with the previous year, partly due to the three newly defined risks ( risk of entry into new markets, compliance and interest rate risk ). The potential estimated loss taking account of the probability of loss occurring has only increased by 4.5 percent compared with the previous year. This increase is offset by growth in sales of 48.2 percent, so that in total risk has fallen in relation to sales. On the basis of the risk analysis, three risks are to be viewed as significant for REpower Systems AG. This results in the company being dependent to a not inconsiderable extent on suppliers being able to provide high quality components (quality risk) in the numbers and at the time required (dependency risk). Furthermore, REpower could be subject to product liability claims (technical risk). When the order backlog is high, supply delays of parts necessary for production could occur for REpower Systems AG. In consequence, the company may not always complete contracts on time, incurring contractual penalties for exceeding deadlines for system readiness.

45 Management Report 45 It cannot be excluded that delivery contacts concluded stipulate delivery at a point in time when meeting the completion deadline for systems under contract is impossible due to component supply delays. The consequences of such circumstances could have a negative impact on the company s asset, finance and earnings situation. Organisational development REpower Systems AG has addressed these risks by increasing the number of its suppliers to reduce dependency on individual component vendors. All components employed are produced and supplied by at least two prominent manufacturers. In particular, for example, the purchase of rotor blades for wind turbines was frequently affected by scheduling difficulties in the past, which is why REpower Systems AG has decided to manufacture these components itself. The production plant for PowerBlades GmbH, a majority holding of REpower to manufacture rotor blades, is currently under construction in Bremerhaven. Production will start in 2008 and a much improved supply of rotor blades is expected in future. A quality management and quality assurance system was introduced as early as in The central aim of this measure was to guarantee that any components supplied met the quality standards demanded by the REpower Systems Group. In particular, before key components from various suppliers are shipped, each product is examined by REpower Quality Assurance or an external expert. The strengthened finance and accounting departments and implementation of decentralised controlling mechanisms in 2006 as part of the RE-Act restructuring program achieved a further substantial lowering of the potential loss amount and probability of incurrence of risk associated with earnings transparency in A similar improvement was achieved regarding information security risk through modification of the existing IT infrastructure and creating redundancy of key elements such as networks and servers. In addition, a user authorisation award process was introduced for SAP R/3 in particular with the aim of guaranteeing data quality. Growth, most notably abroad, means that the company is faced with particular organisational challenges. Delays in adjusting and expanding existing structures, in the case of organisational measures or in the introduction of new internal structures may therefore have a negative impact on the net assets, financial position and results of operations of the REpower Systems Group. To limit this risk, additional staff were employed in the departments responsible for finance and accounting, treasury, controlling (centralised and decentralised) and controlling for subsidiaries and investments. Furthermore, a project was set up to gear business processes, competences and responsibilities to continuing rapid growth in and internationalisation of the company s business. As part of this project, approximately 280 processes were identified and defined in Of these, 130 processes have been passed and published on the Intranet so far, which makes compliance with them mandatory in the organisation. As part of the audit, compliance with processes was reviewed by the quality management department. Organisational development with regard to future growth will also be continued in the above-mentioned manner in In the context of global climate change, increasing support worldwide at political and regulatory level for renewable energies has resulted in a further considerable increase in demand for wind turbines. This results in a considerable decline of the risk, not only in relation to a change of the general legislative framework, but also the risk of market transparency and competition.

46 46 Management Report Opportunities Thanks to its excellent technology, REpower is very well placed to exploit future market developments. REpower is also in a position to maintain its technological lead through its research and development activities and its experience built up over many years. The planned amendment of the Renewable Energies Act (EEG), which, according to current assessments based on the draft presented by the federal government, will make a substantial contribution to increasing demand for offshore turbines, offers opportunities in Germany. REpower will be able to profit from this development with the most powerful offshore wind turbine on the market, the REpower 5M. Thanks to the extension of the subsidy for renewable energies, it is even possible that a major, long-term market will be created in the USA. Through an agreement with a competitor company regarding the use of a patent needed for modern wind turbines, the conclusion of framework and supply agreements and a newly established branch, REpower has already established a good starting position, which will allow it to benefit more than most from growth in this market. Through measures to ensure more suppliers can meet our standards and the establishment of an in-house manufacturing capability for rotor blades, there is the opportunity to be able to produce higher annual volumes in future. Furthermore, in-house manufacture of rotor blades could contribute to an improvement of the margin situation. Supplementary report At the year-end, Dr. Hans-Joachim Reh and Dr. Jorge Martins resigned from the Supervisory Board. The long-standing Chairman of the Executive Board, Prof. Dr. Fritz Vahrenholt also resigned at the end of the year. On 1 January 2008, Mr Per Hornung Pedersen took over as Chairman of the Executive Board. On 10 January 2008, Prof. Dr. Fritz Vahrenholt was legally appointed to the Supervisory Board. At the Supervisory Board meeting on 7 February, Prof. Dr. Fritz Vahrenholt was also named as the Deputy Chairman of the Supervisory Board by the Supervisory Board. On 10 March 2008, Andre Horbach was legally appointed to the Supervisory Board.

47 Management Report 47 Forecast Economic situation According to a forecast by the Institute for the World Economy, the global economy will lose momentum perceptibly in Growth will slow from 5.1 percent to between 4.4 percent and 4.5 percent. The downturn in the USA, where the property crisis is persisting and the momentum generated by private consumption is likely to decline appreciably, will play a decisive role in the slowdown in the global economy. The Federal Ministry of Economics and Technology (BMWi) and the OECD are also expecting economic growth to weaken. The BMWi has cut its forecast for growth in gross domestic product in Germany in 2008 in several steps to 1.7 percent. Economic growth is also likely to be slightly lower in newly industrialising and developing countries, most notably in Asia, however, it will remain at a high level. Expansion will continue in the euro zone, although here, too, the tempo will slow because of higher oil prices, the stronger euro, higher interest rates and more cautious lending policies. Sector development In 2008, REpower Systems AG is again expecting robust growth in the global wind energy market, which will continue to be initiated by Europe and America although strong impetus is also expected from Asia in REpower is convinced that offshore business will play a dominant role in future. REpower considers a total of 1,500 MW of installed wind energy output on the sea to be realistic by For 2008, the experts at BTM-Consult ApS forecast new output installed in Europe of 9,760 megawatts and for America, 5,700 megawatts, of which 4,000 megawatts will be attributable to the USA alone and 1,200 megawatts to Canada. Asia ranks third with 5,110 megawatts (China 2,500 megawatts, India 2,400 megawatts). Worldwide BTM Consult expects new output totalling 21,980 megawatts in The forecast for global output installed by MAKE Consulting dated February 2008 (21,855 megawatts) is similar. However, the breakdown according to individual countries differs. MAKE expects that new output of 7,925 megawatts will be installed on the European market, while America and Asia follow with 6,950 megawatts and 6,700 megawatts respectively. According to the study, the most important individual markets are the USA (5,700 megawatts), followed by China (4,000 megawatts) and India (1,700 megawatts). Investment For the fiscal year 2008/09, REpower is planning total investment of approximately EUR 86 million, of which some EUR 44 million is for the expansion and construction of production and administration buildings, approximately EUR 15 million for master patterns and moulds for rotor blades and EUR 12 million for extensions within non-current assets. In essence, other investment relates to IT equipment, vehicles as well as office fixtures and fittings. On the balance sheet date, the company already had contractual obligations in connection with the construction of an assembly hall amounting to EUR 15.5 million. REpower has reached agreement on the construction of a production and an administration building with the town of Osterrönfeld in the district of Rendsburg. In return the local business deve-

48 48 Management Report lopment agency has offered to develop the site and provide the necessary infrastructure within a year. There was no contractual obligation at the balance sheet date. Growth in sales and earnings By resolution of the extraordinary Annual General Meeting on 17 October 2007, the fiscal year of REpower Systems AG will end on 31 March in future. Against the background of the high order backlog in fiscal year 2008/09, REpower expects an increase in sales volume to EUR 1.1 billion in fiscal year 2008/09. The sustained improvement in cost structures and processes within the REpower Group will lead to a further rise in earning power. REpower is therefore expecting an EBIT margin of between 5.5 percent and 6.5 percent in 2008/09. Planning for fiscal year 2009/10 envisages growth in sales of percent, which will be accompanied by a further increase in the EBIT margin. Long-term sustainability The most important resource REpower Systems AG has is its highly qualified and motivated employees, who make a considerable contribution to the growth and success of the company. REpower offers them individual perspectives in a challenging and international environment. Personnel As of 31 December 2007, the REpower Systems Group employed a total of 1,160 staff, 1,005 of them at the REpower Systems AG parent company. The employees are highly qualified. More than one in five employees at REpower is an engineer, representing 22 percent of total personnel. A further 10 percent have degrees in other subjects, approximately 47 percent have a technical background. The remaining 21 percent are divided between commercially qualified staff working in administration as well as trainees and final year students REpower Systems AG 1, REpower Systems Group 1,

49 Management Report 49 Executive Board remuneration The remuneration of the Executive Board is shown in the following table. Name Year Fixed Variable remuneration remuneration Pension Share options EUR EUR EUR EUR Prof. Dr. Fritz Vahrenholt , ,000 20,000 (CEO) ,000 66,000 80,000 24,000 Pieter Wasmuth , ,000 15,000 (CFO) ,750 48,000 68,250 19,000 Matthias Schubert , ,000 15,000 (CTO) ,000 48,000 60,000 14,000 For details of the remuneration structure, please refer to the comments in the Corporate Governance report. The remuneration report is a component of the joint management report and is shown in the Corporate Governance report. Employee share option program As an additional form of remuneration and a measure to improve employee loyalty to the company, REpower Systems AG has been issuing share options to specific company employees since The group of those with option entitlements is made up of members of the REpower Systems AG Executive Board, executives of the subsidiaries and the REpower Systems Group and REpower Systems Group employees who have contributed in a material fashion to the success of the company. The holding period for the options is two years. The options from the 2005 share option program were almost fully exercised in the reporting period. A total of 65,400 new REpower Systems AG shares were issued. Another offer of up to 235,000 share options was made to a total of 314 employees, executives of the subsidiaries and Executive Board members in the 2007 reporting year. Company pensions Via its REpension plan, REpower offers its employees the option of an Allianz company pension fund and a direct insurance policy from Standard Life. It also offers disability insurance at Gerling. To encourage take-up of these pension products, REpower also offers its employees a subsidy amounting to 50 percent of savings from the employer s contribution to social insurance. At the end of the reporting period, 324 employees (approximately 32 percent of all employees) were insured via the REpension plan. Apprenticeship as a obligation to society During the year, the number of apprentice positions increased by 15 percent from 40 to 46, equal to 4.0 percent of staff. In addition to apprentice positions, the company offers a wide range of intern and student positions. In fiscal year 2007, a total of 40 interns and students were employed by REpower. Apprentices make up 4.0 percent

50 50 Management Report REpower offers vocational training, providing for the future: in the company it is possible to obtain professional qualifications as an office communication officer, warehouse specialist, commercial officer in industry or IT, mechatronics technician or in technical design and since 2005 as a machine fitter as well. In the reporting period a position for a voluntary ecological year was offered and filled. In addition to its in-house training and educational programs, REpower launched a scholarship program together the prestigious Technical University of Hamburg-Harburg in October. The program sponsors the 10 best students on the Electrical Engineering course by paying their fees retrospectively up to a maximum of EUR 500 each. In periods of high unemployment among young people, REpower is proud of its training and apprenticeship programs and the steady increase in the number of employees. The company assumes its social responsibility to society and acts by allowing young people high-quality training and thus future careers with a perspective. SCC standard As one of the first turbine manufacturers, REpower Systems AG has received the safety certificate for its occupational health and safety protection line with the international SCC standard (Safety Certificate Contractors) from Veritas Quality International GmbH. The international standard regulates safety health and environmental management in the company. Thus REpower meets its responsibility for the safety of its employees and its products. Accident statistics and sickness rate In fiscal year 2007, there were a total of 33 work accidents at REpower Systems AG. This is 20 accidents more than in the previous year. Statistically all accidents in the company are recorded from one day lost working time. To obtain an international comparison the SCC figure is also calculated. This is derived by multiplying the work accidents by 1,000,000 and then dividing this figure by the number of work hours per year. Accident frequency, as measured by the SCC standard, increased by 69 percent in comparison with the previous year from to Once again, the trend in the sickness rate was positive, declining over the year from 3.1 percent to 2.9 percent. Training The REpower training department provided 5,826 man-days of instruction and skills development to 792 staff members in Germany (previous year: 3,822 man-days and 637 staff members) through an array of 125 separate training modules. In addition, a total of 117 staff members at international branches received 338 man-days of training through an array of 46 separate training modules. On average all REpower staff members took part in 6.5 days of training during The number was higher as a result of SCC training for commercial, technical and operating staff. Nontechnical training, particularly that relating to SAP and Poms, was also extended, developed and implemented to meet demand. These topics are also included in the training program as standard training sessions now. 68 employees of operators, customers and service providers received product-related information in 12 training sessions.

51 Management Report 51 Within the framework of the REpower North (China) joint venture, 24 staff members received the first training packages as part of the licensing agreement. 5M type certificate On 23 November 2007, a type certificate was awarded for the REpower 5M by the accredited certification agency DEWI-OCC. This certifies that the REpower 5M meets the plan specifications and is a safe structure within its typical environment. The certification agency also confirms that the REpower 5M has successfully completed the test phase. Research & development Research and development expenses amounted to EUR 13.4 million in the fiscal year and EUR 14.0 million in The prototype of the so-called cold climate version of an MM82 (MM82 CCV) was successfully erected in Inner Mongolia in Huitengxile, China at the end of 2007 and was commissioned in January This meant that tests of the turbine s cold climate characteristics could start, as planned, in winter. In the USA, the first MM92-60 Hz for the Goodnoe Hills project was commissioned successfully. The turbines are performing in line with expectations. Development of the 3.3M remains on schedule. All major components have been specified and ordered. Assembly of the first turbines is scheduled to take place at the new plant in Bremerhaven, which is currently under construction. The prototype will be installed at the end of Development of the 6M, an enhanced version of the 5M, and its main components is proceeding on schedule. The turbines are to be assembled parallel to the 3.3M in Bremerhaven from May A total of three 6M turbines will be erected at the Elhöft site in Schleswig-Holstein from autumn In 2007, a wind farm with five REpower 5M turbines was constructed for the Büttel project. Together with achieving type certification, which REpower was the first manufacturer to receive for a 5 megawatts turbine, this represented an important milestone on the path towards starting series production of the 5M. Preparations for the first commercial offshore project, namely Thorton Bank / Belgium, involving six 5M turbines, which are due to be installed in summer 2008, are ongoing with various technical adjustments required to the product-specific offshore equipment. The predevelopment phase of the RE61.5 rotor blade is currently concentrating on aerodynamics and geometry as well as optimising the structure. In addition to using as little material as possible, considerations are focused on minimising throughput time in production. Production of the RE40.0 rotor blade has now started. All assumptions, including the production times that could be achieved, have been confirmed. Manufacture of the master pattern for the RE50.8 has started. Specification of the structure and the blade connection will be completed shortly.

52 52 Management Report Construction of the RE45.2 test blade for the MM92 has been completed. It is now at the Blaest test centre in Denmark to undergo the static and dynamic load tests. A program to boost output was completed for type MM82 and MM92 turbines. A package of innovative aerodynamic measures for developed as supplementary equipment for LM rotor blades, which produces one to three percent more energy depending on location. All the requisite validations including output curve measurement, sound emission and load behaviour were carried out successfully. Closing statement on the report on relations with affiliated companies The Executive Board of REpower Systems AG submitted a report on relations with affiliated companies to the Supervisory Board in accordance with Article 312 Paragraph 1 of Stock Corporation Act. The Executive Board states that the company received appropriate compensation for every legal transaction according to the circumstances known at the time in which the legal transaction was undertaken. No reportable measures were taken.

53 Management Report 53

54 54 Group Notes Group Notes

55 Group Notes 55

56 56 Group Notes Consolidated balance sheet of REpower Systems AG Assets Notes EUR EUR Current assets 4.1. Liquid funds ,908, ,066,967 Interests in project companies 14,850 40,000 Future receivables from construction contracts ,270,776 36,985,072 Trade receivables ,301,030 95,105,017 Receivables from participations , ,566 Receivables from associates and joint ventures ,536,060 1,565,348 Inventories ,510,839 66,212,982 Other financial assets ,025,357 4,526,409 Other miscellaneous current assets ,381,752 26,717,435 Other current assets ,407,109 31,243,844 Total current assets 583,483, ,636,796 Non-current assets 4.2. Property, plant and equipment ,734,401 22,035,649 Other intangible assets ,440,223 13,764,693 Goodwill 1,388,710 1,329,667 Investments in associates and joint ventures ,547,200 2,999,372 Other financial assets 626, ,763 Loans granted ,003,266 6,581,639 Deferred taxes ,009,542 7,352,094 Other miscellaneous non-current assets 1,463,002 2,339,515 Other non-current assets 1,463,002 2,339,515 Total non-current assets 90,212,460 57,014,392 Total assets 673,696, ,651,188

57 Group Notes 57 Shareholders equity and liabilities Notes EUR EUR Current liabilities 4.3. Short-term loans and current portion of long-term loans 473, Trade payables 108,117,135 76,945,568 Liabilities to associates and joint ventures 494,054 0 Advance payments received ,966,589 91,407,273 Provisions ,765,434 16,969,740 Deferred sales ,403, ,922 Income tax liabilities , ,130 Other financial liabilities ,060,688 3,099,829 Other miscellaneous liabilities ,360,859 11,935,396 Other current liabilities ,421,547 15,035,225 Total current liabilities 326,624, ,136,967 Non-current liabilities 4.4. Long-term loans ,406,818 2,354,760 Capital from profit participation rights ,000,000 10,000,000 Deferred taxes ,400,139 7,329,672 Total non-current liabilities 20,806,957 19,684,432 Shareholders equity 4.5. Subscribed capital ,993,576 8,101,797 Share issue for capital increase 0 16,200 Additional paid-in capital ,895, ,346,006 Currency translation 64,948-30,461 Retained earnings 35,597,083 14,374,915 Equity relating to shareholders 325,550, ,808,457 Minority interests ,853 21,332 Total shareholders equity 326,264, ,829,789 Total shareholders equity and liabilities 673,696, ,651,188

58 58 Group Notes Consolidated income statement of REpower Systems AG Income statement Pre-year Notes EUR EUR Sales ,159, ,834,909 Changes in work in progress -2,006,782 2,705,553 Total performance 678,153, ,540,462 Other operating income ,003,546 3,034,112 Cost of materials / cost of purchased services -552,110, ,506,723 Personnel expenses ,554,898-28,504,173 Depreciation on property, plant and equipment and amortization on intangible assets -6,589,209-4,318,263 Other operating expenses ,699,560-33,060,350 Operating result 28,202,316 12,185,065 Interest and similar financing income 6,237,142 2,333,185 Interest and similar financing expenses -4,866,456-3,567,866 Share of result from associates -113, ,798 Income before taxes 29,459,139 11,200,182 Taxes on income -8,004,235-3,988,859 Other taxes -336, ,768 Net income for the year 21,118,439 7,053,555 Share of net income for the year attributable to minority interests -103,729-9,160 Share of net income for the year attributable to shareholders of the parent company 21,222,168 7,062,715 Eearnings per share (undiluted) Earnings per share (diluted)

59 Group Notes 59 Cash flow statement Cash flow statement Pre-year Notes EUR EUR Cash flow from operating activities 10. Profit for the period before taxes 29,459,139 11,200,182 Adjustments for: Depreciation on property, plant and equipment, amortization of intangible assets and write-down of financial assets 6,589,209 4,318,263 Write-down of loans granted 209,813 0 Profits /losses from associates 113, ,798 Interest income -6,237,142-2,333,186 Interest expenses 4,656,643 3,567,866 Increase / decrease in provisions 3,795, ,537 Profit /loss on disposal of fixed assets 99, ,811 Change in working capital -82,384,396 26,730,379 Interest received 6,237,142 1,404,068 Interest paid -4,656,643-3,567,866 Income tax paid -75, ,568 Other non-cash income and expenditure -735,742-1,944,266 Cash flows from / used in operating activities -42,927,901 39,251,862 Cash flow from investing activities: 10. Proceeds from the sale of fixed assets 2,346, ,816 Payments for the purchase of intangible assets -8,868,846-13,192,700 Payments for the purchase of property, plant and equipment -34,598,139-8,750,473 Payments for the further purchase of shares in associates and joint ventures -940, ,999 Csah flows used in the acquisition of investments -42,061,073-22,555,356 Cash flow from financing activities 10. Receipts from increases in equity 110,937,821 79,169,633 Loans issued -632, ,717 Loan repayments -947, ,346 Cash flows used in / from financing activities 109,357,051 77,716,570 Increase / decrease in cash and cash equivalents 24,368,077 94,413,076 Cash and cash equivalents at the beginning of the period 120,066,858 25,653,782 Cash and cash equivalents at the end of the period 144,434, ,066,858 Bank balances ,908, ,066,967 Short-term bank liabilities , Cash and cash equivalents at the end of the period ,434, ,066,858

60 60 Group Notes Statement of changes in consolidated shareholders equity Subscribed capital Contributions for performance of conditional capital increase Additional paid-in capital in EUR in EUR in EUR Balance at ,941, ,670,543 Capital increase including transaction costs for capital increase less tax advantages 2,160,599 78,172,486 Shares issued (not yet registered) 16,200 Share option plans 502,977 Foreign currency translation Net result for the year Group result Balance at ,101,797 16, ,346,006 Balance at ,101,797 16, ,346,006 Capital increase including transaction costs for capital increase less tax advantages 826,379-16, ,238,566 Shares issued (not yet registered) 65,400 Sucessive acquisitions of shares in other entities with existing controlling interests Share option plans 5,310,556 Foreign currency translation Net result for the year Group result Balance at ,993, ,895,128

61 Group Notes 61 Currency translation Retained earnings Equity attributable to shareholders Minority interests Total shareholders equity in EUR in EUR in EUR in EUR in EUR -18,505 7,312,200 99,905,436 30,492 99,935,928 80,333,085 80,333,085 16,200 16, , ,977-11,956-11,956-11,956 7,062,715 7,062,715-9,160 7,053,555-11,956 7,062,715 7,050,759-9,160 7,041,599-30,461 14,374, ,808,457 21, ,829,789-30,461 14,374, ,808,457 21, ,829, ,048, ,048,745 65,400 65, , ,250 5,310,556 5,310,556 95,409 95,409 95,409 21,222,168 21,222, ,729 21,118,439 95,409 21,222,168 21,317, ,729 21,213,848 64,948 35,597, ,550, , ,264,588

62 62 Group Notes Segment Reporting REpower Systems-Group Revenues in TEUR in TEUR Germany 237,710, ,245,452 Outside Germany 442,449, ,589, ,159, ,834,909 Assets in TEUR in TEUR Germany 667,624, ,258,205 Outside Germany 6,071,790 7,392, ,696, ,651,188 Debts in TEUR in TEUR Germany 336,931, ,425,522 Outside Germany 2,546,660 5,033, ,478, ,459,491 Investments in TEUR in TEUR Germany 45,120,250 24,817,165 Outside Germany 591, ,788 45,711,993 25,429,953 Write offs in TEUR in TEUR Germany 6,329,686 4,182,440 Outside Germany 259, ,823 6,589,209 4,318,263

63 Group Notes 63

64 64 Group Notes 1. Introduction The REpower Systems Group with REpower Systems AG, Überseering 10, 22297, Hamburg, Federal Republic of Germany, as a listed parent company, operates in the area of manufacturing and selling wind energy turbines as well as in projecting and providing turnkey wind farms. REpower Systems AG has a duty to prepare consolidated financial statements for the fiscal year ended 31 December The consolidated financial statements for the year ended 31 December 2007 were prepared in accordance with Article 315a of the German Commercial Code in conjunction with Article 4 of Regulation (EC) no. 1606/2002 of the European Parliament and the European Council of 19 July 2002 concerning the adoption of international accounting standards in the currently valid version of the International Financial Reporting Standards (IFRS), applicable in the European Union. Die IFRS comprise the International Financial Reporting Standards (IFRSs) und International Accounting Standards (IASs) published by the International Accounting Standards Board (IASB), as well as interpretations of the International Financial Reporting Interpretations Committee (IFRICs) and its predecessor, the Standing Interpretations Committee (SICs). IFRS requirements were fulfilled completely and led to the presentation of a true and view of the actual situation with regards to the REpower System Group s net assets, financial position and results of operations. The consolidated financial statements of the company are published in the electronic Federal Gazette (elektronischer Bundesanzeiger). Individual balance sheet and income statement items as well as the balance sheet are summarised in order to improve the clarity of presentation. These items are explained in the notes. The consolidated financial statements were prepared with the euro as the functional currency. The income statement is broken down according to the total cost method. The preparation of the consolidated financial statements is carried out on the basis of accounting for assets and liabilities at amortised cost. Excluded from this are derivative financial instruments, which are carried at fair value as of the balance sheet date. On 25 August 2007, the Supervisory Board resolved to propose a changeover of the parent company s fiscal year to a period of 1 April to 31 March of the following year. The period from 1 January 2008 to 31 March 2008 is thus a short fiscal year. At the Extraordinary General Meeting on 17 October 2007, the company s shareholders endorsed this amendment to the Articles of Association. The financial statements following the consolidated financial statements will thus be to 31 March Consolidation 2.1. Principles of consolidation All significant German and foreign subsidiaries are included in this consolidated financial statements where REpower Systems AG has direct or indirect control of the financial and business policies of these companies. Capital consolidation of subsidiaries is performed in line with the purchase method. In this process, the cost of the investments acquired is offset against the fair value of the net assets of the subsidiary attributed to the parent company at the time of acquisition. An asset difference resulting from company purchases is capitalised as derivative goodwill. Negative goodwill, which results from capital consolidation at the time of acquisition, is recognised in income immediately. Derivative goodwill is examined at least once annually in the following periods with regards to the value of goodwill and in the event of impairment, amortised if necessary to the lower recoverable amount. Hidden reserves and charges disclosed as a result of fair value accounting of the assets and liabilities as part of a first-time consolidation are carried, amortised or realised in the following periods according to the development of assets and liabilities. Expenses and income, intergroup transactions as well as the receivables and liabilities between the companies included in the consolidation were eliminated in compliance with IAS 27.

65 Group Notes 65 Companies which the company manages in conjunction with other partners, as well as associated companies in which the Group has a significant influence on financial and business policy, but without the possibility of control, are included in the consolidated financial statements according to the equity method. In determining goodwill as well as the proportionate fair value of assets and liabilities, the principles of full consolidation apply. Inclusion in accordance with the equity method is based on the IFRS financial statements of these companies at the Group reporting date. Losses from associated companies which exceed the equity holding s carrying amount or other noncurrent receivables from financing the company are not recognised as long as there is no obligation of supplementary payments. Significant receivables and liabilities were eliminated. The REpower Systems AG financial statements as well as those of the subsidiaries, associated companies and joint ventures are prepared in accordance with a uniform accounting policy. The financial statements of companies included in the consolidation are prepared to the REpower Systems AG reporting date. Intercompany assets and liabilities from subsidiaries whose functional currency is not the euro are translated at the currency exchange rate applicable on the reporting date. Income statement items are translated at the transaction rate for the relevant year. Subsidiaries equity capital components are translated at the corresponding historical rate when they occur. Exchange differences resulting from translation are recognised as adjustment items for currency translation within Group equity capital Scope of consolidation Fully consolidated companies The scope of consolidation includes the following German and international companies which are fully consolidated in the consolidated financial statements: Project companies Share in % REpower Betriebs- und Beteiligungs GmbH, Rendsburg Windpark Großvargula Betriebs GmbH, Breydin (in liquidation) REpower Investitions- & Projektierungs GmbH & Co. KG, Rendsburg Eolis S.a.r.l., Nanterre, France PowerBlades GmbH, Lemwerder Sales companies REpower Espana S.L., Madrid, Spain FEdeF S.A.S., Surenes, Frankreich (in Liquidation) REpower S.A.S., Nanterre, France REpower Diekat, Athens, Greece REpower UK Ltd., Edinburgh, Great Britain REpower Italia SRL., Milan, Italy REpower Australia Pty Ltd. Melbourne, Australia REpower Wind Systems, Peking, People s Republic of China REpower USA Corp., Portland, U.S.A REpower Benelux b.v.b.a., Brussels, Belgium REpower Betriebs- und Beteiligungsgesellschaft mbh, Rendsburg, and Windpark Großvargula Betriebs GmbH, Breydin, have holdings in German wind farm companies, but no operations. Die Großvargula Betriebs GmbH, which was active exclusively as a general partner to Windpark Großvargula GmbH & Co. KG, a company sold in the 2003 fiscal year, has been in liquidation since 1 January REpower Investitions- & Projektierungs GmbH & Co. KG, Rendsburg was founded as a project company and implemented the first reference project for 5-MW type series wind turbines at Büttel in Schleswig-Holstein, Germany in December During the 2007 fiscal year, after the disposal of the interest was initially planned, the complete net assets of REpower In-

66 66 Group Notes vestitions- & Projektierungs GmbH & Co. KG were sold to an investor as part of an asset deal. Since all company shares on the reporting date remain assigned indirectly or directly to REpower Systems AG, the company shell is included unchanged in the course of full consolidation in the consolidated financial statements. On 5 June 2007, all shares of the shell company 142. Alster GmbH were purchased for a cash price of TEUR 25 and the company was renamed Power Blades GmbH. 49 percent of the shares were then sold to the Abeking & Rasmussen Group at the pro rata purchase price, so that REpower Systems AG is in possession of 51 percent of Power Blades GmbH shares. In the future, Power Blades GmbH will operate a manufacturing site in Bremerhaven for the manufacture of blades for wind turbines. On the balance sheet date, the company had commenced operations at a low level. The completion of manufacturing site is planned for the middle of As a result of the REpower Systems AG s controlling interest in Power Blades GmbH, the company is fully consolidated in the consolidated financial statements. There are investments in ten foreign marketing companies with the purpose of marketing REpower Systems AG wind turbines in Europe (previous year. seven). REpower Wind System Trading (People s Republic of China), with its headquarters in Peking, was founded in 2007 and manages sales activities for the REpower Group in China. The company FEdeF S.A.S. ceased operation of its business activities in the 2006 fiscal year. In the fourth quarter of 2007, the companies REpower U.S.A. Corp, Portland, U.S.A. and REpower Benelux bvba., Brussels, Belgium were newly founded by cash subscriptions of TEUR 50 and TEUR 25 and commences operations. The company REpower U.S.A. Corp. serves to develop the market in the United States of America. REpower Benelux bvba. was formed as a sales and service company for the Belgian market and is responsible for the first offshore project with 5-MW type series equipment at the Thorntonbank wind farm Jointly managed and associated companies In the consolidated financial statements, the following material jointly controlled entities and associated companies are consolidated at equity: Group share of nominal capital in % in % REpower Portugal - Sistemas Éolicos S.A., Oliveira de Frades, Portugal REpower (North) China Ltd., Baotou, People s Republic of China The companies serve as sales companies to develop sales markets in foreign countries. REpower (North) China Ltd. was founded in fiscal year 2006 as part of a joint venture and first operated in the 2007 fiscal year. REpower Systems AG acquired a share of EUR 1.9 million in the company s subscribed capital and provided non-cash contributions of licences and expertise. Further contributions were made in REpower Systems AG obtained the majority of voting rights and is in the position to exert a material influence on the company s financial and business policies. However, it is barred from controlling REpower (North) China Ltd. due to the rights granted to other shareholders. 3. Accounting policies The accounting policies applied in the consolidated financial statements for 2007 are unchanged as against the fiscal year With regards to presentation, the following changes were made to the previous year s financial statements, which led to an adjustment of the previous year s information in this financial statement in order to enable comparability. The following information relates to figures from the previous year:

67 Group Notes 67 Advance payments on inventories (TEUR 11,932) are allocated to the other assets balance sheet items. In the previous year s financial statements these were allocated to inventories. Liabilities with a small degree of uncertainty with regards to the probability of occurrence and the amount were reported as provisions in the previous year and are now reported as trade accounts payable (TEUR 8,022) or other current liabilities (TEUR 2,766). The presentation of other operating income and expenses was adjusted so that this is reported as TEUR 1,306 less Liquid funds Liquid funds consist primarily of cash in bank and are carried at nominal value. Amounts in foreign currency are measured as of the reporting date Shares in project companies Shares in project companies are classified as available-for-sale as defined by IAS 39 and recognised on the reporting date at fair value or, provided it can be reliably measured, at amortised cost Receivables and other financial assets Trade receivables, intra-group receivables, receivables from project companies and other primary financial assets allocated to the category loans and receivables are carried at the time of preparing the consolidated financial statements at fair value plus transaction costs. Subsequent measurement is performed at amortised cost taking the effective interest rate into account. Default risks are taken into account with appropriate valuation allowances which are determined on the basis of experience and individual risk assessments Inventories Inventories comprise raw materials and supplies and work in progress. Raw materials and supplies are carried at the lower of cost or net realisable value. Work in progress for which no legally effective, customer-specific order exists is measured at the lower of cost or net realizable value. In addition to material and production overheads, manufacturing costs comprise overheads attributable as per IAS 2, but not financing costs Property, plant and equipment Items of property, plant and equipment are carried at cost and depreciated on a straight-line basis over their economic life. Cost includes all expenses for purchasing the assets, insofar as these can be reliably calculated or estimated. The manufacturing costs of internally generated equipment comprise direct costs as well as attributable overheads. Loan interest costs are not included. The assessment of depreciation is based on the following estimated economic lives: Economic life years Buildings Plant and machinery 2-21 Other equipment, office and operating equipment 3-10

68 68 Group Notes 3.6. Intangible assets Acquired intangible assets are measured at cost and amortised on a straight-line basis over the respective economic life. Research costs are reported as current expenses. Development costs for future products and other internally generated intangible assets are capitalised at cost, provided that the manufacture of these products is likely to generate an economic benefit to the REpower Systems Group. In the event that the requirements for capitalisation are not given, expenses are recognized directly in income the year in which they occur. Capitalised development costs comprise all direct costs and overheads attributable to the development process. Financing costs are not capitalised. Amortisation is performed in relation to quantity or on a straight line basis. If the volume of sales can be estimated with reasonable assurance, amortisation is performed according to quantity in relation to the total volume of sales expected. With development costs not related to quantity, amortisation is performed on a straight line basis from the start of production for the expected duration of the developed models. The following economic lives have been applied: Economic life years Capitalised development costs 5* Licences, software 3-10 * Years or according to quantity 3.7. Impairment on property, plant and equipment and intangible assets REpower Systems AG examines the value of fixed assets (property plant and equipment as well as intangible assets) with regards to any impairment requirement. When carrying out impairment tests derivative goodwill is allocated to the reporting entities for which allocation of derivative goodwill is implemented in the Group s internal reporting system. The reporting units generally correspond to individual Group companies. Payment streams of the reporting entities are discounted by a cost of capital rate orientated to comparable companies. Impairment is performed if the capital value of the streams of payment is less than the carrying amount of intangible assets and property, plant and equipment as well as the net financial instruments of the reporting entity including the allocated derivative goodwill. Impairment of other intangible assets and property, plant and equipment is performed if certain events or developments result in the carrying amount of the asset no longer being covered by expected disposal proceeds or the discounted net payment streams from any further use. The payment streams are also discounted at a cost of capital rate orientated towards comparable companies. If a determination of the recoverable amount for individual assets is not possible, the stream of payments is determined for the next highest group of assets is for which such a stream of payments can be determined. Reversals are performed if the reasons for impairment are inapplicable in the following period. Reversal is performed to a level which does not exceed the amount without impairment. A reversal of an impairment of goodwill is not carried out Loans granted Loans granted which are allocated to the category loans and receivables are carried at fair value upon initial recognition. Subsequent measurement is performed at amortised cost taking the effective interest rate into account.

69 Group Notes Share options In the consolidated financial statements, share options granted to members of corporate bodies and executives are carried in line with the regulations of IFRS 2. Share options grant subscription rights to new company shares from contingent capital and are a form of remuneration. Transactions which are to be fulfilled by granting shares are measured at fair value as of the day they are granted. The fair value of share options on the day they are granted is determined by an external assessor using the Monte Carlo simulation method. The calculated expense is distributed over the period in which the options can be exercised on a straight-line basis and the attributable staff costs of the relevant fiscal year are recognised directly in income in the capital reserves Provisions Provisions are made for all third party obligations where it is probable that the fulfilment of the obligations will result in outflows of resources and a reliable estimate of the amount of the obligation can be made. Warranty provisions are made both for known individual risks and for general risks. Specific technical warranty risks can be individually quantified by comprehensive documentation and are taken into consideration by individual provisions. The economic risk and the level of provisioning are evaluated on an ongoing basis in coordination with the technical departments taking into account existing risks. Provisions are recognised for general risks on the basis of experience. The system for establishing collective warranty provisions is as follows: For turbines erected, provisions are made for the anticipated actual costs per year of the warranty of the contractual warranty period. The actual costs are determined on the basis of past experience and examined on an ongoing basis. For wind farm projects (turnkey), project-specific provisions are established in respect to guarantee commitments for the park infrastructure. The individual level of the provision depends on the park size and the location of the park in Germany or internationally. If the provision amounts are material, they are discounted Liabilities Liabilities are measured at amortised cost corresponding to the repayment amount. If the liability amounts are material, they are discounted on the basis of the effective interest rate method Transaction costs incurred for issuing equity instruments If transaction costs are incurred for issuing equity instruments these are deducted on equity from the issue proceed minus any related income tax advantages. Only directly attributable external costs are recognised as costs for an equity transaction Realisation of sales Sales include all proceeds from the sale of wind energy turbines, license revenues and revenues from service and maintenance contracts. For wind turbine construction orders where on the reporting date both a specific legally effective customer order exists and where the order outcome as well as the expected total costs can be reliably estimated on the basis of Group budgeting and cost accounting, the percentage of completion method in accordance with IAS 11 is used. The degree of completion

70 70 Group Notes is calculated according to the cost-to-cost method. Only the costs relating directly to the service rendered are taken into account. Borrowing costs are recognised as an expense. Advance payments received for contracts are deducted directly from future receivables from construction contracts. Contracts for the delivery of wind turbines to customers are considered completed from the initial installation of the equipment. If no installation is agreed, sales are realised at the time that the benefits and risks are passed on to the purchaser and the payment is probable. License revenues result not only from quota licenses, but also single licenses independent of time or units. Proceeds from licences are realised on installation. In the case of single licenses, sales are realised when the license is granted. Advance payments received on quota licenses are deferred in equity and recognised in income in line with the economic substance of the contract. Revenues for service and maintenance contracts are realised insofar as the respective services have been rendered Taxes on income REpower Systems AG recognises current taxes when they are caused at the level of the amount due. Deferred taxes are recognised according to the liability method, after deferred tax assets or deferred tax liabilities are carried with future tax effects which arise as a result of differences between IFRS and statutory accounting of assets and liabilities. The effects of tax rate changes on deferred taxes are recognised in income in the reporting period in which the legislation mandating the change in tax rate is passed. However, the effects of tax changes on equity are also recognised in equity without any effect on income. If the realisation of deferred tax assets does not appear reasonably likely in the future, no recognition occurs Borrowing costs Borrowing costs are recorded as an expense and not included in cost Government assistance (investment subsidies) Government assistance is recognised according to the character of the subsidised expenses. Insofar as subsidies relate to capitalised assets, the assistance granted reduces the cost of the subsidised assets. Assistance granted as an expenditure allowance is realised in the income statement of the fiscal year in which the subsidised expenses were incurred Transactions in foreign currencies Purchases and sales in foreign currencies are translated using the current price applicable at the time of the transaction. On the balance sheet date, these are recognised using the exchange rate valid at this time. The gains and losses resulting from foreign currency exchange in the translation are recognised in income Financial instruments Financial assets are recognised on delivery, i.e. the date of order fulfilment. Financial instruments consist on the one hand of liquid funds, receivables and other financial assets as well as financial liabilities and loans insofar as these relate to a contract. The initial recognition of financial assets is performed at fair value plus directly attributable transaction costs, insofar as the financial assets are not allocated to the category at fair value through profit and loss. The REpower Group has no primary financial assets to be allocated to this category. Subsequent measurement of financial assets is carried out either at fair value or at amortised cost taking the effective interest rate into account depending on the allocation of the individual financial instruments to the categories in accordance with IAS 39. At initial consolidation financial obligations are carried at fair value minus transaction costs and in subsequent measurement at amortised cost.

71 Group Notes 71 Financial assets are derecognised provided that either the rights to streams of cash payments resulting from assets have expired or almost all risk of any form have been passed on to a third party so that the criteria for derecognition are met. Financial obligations are derecognised if obligations have either expired or were cancelled Use of assumptions The preparation of these consolidated financial statements requires that the management make estimates and assumptions on which the value of assets and liabilities, contingent liabilities and other financial obligations as of the balance sheet date and sales and expenses in the fiscal year depend. Key estimates and assumptions relate to impairment tests (see note 4.2), guarantee provisions (see note 4.3.2), measurement of share options (see note 4.5.2), the realisation of sales according to the percentage-of-completion method (see note 4.1.2) and the value of deferred tax assets (see note 4.2.5). The actual situation which occurs may differ from these assumptions. Also, changes in the current economic conditions and other events may have a material impact on the actual figures New accounting standards and their application The following standards published by the IASB and the IFRIC were applied by the company for the first time in the 2007 fiscal year: IFRS 7 (Financial Instruments: Disclosure) and the amendments to IAS 1 ( Presentation of Financial Statements: Equity Disclosures ) require information on the importance of financial instruments to the financial position and results of operations of the company and qualitative and quantitative information on the nature and extent of risks which the company is subject to as a result of the financial instruments to the reporting date and how they are managed. The information to be disclosed as per IAS 32 Financial Instruments: Presentation and IAS 30 Disclosures in Financial Statements of Banks and Similar Financial Institutions are combined and supplemented with new information to be disclosed. IFRS 7 and the change to IAS 1 are mandatory for fiscal years beginning on or after 1 January In applying IFRS 7 and IAS 1 comprehensive information arises in relation to financial instruments and their relevance to the assessment of net assets, financial position and results of operations as well as a qualitative and quantitative presentation of the nature and extent of risks associated with financial instruments. IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies, IFRIC 8 Scope of IFRS 2, IFRIC 9 Reassessment of Embedded Derivatives, and IFRIC 10 Interim Financial Reporting and Impairment are mandatory for fiscal years beginning on or after 1 January 2007 but due to the nature of business activities they had no material effects on Group net assets, financial position and results of operations at REpower Systems AG. The application of the following standards and interpretations published by the IASB in 2006 and 2007 is not yet mandatory for the REpower Systems Group in the consolidated financial statements as of 31 December 2007: In November 2006, the IASB published IFRS 8 Operating Segments. IFRS 8 replaces IAS 14 Segment Reporting and adapts the regulations for segment reporting to the US Statement of Financial Accounting Standards regulation (SFAS) 13 Disclosures about Segments of an Enterprise and Related Information with the exception of minor differences. This standard requires that companies disclose quantitative and qualitative information with regards to their reporting segments. Reporting segments are operating segments or combinations of operating segments which fulfil particular criteria. Operating segments are the components of a company for which separate financial information is available, which is regularly examined by the Chief Operating decision maker, in order to evaluate the success of the company and decided how resources are to be distributed. In general, this financial information must be reported on the basis of internal management. On this basis the management can evaluate the business success of operating segments and decide how to allocate resources to the operating segments. IFRS 8 is mandatory for fiscal years beginning on or after 1 January Earlier adoption is permitted. The company has not yet fully assessed the possible effects of IFRS 8 on segment reporting. In March 2007, the IASB published amendments to IAS 23 Borrowing Costs. The material changes to the standards concern the discontinuation of the option of directly recognising borrowing costs as an expense which can attributed to the

72 72 Group Notes acquisition, construction or production of a qualifying asset. Such borrowing costs must be capitalised as part of the cost of the qualifying asset. This standard applies for the first time to borrowing costs for qualifying assets where capitalisation occurs on or after January Earlier adoption is permitted. The company has not yet finally assessed the impact of introducing the changes of IAS 23 with regards to the company s net assets, financial position and results of operations. In September 2007, a revised standard, IAS 1 Presentation of Financial Statements was published. The revision aims to improve the possibilities for analysis as well as aiding comparison of financial statements for their users. IAS 1 prescribes the presentation and structure of the financial statements. In addition, it contains the minimum requirements for the content of financial statements. The new standard is mandatory for fiscal years beginning on or after 1 January Earlier adoption is permitted. The company has not yet finally assessed the effect of introducing the changes in accordance with IAS 1 with regards to the company s net assets, financial position and results of operations. In November 2006, IFRIC 11 IFRS 2 Group and Treasury Share Transactions was published. This regulation deals with the issue of how group-wide, share-based remuneration should be recognised, the effects of employee changes within a group and how share-based remuneration should be treated when the company issues treasury shares or acquires thirdparty shares. IFRIC 11 is mandatory for fiscal years beginning on or after 1 March Earlier adoption is permitted. The company has not yet finally assessed the effect of introducing IFRIC 11 with regards to the company s net assets, financial position and results of operations. In November 2006, IFRIC 12 Service Concession Agreements was also published. Service concession agreements are agreements which are made between the government and private companies in order to provide public services such as roads, energy supply and transport. The interpretation prescribes the accounting policies of such agreements between government and private companies. IFRIC 12 is mandatory for fiscal years beginning on or after 1 January Earlier adoption is permitted. As the Group does not have any service concession agreements as per IFRIC 12, IFRIC 13 has no material effect on Group net assets, financial position and results of operations at REpower Systems AG. In June 2007, IFRIC 13 Customer Loyalty Programmes was published. IFRIC 13 prescribes the accounting policies for revenues from sales processes, and related expenses for obligations arising from customer loyalty programmes such as award, bonus or loyalty programmes. IFRIC 13 clarifies that such business is to be regarded as multi-component transactions where the part of sales which is due to premiums is recognised as a liability until the customer either exercises his premium right or forfeits it. IFRIC 13 is mandatory for fiscal years beginning on or after 30 June Earlier adoption is permitted. Due to the nature of the Group s business activities, IFRIC 14 has no material effects on Group net assets, financial position of results of operation for REpower Systems AG. In July 2007, IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction was published. IFRIC 14 contains general guidelines for determining the excess limit of a pension fund which can be recognised as an asset in accordance with IAS 19 Employee Benefits. The interpretation also describes how regulatory or contractual minimum financing regulations can have an effect on a pension fund s assets or liabilities. IFRIC 14 is mandatory for fiscal years beginning on or after 1 January Earlier adoption is permitted. As the Group does not have any pension funds as per IAS 19, IFRIC 13 has no material effect on Group net assets, financial position and results of operations at REpower Systems AG. 4. Information on individual balance sheet items 4.1. Current assets Liquid funds The company has only restricted access to cash in bank amounting to TEUR 144,909 (2006: TEUR 120,067), since from these assets, a cash deposit amounting to TEUR 40,401 (previous year: TEUR 65,696) serves as collateral for payments, contract performance and warranty guarantees granted by banks to customers. The reduction of the cash deposit in 2007 is based on a reduction of deposit quotas at the banks and credit insurers who finance us.

73 Group Notes Construction contracts carried as assets in TEUR in TEUR Receivables 90,182 51,597 Less advance payments received -28,911-14,612 61,271 36,985 This item lists work in progress as of the reporting date which was reported according to the percentage-of-completion method in compliance with IAS 11. Advance payments on contracts recognised are deducted directly. These contracts incurred material costs amounting to TEUR 75,349 (previous year: TEUR 44,306). In 2007, the contribution to the operating result by these projects totalled TEUR 14,833 (previous year: TEUR 7,291) Trade accounts receivable Trade receivables relate primarily to receivables from customers resulting from the delivery of wind turbines in TEUR in TEUR Trade accounts receivable 200,301 95, ,301 95,105 Total specific valuation allowances of TEUR 2,239 were recognised for receivables as of 31 December 2007 (as against TEUR 2,430 as of 31 December 2006) in TEUR in TEUR Specific valuation allowances As of beginning of fiscal year 4,030 3,580 Reversal ,980 Addition 2,239 2,430 As of end of fiscal year 5,560 4, Receivables from investment companies Items are composed as follows: in TEUR in TEUR Receivables from investment companies Loan to Energy Wind Czech s.r.o., (Czech Republic) Loan to Windpark Finsterwalde GmbH, Finsterwalde Loan to Sister Ltd., Portugal Other

74 74 Group Notes Receivables from associated companies and joint ventures Receivables from associated companies amounting to TEUR 10,536 comprise TEUR 5,190 from REpower Portugal Sistemas éolicos, S.A. (Portugal) and TEUR 5,346 from REpower North (China) Ltd., Baotou, People s Republic of China. Receivables are primarily due to the delivery of wind turbines Inventories Valuation allowances for inventories amount to TEUR 1,523 as of 31 December 2007 (previous year: EUR 0). TEUR 1,523 of this was recognised in The carrying amount of inventories which are recognised as expenses during the fiscal year amounts to TEUR 554,117 (previous year: TEUR 383,801) in TEUR in TEUR Raw materials and supplies 86,119 51,854 Work in progress, advance payments 11,392 14,359 97,511 66,213 Raw materials and supplies relate to inventories for the production of wind energy turbines. Work in progress relates to turbines under construction Other current assets in TEUR in TEUR Other assets Advance payments 40,599 11,932 Accounts due from sales tax refunds 18,489 10,586 Loaned equipment 2,548 1,186 Prepaid insurance premiums (ISK) 801 1,069 Other 945 1,945 63,382 26,718 Other financial assets Loans Receivables from insurance companies 3,211 1,650 Other 1,534 2,268 5,025 4,526 68,407 31, Non-current assets Non-current assets Land and buildings relate primarily to the production sites used by the company. Plant and machinery relate primarily to facilities for the production of wind turbines.

75 Group Notes 75 Assets under construction on the reporting date relates primarily to expenses for the extension of production locations as well as blade moulds. The development in property, plant and equipment is shown in the statement of consolidated fixed assets Other intangible assets In the 2007 fiscal year, research and development expenses amounted to TEUR 13,375 (previous year: TEUR 14,018), of which TEUR 7,123 was capitalised (previous year: TEUR 5,664) Jointly ventures and associated companies Joint ventures and associated companies which are recognised using the equity method achieved a result of TEUR -235 (previous year TEUR 250) in the 2007 fiscal year as well as sales of TEUR 13,085 (previous year: TEUR 18,516). These companies non-current assets as of 31 December 2007 amounted to TEUR 6,519 (previous year: TEUR 93). Current assets amounted to TEUR 56,353 (previous year: TEUR 10,269), non-current liabilities TEUR 15,481 (previous year: TEUR 6,442) as well as current liabilities TEUR 34,164 (previous year: TEUR 1,586) Loans granted The items contain loans granted to wind farm project companies. If the loans are interest bearing, the interest rates fluctuate in a range between 2.05 percent and 7.0 percent per annum Income tax Taxes on income are as follows: in TEUR in TEUR Current income taxes 3, Income tax assets from previous years Defered tax expense 4,589 4,155 Taxes on income 8,004 3,989 Deferred taxes are calculated on the basis of future tax rates. The corporate tax rate for companies in Germany was 25.0 percent for 2007 (previous year: 25.0 percent) in addition to the solidarity surcharge of 5.5 percent (previous year: 5.5 percent). The total rate of corporation tax is thus percent. When trade taxes are taken into account, the total tax rate amounts to 40.0 percent (previous year 40.0 percent). This total rate of tax will be reduced to 30.0 percent from 2008 as a result of the company tax reform in percent of this relates to corporation tax of 15 percent in addition to 5.5 percent solidarity surcharge on corporation tax and percent to trade tax. The reduction in the tax rate was taken into account when determining the deferred tax assets and liabilities for the German companies. This result in deferred tax income amounting to TEUR 1,463, results which is fully recognised in income. In the 2007 fiscal year, the current tax advantage of TEUR 176 (previous year: TEUR 1,163) is directly offset against equity capital since these costs are directly related to a capital increase. We refer to note

76 76 Group Notes The causes for the deviation between the Group s expected and actual tax expense is presented below. Expected tax expense is calculated using the total domestic tax rate of 40 percent for the 2007 and 2006 fiscal years: in TEUR in TEUR Expected tax expense 11,649 4,417 Employee option programmes/share options 2, No measurement of capitalised deferred taxes on tax loss carryforwards Income taxes for previous years Non deductible operating expenses Tax-free profit distributions Tax loss carryforwards not capitalised in previous years -3,707 - Reduction of corporate tax in Germany -1,463 - Varying tax rates for income and municipal taxes (trade tax) Losses from partnerships Other tax effects Actual tax income 8,004 3,989 Due to the earnings trend, the tax loss carryforwards not taken into account in previous years are valuable. Initial capitalisation led to an improvement of the result amounting to TEUR 3,707. Expenses from employee option programmes have influenced the Group s tax rate as these expenses are not deductible as expenses for tax purposes. The tax effect from this amounts to TEUR 2,124. We refer to the information on the share option programme. The corporation tax credit of TEUR 301 which has not been paid out as a result of a moratorium in German tax law will be paid to REpower Systems AG in instalments from 30 September Deferred tax assets and deferred tax liabilities are divided into the following items: in TEUR in TEUR Assets Tax loss carryforwards 3,977 7,233 Provisions Intercompany profits Other Deferred tax assets 5,009 7,352 Liabilities Receivables from PoC 4,372 2,917 Development costs 4,025 2,673 Property, plant and equipment 990 1,569 Other Deferred tax liabilities 9,400 7,330 Offsetting Deferred tax assets 868 1,379 Deferred tax liabilities 5,259 1,357

77 Group Notes 77 Deferred taxes on tax loss carryforwards were recognised at the level of the tax impact of the expected usable tax losses of the German and international Group companies. The key factor for determining the value of deferred tax assets is the estimation of probability of a reversal of measurement differences and the utility of tax loss carryforwards which led to deferred tax assets. These depend on the occurrence of future taxable profit during the periods in which measurement differences relating to tax are reversed and tax loss carryforwards can apply. According to the current status, tax loss carryforwards can be carried forward without restriction in subsequent years in all countries where tax loss carryforwards occur. Due to the expected taxable income situation, it is assumed that appropriate benefits can be realised from deferred tax assets. For deferred tax assets from tax loss carryforwards, it is expected that TEUR 3,109 will be utilised in the next year. The remaining amount will be used in subsequent periods. All other deferred tax assets will be utilised in the 2008 fiscal year in their full amount (TEUR 1,032). It is expected that in the 2008 fiscal year deferred tax liabilities of TEUR 5,030 will be deployed, and an amount of TEUR 4,370 in the following year. In the fiscal year tax loss carryforwards amounting to TEUR 190 were not applied (previous year: TEUR 3,707) since their realisation is unlikely Current liabilities Advance payments received Advance payments received relate to advance payments by customers which are not related to construction contracts Provisions Provisions relate primarily to deferrals for guarantee expenses. Assuming a level of EUR 16.4 million in the previous year and a utilisation of EUR 7.8 million and additions of EUR 11.6 million, on the balance sheet date, taking reversals of EUR 1.0 million into account, there are provisions for guarantees of EUR 19.2 million. Taking utilisation and additions are taken into account, other provisions increased from EUR 0.5 million to EUR 1.5 million Deferred sales Advance payments are reported as deferred sales Income tax liabilities Income tax liabilities primarily relate to current deferred taxes for the fiscal year.

78 78 Group Notes Other current liabilities Other current liabilities are composed as follows: in TEUR in TEUR Other financial liabilities Liabilities to employees 6,199 3,100 Customers with credit balances 1,685 0 Other ,061 3,100 Other liabilites Sales tax 1,454 10,946 Other liabilities to the tax office Social security liabilities Other ,361 11,935 10,422 15, Noncurrent loans and capital from profit participation rights Of a total of non-current loans and profit participation rights which amount to TEUR 11,407 (previous year: TEUR 12,355), TEUR 10,000 relates to a profit participation right taken up in May 2004 that has a duration to 2011 as well as liabilities to banks amounting to EUR 1,047. For profit participation rights, a basic interest rate of 7.9 percent in addition to a variable interest rate dependent on net income is paid. In fiscal year 2007, this amounted to TEUR 200 (previous year: EUR 0). The interest rate for bank loans was between 3.0 percent and 8.0 percent per year. Non-current bank liabilities amounting to TEUR 1,407 (previous year: TEUR 2,350) are secured by liens and assignments of security from electricity proceeds as well as from claims from insurance contracts Equity capital The change to equity capital components is represented in the statement of changes to Group equity Subscribed capital The subscribed capital of REpower Systems AG as of 31 December 2007 was EUR 8,993,576 (previous year: EUR 8,117,997) and is divided into 8,993,576 (previous year: 8,117,997) no-par value ordinary bearer shares, each with a notional share of capital of EUR This includes 65,400 shares (previous year: 16,200) issued as part of an employee option programme which is entered into the commercial register after the reporting date. In the previous year, then was recorded in a special equity item. In the 2007 fiscal year, 810,179 shares (previous year: 2,160,599) were issued as part of a capital increase from authorised capital against cash contributions and 65,400 shares issued as part of an employee option programme. As part of the share issue, an amount of TEUR 110,503 (previous year: TEUR 79,918) was transferred to capital reserves. The total issue amount totalled TEUR 111,329 (previous year: TEUR 82,078). Authorised capital By way of resolution passed by the Annual General Meeting on 30 May 2006, the Executive Board was authorised, with the approval of the Supervisory Board, to increase the share capital of REpower Systems AG on one or several occasions by

79 Group Notes 79 issuing new shares against cash or non-cash contributions up to EUR 4,050,898 up to 29 May After a partial utilisation of EUR 810,179 in the 2007 fiscal year, EUR 3,240,719 still remains available for future capital increases. Contingent capital There is a contingent capital increase of subscribed capital of up to EUR 2,475, The contingent capital increase is to be carried out only in the event of an option or convertible bond issue. Furthermore, there is a contingent capital increase of subscribed capital of up to EUR 504,300. The contingent capital increase is carried out with the issue of up to 504,300 new ordinary bearer shares only insofar as the holders of subscription rights exercise their rights in the context of employee option programmes. Issuing profit participation certificates The company was authorised by the Annual General Meeting on 9 June 2004 to issue further profit participation certificates amounting to up to EUR 20,000,000 by 8 June REpower Systems AG has not yet exercised this right Capital reserve The development of the capital reserve is presented in the statement of changes in shareholders equity. As part of the capital increases described in note Subscribed capital, funds of TEUR 110,503 (previous year: EUR 79,918) were provided. The issuing costs attributable to the capital increase amounted to TEUR 441 (previous year: TEUR 2,908) minus applicable tax benefits amounting to TEUR 177 (previous year: TEUR 1,163) were deducted from the capital reserve resulting from the issue of new shares. Share option programme REpower Systems AG operates a share option programme which offers beneficiaries the right to acquire one share per option at an established basis price. A cash payment is not possible. The options can be exercised during an agreed time period each with a duration of five years, but two years after they are granted (blocking period). Options may only be exercised when the relevant employee at the time of exercise is still employed at REpower Systems Group and the XETRA share price of REpower Systems AG at any time (for options issued in 2007: at least 21 days) has been at least 120 percent of the basis price. As of 31 December 2007, as part of the share option programme, shares issued to the Executive Board and company management in the years from 2005 to 2007 performed as follows in the 2007 fiscal year: Number Basis price or share price upon exercise (weighted average) in EUR Options outstanding at the start of the fiscal year 259, Granted 234, Exercised -65, Forfeited/lapsed -2, Options outstanding at the end of the fiscal year 426, Of which exercisable 1,

80 80 Group Notes The fair value of share options granted on the grant date is determined by an external assessor on the basis of the following assumptions and factors: Granted in fiscal year Basic price EUR EUR Share price of REpower Systems AG shares EUR EUR Risk-free interest rate 4.47% 3.71% Expected volatility 43.37% 43.30% Remaining blocking period (in months) Remaining maturity Fair value per share option EUR EUR Expected volatility is based on historical volatility which is determined from daily closing prices for REpower Systems AG shares. The REpower Systems share performance in the first half of 2007 was influenced significantly by a takeover battle for REpower Systems AG carried out by two companies. Due to the one-off nature of this event and the extreme share price fluctuations involved, the historical data was adjusted for the period of the takeover battle. The Monte Carlo simulation method used maps the performance target in the form of an increase in the share price of REpower Systems by at least 20 percent compared to the basis price and allows for the possibility of early exercise within the time period for exercising options and the beneficiaries early exercise behaviour, i.e. the possibility that employees exercise their option before the end of the time period. On 20 March 2007, as a result of the capital increase (see above) resolved by the REpower Systems AG Executive Board with the approval of the Supervisory Board, the company reduced the basis price of outstanding options in relation to the dilution resulting from the capital increase. The increase in total fair value of the 2006 tranche which resulted totalled TEUR 403. The total fair value for the 2005 tranche decreased to TEUR 17 and was thus not taken into account on the balance sheet. Since the blocking period for the 2006 tranche at the time of the change had not yet expired, an amount of TEUR 242 was recognized as an expense on a straight line basis for the previously concluded part attributable to the blocking period. The value of changed share options as of 20 March 2007 is determined by an external assessor on the basis of the following assumptions and factors: Granted in fiscal year 2006 originally Basis price EUR EUR REpower Systems AG share price EUR EUR Risk-free interest rate 3.71% 3.88% Expected dvidend EUR 0.53 EUR 0.41 Expected dividend EUR 1.05 EUR 0.73 Expected dividend EUR 1.16 EUR 0.80 Expected volatility 43.30% 38.79% Remaining blocking period (in months) Remaining maturity (in months) Fair value per share option EUR EUR

81 Group Notes 81 Since the performance target of an increase in the REpower Systems share price by at least 20 percent more than the basis price was already achieved, modelling early exercise was not undertaken for this calculation. At the Annual General Meeting of 21 June 2007, a resolution was made to adjust the option conditions for the 2006 share option plan to the conditions of the newly established 2007 share option plan. The fair value of amended share options as of 21 June 2007 is determined by an external assessor on the basis of the following assumptions and factors: Granted in fiscal year Basis price EUR EUR REpower Systems AG share price EUR EUR Risk-free interest rate 3.88% 4.48% Expected dvidend EUR 0.41 EUR 0.41 Expected dividend EUR 0.73 EUR 0.73 Expected dividend EUR 0.80 EUR 0.80 Expected volatility 38.79% 41.30% Remaining blocking period (in months) Remaining maturity (in months) Fair value per share option EUR EUR In the 2007 fiscal year, the company recognised staff costs from share-based payments totalling TEUR 5,310 (previous year: TEUR 503) Minority interests Minority interests relate to the shares of third parties in German and international Group companies. 5. Information on the income statement 5.1. Sales In 2007 and 2006, the operations of companies in the REpower Systems Group related almost exclusively to developing, manufacturing and projecting wind turbines percent (previous year: 41.5 percent) of sales in the turbine business were generated from the German market, 65.1 percent (previous year: 58.5 percent) from international markets in TEUR in TEUR Proceeds from the sale of wind turbines 630, ,061 Service/maintenance and materials purchasing 30,288 25,064 Electricity proceeds 1,607 1,519 Licence revenues 8,614 5,117 Other 8,909 8, , ,835

82 82 Group Notes 5.2. Other operating income Other operating income breaks down as follows: in TEUR in TEUR Insurance payments/compensation 5,212 2,352 Income from exchange rate differences Investment subsidies, research and development subsidies Income from the disposal of fixed assets Land income Other ,003 3,034 The item insurance payments/compensation includes payments by insurers and suppliers. The rise in this item is primarily due to the settlement of a marine transport claim and contractually agreed penalties for delays in delivery delay Staff costs in TEUR in TEUR Wages and salaries 42,316 22,540 Social security constributions 7,239 5,964 49,555 28,504 The average annual number of employees was: Salaried employees Waged employees ,

83 Group Notes Other operating expenses Other operating expenses are composed as follows: in TEUR in TEUR Guarantee expenses 10,125 2,412 Legal and consulting costs 7,541 5,755 Travel expenses 4,922 3,797 Purchased services 4,667 3,343 Office and land costs 4,023 2,117 Costs of training and appointing staff 2,857 1,748 Administrative costs 2,459 1,823 IT & telecommunication costs 2,390 1,619 Vehichle costs 2,195 1,386 Write-off/write-downs of receivables 1,530 2,063 Advertising and trade fair expenses 1, Costs of monetary transactions 1, Repairs and maintenance 979 2,886 Insurance costs Other 2,298 1,462 48,699 33, Earnings per share Basic earnings per share is generated by dividing the REpower Systems AG shareholders share of earnings and the weighted average number of shares in circulation during the fiscal year. A dilution of earnings per share results from what are known as potential shares. This include options which only dilute earnings if these result in an issue of shares at a value below the average share price. There was a dilution effect in both tranches of the share option plan in EUR in EUR Net consolidated income (loss) assigned to REpower Systems AG 21,222,168 7,062,715 shareholders In addition: effects from stock option plans with a diluting effect 0 0 Fully diluted net consolidated income (loss) assigned to REpower Systems AG shareholders 21,222,168 7,062,715 Weighted average of outstanding shares (basic) 8,731,325 7,507,801 Effect of share options 588, ,350 Weighted average of outstanding shares (fully diluted) 9,320,263 7,767,151 Earnings per share (basic) Earnings per share (fully diluted)

84 84 Group Notes 6. Contingent liabilities and other financial obligations in TEUR in TEUR Other financial obligations Obligations from lease and rental contracts Due within one year 3,720 1,619 Due between 1 and 5 years 10,765 5,138 Due between 1 and 5 years ,819 7,111 Contingent liabilites Land charges 3,068 3,068 Letters of comfort 12, ,480 3,428 At REpower Systems AG and in the companies included in the scope of consolidation, all leases are operating leases. Lease payments are recognised on a straight-line basis directly in income over the contract period. Obligations from lease and rental contracts relate primarily to obligations from the rental of office and warehouse space. Expenses amounting to TEUR 2,424 (previous year: TEUR 1,065) were recognised for lease and rental contracts. On the balance sheet date, letters of comfort for associated companies and joint ventures amounted to EUR 12.4 million (previous year: EUR 0.36 million). As of the balance sheet date there are purchase commitments amounting to approximately EUR million (previous year: EUR million) to purchase inventories and approximately EUR 21.4 million (previous year: EUR 15.5 million) to purchase property, plant and equipment. 7. Financial risks and financial instruments 7.1. Principles of risk management With regard to financial assets, financial liabilities and planned transactions, REpower Systems AG is subject to risks from changes in the price of raw material and purchasing prices, exchange rates, interest rates and the share price. The aim of financial risk management is to limit the market risks through current operating and financially orientated activities. In order to do this, specific hedging instruments are used according to the assessment of risk. In principle, risks are only hedged if they have an effect on the Group s cash flow. Derivative financial instruments are only used in exceptional circumstances to hedge exchange rate risks in customer contracts and are not used for trading or speculative purposes. The principles of financial policy are agreed on an annual basis by the Executive Board and monitored by the Supervisory Board. The implementation of financial policy as well as ongoing risk management is the responsibility of Group Treasury, with the involvement of Group Controlling. Certain transactions require only the prior consent of the Executive Board, which is also regularly informed of the scope and amount of current risk exposure. Treasury regards effective management of financial instruments as one of its main functions. In order to assess the effects of different events on the market, simulation calculations using various worst-case and market scenarios are undertaken Information about the nature and extent of risks associated with financial instruments Primary financial instrument assets in line with IFRS 7 include receivables and other assets, provided that they are based on a contract, as well as liquid funds. Primary financial instrument liabilities in line with IFRS 7 include all sub-groups of

85 Group Notes 85 liabilities with the exception of provisions, deferred sales and deferred taxes as well as liabilities from income taxes. Furthermore, those items which do not relate to a contract are also not included. Derivatives are deployed only to a limited extent. The credit and default risk of financial assets is constantly monitored. Before closing transactions, the Group checks the customer s rating and also has corresponding collateral provided. The credit and default risk of financial assets corresponds to the maximum amounts posted on the assets side. There is no material concentration of default risks in the Group. Currency risks exist only insofar as deliveries are made outside the euro zone countries. Risks as per IFRS 7 arise through financial instruments which are denominated in a currency other than the functional currency and are of a monetary nature. Differences due to exchange rates arising from the translation of financial statements in the Group currency are not taken into account. In the 2007 fiscal year, no hedging transactions were used. Gains and losses from hedging transactions are reported in the income statement. The company did not use hedges. The liquidity risk is monitored as part of continuous liquidity planning. Interest rate risks are not hedged. The acquisition of a hedging transaction was undertaken once on the basis of a hedging opportunity at relatively low cost. As of 29 November 2006, REpower Systems AG had utilised publicly funded loans with a total value of TEUR 2,368. In an effort to streamline interest payments, individual loans were converted into a variable-rate Euro loan of the same amount, the interest on which was optimised by entering into a swap. The term of the interest rate swap covers the period from 1 December 2006 to 2 December The interest derivatives concluded have the following fair values as of 31 December 2007 including accrued interest which was calculated according to a mark-to-market valuation: Product Nominal amount Final maturity Fixed interest rate / strike Valuation on reporting date in EUR million in EUR Cap ,061 Swap ,509 Within the Group, interest rate changes result primarily in an increase or decrease of the interest for loans and overdrafts. These financial instruments serve as advance financing for wind turbine supply contracts. A change of interest rates thus directly impacts the project result. As part of the disclosure of market risks, IFRS 7 requires information about how hypothetical changes to risk variables affect the price of financial instruments. The purchase price for components as well as the share or index prices are particularly significant risk variables. The material market risk from component price development is offset by contracts with suppliers related to time or quantity, or by direct participation of supplier in joint ventures.

86 86 Group Notes 7.3. Information on the significance of financial instruments for the consolidated financial statements Based on the relevant balance sheet items, the relationships of the categorisation of financial instruments as per IFRS 7 and the financial instrument carrying amounts are listed in the following tables. Furthermore, liquid funds are listed which are not allocated to any category of IAS 39. For comparison, the figures from the previous year as of 31 December 2006 are shown separately in the following table Category* Carrying amount Amortised cost Fair value not affecting income Fair value affecting income in TEUR in TEUR in TEUR in TEUR Liquid funds 144, , Shares in project cormpanies AFS Gross amount due for construction contracts L+R 61,271 61, Trade accounts receivable L+R 200, , Receivables from investment companies L+R Receivables from associated companies and jointly ventures L+R 10,536 10, Other financial assets - loans L+R 1,743 1, Other financial assets - other L+R 4,745 4, Other financial assets AFS Loans granted L+R 7,003 7, * AFS: available-for-sale L+R: loans and receivables 2006 Category Carrying amount Amortised cost Fair value not affecting income Fair value affecting income in TEUR in TEUR in TEUR in TEUR Liquid funds 120, , Shares in project cormpanies AFS Gross amount due for construction contracts L+R 36,985 36, Trade accounts receivable L+R 95,105 95, Receivables from investment companies L+R Receivables from associated companies and jointly ventures L+R 1,565 1, Other financial assets - loans L+R 2,947 2, Other financial assets - other L+R 3,918 3, Other financial assets AFS Loans granted L+R 6,582 6,

87 Group Notes 87 The book values of the financial assets measured at fair value correspond to the market values. Financial instruments measured at amortised cost are listed with their fair value and carrying amount in the following table and the figures for the previous year are listed for comparison: Category Carrying Fair value Carrying Fair value amount amount in TEUR in TEUR in TEUR in TEUR Liquid funds 144, , , ,067 Shares in project cormpanies AFS Gross amount due for contract work L+R 61,271 61,271 36,985 36,985 Trade accounts receivable L+R 200, ,301 95,105 95,105 Receivables from investment companies L+R Receivables from associated companies and joint ventures L+R 10,536 10,536 1,565 1,565 Other financial assets - loans L+R 1,743 1,743 2,948 2,948 Other financial assets - other L+R 4,745 4,745 3,918 3,918 Other financial assets AFS Loans granted L+R 7,003 7,003 6,582 6,582 Liquid funds, construction contracts carried as assets, intragroup receivables, receivables from associated companies and joint ventures, trade accounts receivable and other financial assets generally have a period of not more than 12 months. Therefore, the carrying amounts on the reporting date correspond closely to the fair values. This also applies to liabilities. The fair values of noncurrent receivables as well as financial investments classified as available for sale with a period of over one year correspond to the present value of the payments related to these assets, taking into account the current parameters which reflect the conditions and expectations related to the market and partners. The fair values of liabilities to banks and other financial institutions are determined on the basis of the present value of payments relating to the debts applying the current rate of interest. The following table shows financial liabilities: 2007 Category* Carrying amount Amortised cost Fair value recognised in equity Fair value recognised in income in TEUR in TEUR in TEUR in TEUR Current loans OL Trade accounts payable OL 108, , Receivables to associated companies and joint ventures OL Other current financial liabilities OL 8,061 8, Noncurrent loans OL 1,407 1, Capital from profit participation rights OL 10,000 10, * OL: Other liabilities

88 88 Group Notes 2006 Category Carrying amount Amortised cost Fair value recognised in equity Fair value recognised in income in TEUR in TEUR in TEUR in TEUR Current loans OL Trade accounts payable OL 76,946 76, Receivables to associated companies and joint ventures OL Other current financial liabilities OL 3,100 3, Noncurrent loans OL 2,355 2, Capital from profit participation rights OL 10,000 10, Category Carrying Fair value Carrying Fair value amount amount in TEUR in TEUR in TEUR in TEUR Current loans OL Trade accounts payable OL 108, ,117 76,946 76,946 Receivables to associated companies and joint ventures OL Other current financial liabilities OL 8,061 8,061 3,100 3,100 Noncurrent loans OL 1,407 1,407 2,355 2,355 Capital from profit participation rights OL 10,000 10,000 10,000 10,000 Loans are determined as the present value of cash flow expected in the future. The normal market interest rate is used for discounting, in relation to maturities. For the loan it is assumed that the carrying amount corresponds closely to the fair value. Due to the short term of trade accounts payable as well as other financial liabilities, it is assumed that carrying amounts correspond to fair value. Book profits or losses for credits and liabilities consist primarily of results from impairment losses and reversals. With regard to impairment losses, we refer to the notes on trade accounts receivable (4.1.3) as well as other current assets (4.1.7). Results from impairment losses and reversals are primarily reported as other operating expenses. Book profits or losses of financial assets available for sale consist primarily of net income from investments. With regard to collateral provided, we refer to note 4.4. The group holds collateral amounting to TEUR 426,244 (previous year: TEUR 196,192), which correspond to the fair value of the security. These are standard industry guarantees which are provided by our customers and suppliers in order to secure the fulfilment of contractual obligations.

89 Group Notes Capital management The objective of the Group s capital management is to ensure that it maintains a good equity ratio and high credit rating in order to support its business activities and maximise shareholder value. This is especially significant in the context of growth targets. REpower Systems AG has a balanced capital structure. Equity capital covers non-current assets by more than 100 percent. The Group monitors its capital with regards to the equity ratio as a ratio of equity reported in the IFRS consolidated financial statements to total assets. The company is not subject to any statutory capital requirements. 9. Information on segment reporting The activities of the REpower Group consist of the development, production and marketing of wind turbines. In addition to development and production, preliminary work is done for project development to support sales, the appropriate rights are acquired and the infrastructure is created to erect turbines at appropriate locations. The primary segment reporting format at the REpower Group is geographic segments since, in terms of business activities it is essentially a single-purpose enterprise. REpower distinguishes between the two reporting segments Germany and Rest of world. The Rest of world reporting segment includes the segments Asia, Europe (not including Germany) and Australia. The information on segment reporting includes data on segment income, assets, liabilities as well as investments and depreciation for each reporting geographic segment. 10. Information on the cash flow statement In compliance with IAS 7, the consolidated cash flow statement is divided into the areas of operating activities, investing activities and financing activities. The funds reported in the cash flow statement include cash and cash equivalents. Current bank liabilities were deducted. The liquid funds are composed as follows: in TEUR in TEUR Liquid funds at the start of the period Cash, bank balances 120,067 67,427 Less current liabilities due to banks 0-41,773 Total 120,067 25,654 Liquid funds at the end of the period Cash, bank balances 144, ,067 Less current liabilities due to banks Total 144, ,067

90 90 Group Notes In determining the cash flow from operating activities, the indirect method was selected. The cash flow statement begins with the income for the period before taxes. The outflow of funds from interest and taxes was allocated to operating activities and reported separately in that item. Cash flow from investing activities includes payments for investments in intangible assets, property, plant and equipment and financial assets and proceeds from disposals of fixed assets. Interest received was not allocated to cash flow from investing activities as in the previous year, but to cash flow from operating activities. The previous year was adapted accordingly. The change in cash flow from financing activities results largely from inflows of EUR million from the share capital increase. This item also shows changes in non-current liabilities due to banks in this area. 11. Related party disclosures The Executive Board and Supervisory Board of REpower Systems AG and companies in which these parties hold the majority of company shares, are classified as related parties. In 2007, Windpark Pattensen GmbH & Co. KG (currently still trading as Orbis GmbH & Co Energie- und Umwelttechnik Zweiundzwanzigste KG) with its headquarters in Rothenburg/Wümme acquired two wind turbines from REpower Systems AG. Three members of the REpower Systems AG Executive Board have holdings in the company as limited partners. The wind turbines purchase prices corresponded to the market price. Other than this, there were no business dealings between related parties and the companies included in the consolidated financial statements. Suzlon Shareholder Group, represented by SE Drive Technik GmbH, AE-Rotor Holding BV, Suzlon Wind Energy Limited and Suzlon Energy Limited, holds percent of REpower Systems AG voting rights. In addition, the Commisariat à l énergie atomique (CEA), Gif-Sur-Yvette, France, and Martifer - Construções Metalomecânicas, S.A. with headquarters in Oliveira des Frades, Portugal, hold a further 29.9 percent and 23.0 percent of voting rights respectively. The shares are attributed to Sulzon Shareholder Group as part of an agreement to pool voting rights, which also counts as a related party due to its controlling interest. To a minor extent, REpower Systems AG purchased components from AREVA Group companies, which were settled at market prices. In addition, wind turbines for an amount of EUR 6.5 million (previous year: EUR 18.5 million) were sold to the associated company REpower Portugal S. A., as well as wind turbines amounting to a total of EUR 4.0 million (previous year EUR 0 million) to the joint venture REpower North China Ltd., which sold these on to external customers. The remuneration of the Executive Board and the Supervisory Board is stated in detail under note Information on the corporate bodies of REpower Systems AG, Hamburg The following are/were appointed as members of the Supervisory Board: Mr Tulsi R. Tanti, Pune, India (member since 21 June 2007) Mr Bertrand Durrande, Paris, France (member until 21 June 2007, Deputy Chairman from 22 June 2007 until 7 February 2008) Prof. Fritz Vahrenholt, Hamburg (member since 10 January 2008, Deputy Chairman since 7 February 2008) Mr Andre Horbach, Amsterdam, Netherlands, operations technician (member since 10 March 2008) Mr Jorge Martins, Sever do Vouga (member until 31 December 2007, Deputy Chairman until 21 June 2007)

91 Group Notes 91 Dr Hans-Joachim Reh, Bargteheide (until 31 December 2007) Dr Rolf Bierhoff, Essen (member until 18 June 2007) Mr Oliver Heinecke, Hamburg Mr Alf Trede, Schwesing The following persons are/were appointed as members of the REpower Systems AG Executive Board of in the 2006 fiscal year: Prof. Fritz Vahrenholt, Hamburg (member until 31 December 2007) Mr Per Hornung Pedersen, Hamburg, (member since 1 January 2008) Mr Matthias Schubert, Rendsburg Mr Pieter Wasmuth, Hamburg 13. Declaration of conformity to the German Corporate Governance Code The declaration of conformity with the German Corporate Governance Code was submitted by the Executive Board and Supervisory Board and published promptly on the company s Web site. This declaration is permanently accessible. 14. Remuneration for the Supervisory Board and Executive Board of REpower Systems AG In line with the Articles of Association of REpower Systems AG, the remuneration paid to the members of the Supervisory Board for the 2007 fiscal year is as follows: Name Attendance fees 2007 Fixed remuneration 2007 Total 2007 Total 2006 EUR EUR EUR EUR Tulsi R. Tanti 5,000 10,000 15,000 - Bertrand Durrande 11,000 17,500 28,500 26,000 Jorge Martins 7,250 12,500 19,750 20,250 Dr. Rolf Bierhoff 3,500 5,000 8,500 13,500 Dr. Hans-Joachim Reh 6,000 10,000 16,000 13,000 Oliver Heinecke 6,000 10,000 16,000 7,833 Alf Trede 6,000 10,000 16,000 7,833 44,750 75, ,750 88,416 The members of the Executive Board of REpower Systems AG are paid a fixed remuneration, the amount of which can be derived from the following table. In addition to a fixed annual salary, each member also receives a performance-related bonus of 30 percent of the fixed annual salary if REpower Systems AG s EBIT amounts to at least 75 percent of the annually budgeted figure. This bonus rises to 40 percent of the fixed annual salary if EBIT reaches the annually budgeted level. It rises further to 50 percent of the fixed annual salary if EBIT reaches 125 percent of the budgeted amount (maximum bonus).

92 92 Group Notes As part of the existing share option programme (see note 4.5.2), share option rights were also granted to members of the Executive Board in the 2006 and 2007 fiscal years. The options can only be exercised if the share price of REpower Systems shares rises to at least 120 percent of the base price at any time. The fair value of options as of 31 December 2007 was TEUR 3,772 (previous year: TEUR 783). At the time of the granting in 2006, the fair value per option was EUR 13.91, for 2007 the fair value per option was EUR Name Options Options Total Quantity Quantity Quantity Prof. Dr. Fritz Vahrenholt 20,000 24,000 44,000 Matthias Schubert 15,000 14,000 29,000 Pieter Wasmuth 15,000 19,000 34,000 50,000 57, ,000 In addition to the above remuneration, the Executive Board member who left in the fiscal year 2005, Thomas Franck, was also granted share-based remuneration which depends on the future development of profits. The remuneration was paid in cash in the 2007 fiscal year. Provisions made in previous years covered this payment obligation adequately. The remuneration paid to the members of the Executive Board for the fiscal year 2007 was as follows: Name Fixed Variable Pension Options remuneration remuneration EUR EUR EUR Quantity Prof. Dr. Fritz Vahrenholt 250,000 66,000 80,000 24,000 Matthias Schubert 180,000 48,000 60,000 14,000 Pieter Wasmuth 171,750 48,000 68,250 19, , , ,250 57,000 The payment of remaining contractual entitlements on the balance sheet date for Prof. Fritz Vahrenholt who left his position as Chairman of the Executive Board amounting to EUR 1,631,500 were agreed. From this, EUR 1,072,500 was paid in 2007, the remaining amount of EUR 559,000 was transferred to provisions. As of 31 December 2007, the shares held by the Executive Board are as follows: Name Shares Additions and Total shares disposals in 2007 Quantity Quantity Quantity Per Hornung Pedersen Prof. Dr. Fritz Vahrenholt 25,800-25,800 0 Matthias Schubert 21,700-11,700 10,000 Pieter Wasmuth ,500-37,500 10,000

93 Group Notes Information on fees paid to auditors A fee of EUR 210,000 (previous year: EUR 163,000) has been recognised for the audit of the financial statements in the fiscal year. EUR 3,144 was paid for other audit or consultancy work in the 2007 fiscal year. 16. Appropriation of REpower Systems AG result The Executive Board of REpower Systems AG, Hamburg, proposes that the retained earnings reported in the annual financial statements as of 31 December 2007, prepared in accordance with the provisions of the German Commercial Code and the German Stock Corporation Act, is carried forward for new account. The single-entity financial statements and consolidated financial statements of REpower Systems AG, Hamburg, will be published in the electronic Federal Gazette (elektronischer Bundesanzeiger). 17. Material events after the reporting date With regards to the changes in the composition of the Executive Board and Supervisory Board, we refer to note 12. The consolidated financial statements were prepared by the Executive Board on 11 March 2008 and thus submitted to the Supervisory Board for approval. The consolidated financial statements will be presented to the Supervisory Board at the Supervisory Board meeting on 20 March 2008 for approval. Hamburg, 11 March 2008 The Executive Board Per Hornung Pedersen Pieter Wasmuth Matthias Schubert

94 94 Group Notes REpower Systems AG Statement of consolidated fixed assets 2007 Acquisition and production costs Balance Additions Reclassifications Disposals Balance EUR EUR EUR EUR EUR I. Property, plant and equipment 1. Land, leasehold rights and buildings, including buildings on non-owned land 7,543,073 2,435, , ,881 10,224, Technical equipment, plant and machinery 10,221,610 3,845, ,767-23,756 13,043, Other equipment, fixtures, fittings and equipment 16,980,737 6,146, ,034-1,011,461 22,449, Advance payments and plant and machinery in process of construction 920,650 22,169, ,380-2,047,256 21,328,772 Total property, plant and equipment 35,666,070 34,598, ,218,354 67,045,855 II. Intangible assets 1.1. Software and other licences 9,647,911 1,686, ,493 11,331, Development costs 6,776,109 7,123, ,899, Intangible assets 16,424,020 8,809, ,493 25,231, Goodwill 4,567,363 59, ,626,406 Total intangible assets 20,991,383 8,868, ,493 29,857,736 Total 56,657,453 43,466, ,220,847 96,903,591

95 Group Notes 95 Depreciation and amortization Book values Balance Additions Reclassifications Disposals Balance EUR EUR EUR EUR EUR EUR EUR 1,291, , ,547,375 8,676,938 6,251,629 3,651,938 1,429, ,608-17,488 4,941,089 8,102,622 6,569,672 8,687,040 2,772, , ,910 10,822,990 11,626,069 8,293, ,328, ,650 13,630,421 4,457, ,398 17,311,454 49,734,401 22,035,649 2,566,173 1,742, ,308,809 7,022,957 7,081,739 93, , ,298 13,417,266 6,682,954 2,659,328 2,131, ,791,107 20,440,223 13,764,693 3,237, ,237,696 1,388,710 1,329,667 5,897,024 2,131, ,028,803 21,828,933 15,094,360 19,527,446 6,589, ,398 25,340,257 71,563,334 37,130,009

96 96 Group Notes Investments of REpower Systems AG as per : Companies Company share in % Investments in associated companies REpower Betriebs- und Beteiligungs GmbH, Rendsburg BWU Projekt GmbH, Trampe REpower Investitions- & Projektierungs GmbH & Co. KG, Rendsburg REpower North (China) Ltd., Baotou, People s Republic of China REpower Espana S.L., Madrid, Spain REpower Italia S.r.l., Mailand, Italy REpower S.A.S., Nanterre, France Eolis S.a.r.l., Nanterre, France Fermes Eoliennes de France S.A.S., Surenes, Franc (in liquidation) REpower Australia Pty. Ltd., Melbourne, Australia REpower Diekat S.A., Athen, Greece REpower UK Ltd., Edinburgh, Great Britain Windpark Großvargula Betriebs GmbH, Breydin 1 (in liquidation) REpower USA Corp., Portland, Oregon, USA REpower Benelux bvba., Brüssel, Belgium REpower Wind Systems Trading (China), Beijing, People s Republic of China Powerblades GmbH, Lemwerder Other Investments Energy Wind Czech s.r.o., Mostkovice, Czech Republic REpower Portugal Sistemas Eólicos S.A., Oliveira de Frades, Portugal Sister Lda, Lissabon, Portugal Windpark Finsterwalde GmbH, Finsterwalde Wasserkraft Finowkanal, GmbH, Breydin REpower Geothermie GmbH, Breydin RETC Renewable Energy Technology Centre, Hamburg ) Shareholding via REpower Betriebs- und Bteiligungs GmbH As per % owned by REpower Systems AG, traded under the name Verwaltungsgesellschaft 144. Alster mbh, with intent to resale 50%.

97 Group Notes 97

98 98 Group Notes Auditor s Report We have audited the consolidated financial statements prepared by the Repower Systems AG, Hamburg, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement and the notes to the consolidated financial statements, together with the management report for the Company and the Group for the business year from January 1 to December 31, The preparation of the consolidated financial statements and the group management report in accordance with IFRSs, as adopted by the EU, and the additional requirements of German commercial law pursuant to 315a Abs. 1 HGB [Handelsgesetzbuch German Commercial Code ] are the responsibility of the parent company`s management. Our responsibility is to express an opinion on the consolidated financial statements and on the group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with Article 317 HGB [Handelsgesetzbuch German Commercial Code ] and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and group management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRSs, as adopted by the EU, the additional requirements of German commercial law pursuant to 315a Abs. 1 HGB and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group s position and suitably presents the opportunities and risks of future development. Hamburg, March 11, 2008 KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft Papenberg Auditor Frahm Auditor

99 Group Notes 99

100 100 Neue Corporate Horizonte bodies Corporate bodies

101 Corporate Neue Horizonte bodies 101 Executive Board Per Hornung Pedersen Chairman, born 1953 in Copenhagen, Chairman of the Executive Board since January 2008, in charge of Business Development, Sales, Production and Project Management, HR and Public Relations. Supervisory Board Pieter Wasmuth Born 1966, Executive Board member since 2005, in charge of Organisation, Finance and Accounting, Controlling, Treasury, Legal, Investor Relations, Risk Management, Project Financing, Logistics and Purchasing, Quality Management, Occupational Health and Safety as well as Service and Maintenance. Matthias Schubert Born 1960, Executive Board member since 2001, in charge of Technology, Product Development, 5M/Offshore, the Support Centre as well as Quality and Technology. Tulsi R. Tanti Prof. Dr. Fritz Vahrenholt Bertrand Durrande Andre Horbach Oliver Heinecke Alf Trede Chairman Deputy Chairman Board membership On 18 June, Dr. Rolf Bierhoff retired from the Supervisory Board. Tulsi R. Tanti was appointed to the Supervisory Board in his place on 21 June 2007 and was elected Chairman of Supervisory Board at the meeting of the company s Supervisory Board on the same date. At an extraordinary meeting on 2 November 2007, the Supervisory Board of REpower Systems AG decided to reorganise the management level. At the year-end, Dr. Hans-Joachim Reh and Dr. Jorge Martins resigned from the Supervisory Board. Prof. Dr. Fritz Vahrenholt, the longstanding Chairman of the Executive Board of the wind turbine manufacturer, retired from day-to-day operations at the year-end and was legally appointed as a member of the Supervisory Board on 10 January On 7 February 2008, he was elected Deputy Chairman of the Supervisory Board. André Horbach, CEO of the Suzlon Energy Group was also legally appointed as a member of the Supervisory Board on 10 March The Supervisory Board appointed Mr. Per Hornung Pedersen as the new CEO from 1 January 2008.